With such a crucial role in our economy, manufacturing companies must continue to keep their eye on the ball and think ahead of the game.
Making sure your accounting systems are fit for purpose has never been more important, explains Andrew Jones, Partner at Haines Watts Birmingham.
A sector to be reckoned with
The UK is currently the ninth largest manufacturing nation in the world and, contrary to popular belief, continues to grow. The Office for National Statistics (ONS) reports that overall, the UK’s industrial sector has increased by 1.4% a year since 1948. It employs 2.7 million people and contributes 11% of GVA.
And we’re certainly doing our bit here in the West Midlands. Figures from R3, an insolvency and restructuring body, show that West Midlands manufacturing companies are continuing to outperform the majority of their regional counterparts and are among the most financially stable in the UK.
We want to keep it that way, but one of the traps that manufacturing companies can sometimes fall into, especially if they are growing, is underestimating the unique accounting challenges they face.
Concentrate on the nuts and bolts
Take a wholesale or retail business, maybe, buying and selling. For these companies, the accounting entries may be simpler. Goods are purchased from a variety of sources with a margin added, and sold on.
When you get to a manufacturer though, it can be a lot more difficult. Manufacturers start with raw materials – nut and bolts and sheets of steel – and then have to build something with those components before selling it on.
Pricing that job for your accounting is not nearly as simple as slapping on a profit margin. You need to determine the cost of the individual parts – effectively the base cost of the materials – and then work out the man hours to find out the labour rate and costs involved.
All these individual costings have to be done separately before you can put it all together and ensure that you’re making a profit.
Technology is the solution
This proves difficult for some accounting solutions, so it’s vital to make sure you’re using a system that has different job costing categories and sets up nominal codes for individual jobs.
At every point in the product’s life-cycle, the right software is needed to track the costs, from when the component comes in for the job, to making sure that every cost is posted in that job, instead of mixing them up in one nominal code.
It’s worth investing in either bespoke manufacturing software or job costing software that links into the accounting solution to enable the manufacturing to drive the accounting rather than the other way around. It sounds simple but some manufacturing businesses can come a cropper thanks to their own success.
A lot of manufacturers start small but as your business grows, if you don’t keep pace with the more complex accounting requirements, you can end up with a much larger mess.
The bottom line is the bottom line
The first element of that mess will be margins. How can you keep track of the profit you’re making on a particular job if you aren’t tracking each element individually?
If it’s not costed right the first time, it will start to make loss on top of loss, and the bottom line will be impacted.
The second element of mess is cashflow. If it’s not costed properly and making money, cashflow will seize up. This is of course something that manufacturers have been aware of since the global financial cash over a decade ago. That was a harsh lesson to not to hold lots and lots of stock, because it’s tying up cash and ultimately cash is king. Lack of it can destroy a business.
So, if you’re got a manufacturing business of whatever size, the golden rules are:
- Make sure you’ve got the accounting package you need, with the right job costing and stock control, that will enable you to track margins and KPIs.
- And don’t have too much cash tied up in stock – make sure your turnover of stock is expedient.
Together, we can keep manufacturing in the West Midlands at the forefront of the industry – where it belongs.
For help and advice on accounting for manufacturing, get in touch with our specialist team.
Haines Watts Birmingham are accountants for manufacturing, based in the West Midlands.
Want to know more? Call us on 01432 273189 or email firstname.lastname@example.org