Manufacturing Finance Made Easy

Tough Industry for Some

Making stuff is hard and if ever there’s a difficult industry, it’s manufacturing. In software, we typically have gross margins in the 80% range which means operating margins can be healthy when you have scale.? Contrast this to my CFO friends in the manufacturing industry who would be ecstatic with gross margins at 30%, ouch.? With these GMs, you have to be operationally disciplined to have some profit and cash cash generation.? Nonetheless, look at some of the largest manufacturers (Taiwan Semiconductor {TSMC}, Sherwin Williams (yes paint), and Tesla who are doing just fine.?

MFG Finance: Measure What Matters

We talked to several CFO peers in the manufacturing industry and did some analysis on why certain companies can excel while others are still struggling and operating at a loss.? Some are in Aerospace, Food, Beverages, and the auto industry.? Auto is particularly challenging due to the supply chain, logistics, and labor (contract labor can have a big impact to GMs), and the cash conversion cycle in the automotive industry is particularly challenging.?

Over at Tesla

I started to think about Elon Musk and Tesla’s scale and how it was able to differentiate itself from the slew of other electric auto makers struggling at the moment.? We analyzed Tesla’s competitive advantage and we discuss the metrics and best practices in MFG that you can use to improve operations at your MFG company.? We have highlights as well from our newly launched infographic guide you can use as an everyday reference.?

Manufacturing is heavily volume based due to its fixed cost and high capital intensity but Musk made it work (most of the time) and we weave our findings with our thoughts on financial metrics and how it all ties together.?

1. Vertical integration and cost control: Tesla's approach to vertical integration, particularly in battery and powertrain production allows it to control costs more effectively than competitors who rely heavily on suppliers. This manufacturing strategy reduces dependency on external vendors and allows for better cost management.?
2. Gigafactories and capital efficiency: Tesla's Gigafactories represent a significant upfront capex investment but demonstrate strong capital efficiency in the long run. By producing batteries, powertrains, and vehicles under one roof, Tesla reduces logistics costs and improves production speed.?
3. Innovation and R&D focus: Despite its focus on cost control, Tesla continues to invest heavily in R&D. This financial commitment to innovation has resulted in manufacturing breakthroughs like the Giga Press, which significantly reduces production complexity and costs. It’s not just making the cars, it’s the process of making the cars that lets Tesla stand out.? Automation is? a recurring theme in our studies.?
4. Direct sales model and inventory management: Tesla's direct-to-consumer sales model, enabled by its manufacturing flexibility, allows for better inventory management and reduced working capital requirements.?
5. Scalability and growth management: Tesla's manufacturing approach is designed for scalability, allowing for rapid production increases as demand grows.?
6. Agile manufacturing and continuous improvement: Tesla's willingness to frequently adjust production lines for improvements demonstrates a unique approach to manufacturing in the auto industry.?

A Guide for MFG leaders

The "Manufacturing Finance Guide" is an invaluable resource for business leaders and finance & accounting professionals in the manufacturing industry. It provides a comprehensive overview of key financial metrics, best practices, and strategic considerations specific to manufacturing companies. Here are some ways the guide proves helpful:

Key Performance Indicators (KPIs): The guide outlines important KPIs for manufacturing finance, including :

Financial metrics:

Revenue Growth

Gross and Operating Margins

Return on Equity (ROE)

Return on Assets (ROA)

Operational metrics are defined and highlighted:?

Production Efficiency, Capacity Utilization, and Inventory Turnover

Cash flow metrics like Operating Cash Flow, Free Cash Flow, and Cash Conversion Cycle.

KPIs help finance professionals track and improve the company's financial health and operational efficiency. And it’s always a good idea to see your performance relative to competitors as valuation premiums are awarded to market leaders with strong financials.?

Debt Management:?

When you peer into balance sheets of some of the largest manufacturers, you will often notice this mismatch between the duration of assets and liabilitiles.? Debt payments, convenants, and the right ratios are important for lenders to monitor and can really hamper your cash flow.??

The guide provides detailed insights into managing debt effectively, covering:

• Debt-to-Equity Ratio
• Interest Coverage Ratio
• Debt Service Coverage Ratio (DSCR)
• This information is crucial for maintaining a healthy financial structure and ensuring the company can pay its bills and not get yelled at by its vendors.?

Capital Structure:

The guide provides a comprehensive overview of debt and a company’s overall capital structure:

This information is crucial for finance professionals to maintain a healthy balance between debt and equity, manage interest payments, and ensure compliance with debt covenants.? And if you’re generating predictable cash, investors want to know that their dividends will grow over time.?

Best Practices: The guide highlights best practices in manufacturing finance, including:

• Lean Manufacturing and Six Sigma methodologies
• Total Quality Management (TQM)
• Agile Methodology for financial planning

These practices can help finance professionals drive efficiency and continuous improvement in manufacturing operations, helping to automate, improve quality and ultimately improve the financial metrics.?

Executive Dashboards: The guide emphasizes the importance of real-time data and executive dashboards for informed decision-making. Here's an example of what such a dashboard might include:

This dashboard provides at-a-glance insights into key financial and operational metrics, enabling quick and informed decision-making.

Industry-Specific Insights: The guide offers valuable information on gross margins across different manufacturing verticals.? One point on gross margins, temporary staffing, labor, shipping, can all negatively impact gross margins.? Custom orders and setup costs can also hamper a manufacturer’s gross margins.?

This GM data helps finance professionals benchmark their company's performance against industry standards and identify areas for improvement.

Cash Conversion Cycle: The guide explains the components of the Cash Conversion Cycle, a crucial metric for manufacturing companies:

Understanding and optimizing this cycle is essential for managing working capital effectively in manufacturing operations as most of my peers explained how terms can be quite bad.? In my world, I’m used to net 30 days, and in manufacturing we’re talking 180 days or more sometimes.??

Making the Difficult Less Difficult

Manufacturing is hard.? Yet Elon and others have separated themselves from their peers and it’s reflected in their stocks premium valuation.? Using the right metrics and minding the right KPIs can help.? Our Manufacturing Finance Guide serves as a comprehensive reference tool, offering insights into financial metrics, operational efficiency, debt management, and industry benchmarks. By leveraging this guide, finance and accounting professionals in the manufacturing sector can enhance their strategic planning, improve operational efficiency, and ensure robust financial performance in their enterprises.

The Guide is now available at Shop - Strativ , etc.