Is your manufacturing company truly financially healthy? How can you tell?
Today’s manufacturing companies collect vast amounts of data through their daily activities. However, simply recording your financial and operational activities is just the beginning. The crucial part is transforming those numbers into actionable insights.
With the right financial analysis, you can uncover opportunities to streamline processes, reduce waste and increase profitability. Here are six ways to measure your manufacturing company’s financial health:
- Assess Your Ability To Meet
Short-Term Obligation Evaluate your company’s ability to meet short-term obligations with short-term assets. Manufacturing companies should maintain a healthy current ratio to ensure liquidity, promote financial stability and prevent disruptions in production.
- Evaluate Your Equipment Efficiency
By measuring your return on investment (ROI) for a piece of equipment, you can determine whether to maintain, expand or reduce its use. A higher ROI indicates that the equipment is contributing well to profits relative to its cost, while a lower ROI suggests underperformance. Over the long term, this can help you assess how effectively your organization is using equipment to generate profit.
- Determine Your Creditworthiness
Assess your financial leverage by comparing your company’s total debt to your shareholders’ equity. A lower leverage ratio indicates a healthier balance between debt and equity, reducing financial risk. Manufacturing companies should monitor this ratio to ensure you are not overly reliant on debt financing, which can lead to financial instability.
- Identify Your Profitable Products
Measure the percentage of revenue that exceeds the cost of goods sold. While you may already measure this company wide, calculating it by individual product can provide even more insights. This number can help you determine which products to optimize production and which may need to be discontinued.
- Track Your Product Defects
Monitoring your company’s defect rate can help you identify the timing and sources of costly product defects. This information can help guide adjustments to processes and enhance quality control measures to improve overall product reliability.
- Analyze Your Labor Efficiency
Revenue per full-time employee equivalent offers insights into internal productivity trends and links revenue to employee costs. It can inform decisions about hiring and workforce adjustments, as well as evaluate how effectively your workforce contributes to revenue generation. Additionally, knowing your revenue per labor hour helps identify any shortages or overages in labor capacity.
Drawing insights from these metrics can be complex, but it is essential for effectively measuring your company’s financial health. With a comprehensive understanding of your financial health and with the right professional advisor on your team, you are best equipped to make the right decisions for your manufacturing company’s future.
About the Expert: Jon Chancey
Jon Chancey joined Warren Averett in 2000 and is a Member in the firm’s Audit Division. He serves as the firm’s regional industry leader for manufacturing and distribution in Central and South Alabama.
(334) 260-2347 | [email protected]
