Common Accounting Challenges for Manufacturing Businesses
If you own or manage a young manufacturing business, you may have come to realize your accounting processes are, well, a headache. Let’s take a look at some common challenges manufacturing enterprises face and how you can solve these problems to achieve what you set out to do in the first place: make a profit.
If you are already underway in your startup venture, you’re certainly aware of the longer timelines that are often a natural part of manufacturing anything. Unlike selling a ready-made item or a service, you need to go through multiple steps before your item is ready for sale.
Depending on what you’re making, you may spend months sourcing raw materials. Rather than just buying the item you’re selling from a wholesaler, you have to make it, first building your assembly line or another manufacturing method, and then actually producing the item.
There may be quality control and re-tooling involved, as well as labeling, packaging, and the like. An item that seems so basic on the retail shelf can take months to produce.
Complex Accounting Processes
Because of the complex manufacturing timelines described above, the accounting process for a manufacturing business can be far more complicated than for other types of enterprises. You need to take into account not just one inventory, but perhaps many inventories, for both parts or materials and finished products.
There are multiple equations used in manufacturing accounting, such as:
Beginning Raw Materials Inventory + Raw Materials Purchases - Ending Raw Materials
Inventory = Raw Materials Used (DM) + Direct Labor (DL) + Factory Overheads (FOH) = Cost of Goods Manufactured
Beginning Inventory of Finished Goods + Cost of Goods Manufactured = Finished Goods Available for Sale - Ending Inventory of Finished Goods = Cost of Goods Sold
People study accounting for years to know how to use these equations properly to prepare their books; it may be above and beyond to understand them as a CEO or founder when in reality you’re an engineer or another professional outside the financial sphere.
Furthermore, there are accounting decisions to be made that affect how your business is perceived, whether to the Internal Revenue Service (IRS) or to potential investors. For example, some businesses consider inventory an asset.
But because inventory (i.e., the materials you need to manufacture your product) requires cash, it can be seen as a liability for some. How you handle this in your books and in practice can make a huge difference to your bottom line.
Running lean by purchasing only as much inventory as you need to have on hand leaves you more cash-rich and doesn’t commit your finances until you need the materials. You don’t want to pay for materials (as well as labor and other overhead) for finished goods that just sit on the shelf.
It typically takes a seasoned accountant to figure out an inventory plan that ensures you have enough raw materials on hand without breaking the bank to stock them, and to portray your business’s financial health properly in your records. Your accountant should be considering factors such as:
Manufacturing costs that are essentially paid for because a client has committed to purchasing items through pre-payment or standing orders (versus speculative orders for online purchase or retail outlets)
Whether buying raw materials in bulk is really cost-effective
How long current inventory has been sitting on your shelf
Time from order to finished product
Average time items remain on the retail shelf
Labor or other fluctuating costs that can affect the cost of finished goods
You want your books to be precise and accurate, in addition to being timely--that is, they are up to date, ideally in real-time with regard to inventory and pieces in production.
To manage the aforementioned complex accounting, you need to have the right software and hardware to do the job. However, many startup businesses find this expense prohibitive. It’s also confusing and often requires knowledge about computers that is beyond a CEO’s scope of running a business.
You can find cloud-based platforms to, for example, manage inventory, but the soup-to-nuts accounting may then be spread across multiple systems. You may have some data stored on your own servers and some elsewhere as you use a SaaS platform for inventory and another program for accounts payable in sourcing. If one element of the entire system is down--a reasonably frequent and inevitable occurrence--you can lose your entire accounting flow chain.
Naturally, this can make it difficult when you have to produce tax documents or materials for an audit. Preparing accounting for a potential investor can become a nightmare.
Time and Personnel Hurdles
Running all of these accounting programs and creating the documentation you need for various scenarios takes time. Many startup businesses try to stay as trim on the personnel side as possible, so the CEO often winds up doing double duty as an accountant.
What happens when you as the owner of your business play accountant? Something’s got to give. Since accounting for a manufacturing business is usually a full-time job for at least one person, you either have to work the hours of two people, or one of your tasks will suffer. You can’t devote all your time to your books at the expense of actually running your company, nor can you let your accounting slide.
Fortunately, there’s another superb option for startup businesses: outsourced accounting services. Scrubbed can handle your manufacturing company’s bookkeeping and more, even the most complicated stuff, leaving you free to run your business and take care of your own to-do list. You can hire Scrubbed for a few months or a few years--however long you need until you find the right person for your CFO or accounting position.
Scrubbed offers turnkey business services including all of the following:
Accounting and financial reporting
Inventory management support
White label accounting
Audit and professional services
Tax preparation and filing
Corporate finance services
At Scrubbed, we offer a free consultation to see how your business could blossom with our services. If you’re the owner of a manufacturing enterprise, you’ll definitely want to hear about how we can tailor a plan for your company, addressing all the concerns discussed in this article. You benefit from knowing your books will be just the way you need them, which not only frees up your time but gives you the confidence you need to go after financing and look toward the future.
About The Author
Brian worked as CPA in various areas of accounting and auditing. He had administrative assignments with an engineering company, and has spent time abroad to help oversee the construction of a Liquefied Natural Gas refinery. At Scrubbed, Brian handles manufacturing, distribution, and other professional services clients, passionate about delivering results for his clients.