How can you use financial reporting to improve your manufacturing business?

Commonly, product cost consist of: - Material Cost: Raw Material (RM), Supporting Material (SM) Packaging Material (PM) - Overhead Cost (OC) which divided to Variable Cost and Fixed Cost. To analyze material cost using: - Variance analysys which compare Standard Formula (BOM-Bill of Material) usage Versus Actual Usage. By this analysis we can understand in which process that has significant untolerance variances. - Review waste resulted in each process. To analyse OC by cost characteristic: - Fixed cost => compare Standard Capacity VS Actual Capacity. By this we can identify calculate idle cost. - Variable cost => compare each cost category standard variable cost per product VS actual cost per product.

Financial reporting in manufacturing: P&L Statements: Analyze revenue and costs, optimizing for profitability. Balance Sheets: Monitor assets, liabilities, ensuring a healthy financial position. Cash Flow Statements: Assess cash generation, maintain liquidity. Budget vs. Actual Analysis: Compare and adjust budgets for accuracy. Cost Analysis: Break down costs, allocate accurately, identify savings. KPIs: Track manufacturing-specific indicators for efficiency and quality. Inventory Management: Optimize turnover, address slow-moving inventory. Financial Ratios: Analyze ROA, ROE, debt ratios, benchmark against industry. Forecasting and Planning: Use historical data for strategic decision-making, adapting to market changes.

We can identify area for costs reduction- such as inefficient production processes, we also can monitor benchmark against industry standarts.

Financial reporting can help you get more insights of costs at various stages. Analyze cost breakdowns in reports to identify areas for efficiency improvement, negotiate better deals with suppliers, optimize production processes, and set competitive pricing strategies. Regularly reviewing financial reports can guide strategic decisions, enhance cost control, and ultimately improve overall profitability.

The role of Financial reporting begins with what is called Proactive Accounting by formulated and translating strategies and plans for Operational and Financial Budgets. Standard costs are the basic key to creating these budgets. When these plans and budgets are applied, actual Performance is measured, Variances are analyzed, and the causes of deviations are determined, either weakness in performance or review of standards. Financial reports in Industrial Firms may help improve Quality through specialized reports on Quality that show the financial impact of poor and weak quality. Specialized financial reports also help in analyzing the value chain and isolating activities that value added than non - value added.

When we analyze inventory, we can use Days of Inventories (DoI) for each category inventories: Raw Material (RM), Supporting Materials (SM), Packaging Materials (PM). Then go to details by quantity, using this step: - Define buffer stocks => consider periodic usage and leadtime to fulfill materials - Define material shelflife => don't buffer much short shelflife materials. - Calculate available warehouse space and quantity buffer stocks. We can have any option to deal with supplier to prepare stocks in their nearest warehouse - Most advance treatment: we can try omni channel system which starting with how many product we can sell connected with how many materials we need (using BOM) and conected also how many material prepared by supplier.

Inventory management is not only considering different methods but also optimise stock levels through which reduce cost as it increases the working capital Stock levels like reorder level and average stock level also helps to save space which increases production efficiency through many ways.

Financial reporting is a key input while assessing a manufacturing business. For it to be actionable and enable manufacturing improvements, it should: - Display a transparent variance analysis between actual and planned costs and clearly link that to the development of operational KPI's that measure process efficiency (e.g. uptime), material cost (e.g. key raw material price) and labor costs. - That variance analysis should bridge actual vs. planned costs and isolate the impact of drivers like: volume, process efficiency, materials price, Fx, wastage and also the impact of any cost reduction projects under implementation. - Produce comprehensive and transparent inventory reporting, with stock turns and obsolescence risk at SKU level.

Effectively managing inventory through financial reporting is paramount. By closely monitoring inventory turnover, you can optimize stock levels, reduce holding costs, and prevent overstock or stockouts. Utilize reports to identify slow-moving items, adjust procurement strategies, and enhance cash flow. This approach ensures that your manufacturing business maintains an optimal balance between meeting demand and minimizing excess inventory expenses.

You can review your financial reports to determine what the stakeholders are focused with investing and inventory. Be sure to analyze quarterly and adjust where necessary. Strategically plan accordingly to maximize profits in areas that are most likely to grow.

Financial reporting benchmarking is one of many tools to check our financial performance. There are some tips from me to do some financial ratio analysis: 1. Profitability Analysis - EBITDA is more relevant used to benchmark with same product category. It will be biased if we use Gross Profit (GP) Benchmarking with the company in different sales channel (retail channel commonly have bigger GP than distribution channel) - Return on Assets / Return on Equity / Return on Investment is more relevant also when we want to define funding strategy 2. Liquidity Analysis: - Cash Convertion Cycle (CCC) is the most prowerful, since CCC considering (Inventory Days, Receivable Days and Payable Days)

While traditional financial ratios are invaluable, they often don't tell the whole story for manufacturing businesses. Incorporating operational metrics, such as machine downtime, production cycle time, and quality control measures, into financial analysis, provides a more holistic view of performance. This integrated approach enables manufacturers to identify correlations between operational efficiencies and financial outcomes, leading to more informed strategic decisions. Additionally, adopting a balanced scorecard approach, which includes financial and non-financial KPIs, can give a more rounded perspective on overall business health.

Financial reporting plays a vital role in evaluating performance within a manufacturing business. Through metrics like revenue, gross margin, and net profit, you can assess overall financial health. Analyzing trends over time helps identify areas of improvement or potential challenges. Additionally, scrutinizing specific performance indicators, such as production efficiency or return on investment, provides valuable insights for strategic decision-making and continuous enhancement of your manufacturing operations.

Financial reporting plays a crucial role in enhancing the performance of manufacturing businesses. By analyzing financial data and trends, businesses can gain valuable insights into their operations, identify areas of improvement, and make informed decisions. Financial reporting allows manufacturers to track their revenues, expenses, and profitability, identify cost-saving opportunities and optimize resource allocation. Furthermore, it enables stakeholders to gauge the effectiveness of their strategies and adjust course if necessary, ultimately leading to improved operational efficiency and profitability.

In my experience, financial reporting is essential for business. I used the financial method z score to get information about costs, income, cash flows, risk of future decisions. I could see where I made unnecessary expenses, I could evaluate my cash flow and improve it. Also, I was able to get quality information about future financial decisions. In my opinion, if there are adequate time series, this is one of the best methods for predicting future financial flows.

There are so many analysis we can use to make better decision. - Contribution margin analysis is the most powerfull for those who have much idle capacity, since we only consider variable cost only. Commonly, we use it until production capacity reached out 85% to 90% - Breakeven analysis is the most powerfull when we want to spend capital expenditure and/or new business and/or projects. We can estimate payback period and/or minimum sales target and/or production capacity to certain payback period. - Capital Budgeting is the most powerfull when we want to know how many fund we need to get some sales target and/or profit target.

The bridges or walks are a key tool to evaluate performance in 3 main areas..SALES, PRODUCTION AND SGA. You avoid to mix responsabilities depending on the market and competition and helps you to separate efficiency on production regardless the commercial situation...and SGA will be benchmarked vs othwer sites with same volume..(depending to much on IT tools like a good ERP).

I have found that integrating scenario and sensitivity planning and analysis alongside traditional financial analysis tools can greatly improve the effectiveness of your financial reporting. Scenario planning involves creating detailed, hypothetical situations to anticipate potential future changes in the business, such as market shifts. By applying financial sensitivity analysis to these scenarios, you can assess the potential impacts on your business, preparing for a range of possible futures. This proactive approach not only aids in risk management but also ensures that your business remains agile and adaptable.

Fimancial reporting is one tool to detect unexpected performance. We can go to detail by combining other operational data (from sales perspective, operation perspective, human resource perspective) to identify more comprehensive unexpected performances. In other words, finance guy looks like "general doctor" who can detect some deases. And he can follow up the finding to "specialist doctor" (expert in each function). In organization context, there should be synergy between each function. There is no Superman, but only Superteam.

In addition to financial reporting, consider factors like market trends, customer feedback, and industry innovations. Stay abreast of technological advancements that could improve efficiency. Cultivate a responsive and skilled workforce, and prioritize sustainable practices for long-term success. Regularly reassess your business strategy, ensuring it aligns with both current conditions and future goals. Combining financial insights with a holistic understanding of your industry landscape contributes to a well-rounded approach for managing and growing your manufacturing business.

The real solution to solving variance comes from focusing on the underlying variables at play. If material cost is more than underlying reason could be lack of stock management strategy. If labor cost is over budget, probably employees are not motivated and therefore it results in more hours than originally budgeted.

In manufacturing, leveraging data analytics and machine learning in conjunction with financial reporting can provide a competitive advantage to the businesses that use it effectively. Imagine a scenario where a manufacturer of automotive parts employs advanced data analytics to predict machine failures before they occur. This predictive maintenance, based on historical data and machine learning algorithms, not only reduces costs associated with unplanned downtime but also improves financial analysis by providing insights into potential future capital expenditures and maintenance costs.