You went into business because you’re passionate about what you do. You chose manufacturing because you love to problem solve, create and scale big ideas. You’ve spent years perfecting your approach and serving your clients, and now … you find yourself caught up in cash flow conversations, budget meetings and financial jargon.
But you’re a manufacturer, not an accountant ... Why is the onus on you? Offload your financial stress to a trusted CFO service like Froehling Anderson. We’ll help you understand what an experienced manufacturing company like yours can expect from an outsourced CFO. Before we start, let’s take a look at the bigger picture.
Understanding Your Entire Financial Picture
Compared to service and merchandising companies, manufacturing companies have a few additional accounts to consider when it comes to understanding their financial situation. These accounts include, but are not limited to, raw materials, work-in-progress, finished goods and several other long-term fixed asset accounts.
Pricing & Profitability
How do you know if you are pricing your product or service adequately? Are you factoring in overhead costs? It’s important to get your pricing right—and that means including overhead costs. These costs typically include rent, office wages, insurance and any other costs not directly associated with the production of your product.
Let’s assume a product costs you $50 to make, and you want a profit margin of 50%. Should you sell the product for $100? That could be your target price … if you have no overhead costs. That’s unlikely. To calculate your overhead rate, you will first need to determine your overhead costs as well as an overhead factor, like the number of products sold.
Next, take your total overhead costs divided by the number of products sold to get your overhead rate per product. If your total overhead costs are $300,000 and you expect to sell 30,000 products, the amount you need to allocate to the cost of each product is $300,000 divided by 30,000—or $10 per unit sold. Sticking with our example above, this means it actually costs you $60 to manufacture your product, and you should sell it for $120 if your target profit margin is 50%.
Capital Budgeting
Picture this: A sales rep comes to your office and tells you that if you buy their piece of machinery, you’ll save big on time, money and taxes. Do you believe them and sign up right away? Or do you get a gut feeling telling you to pause and think?
If an offer like this seems too good to be true, you’re probably right. In this scenario, you want to prepare a capital budget to determine the true cost of new machinery and what the payback period would look like for you. Keep in mind:
- Tax Consequences – You can deduct 100% of the cost of your new machine in the year it’s placed in service if you meet certain requirements. But there can be unforeseen tax consequences a capital budget will consider.
- Payback – Do you have the cash on hand to pay outright for the new machine, or will you need to finance it? Is financing available to you? How much interest expense will you incur if you choose to finance your purchase? The discount rate of future cash flows is a key consideration.
- Removal or Replacement – Will you have to get rid of an existing piece of machinery to make room for the new one? Will there be disposal costs?
- Maintenance Fees – Are there annual or monthly maintenance fees associated with the new piece of equipment? What about unexpected fees?
Your capital budget should account for all of the items above, while also considering the discount rate on cash flows and determining the net present value of your investment. This will help you decide whether it’s a good time to invest in something new, or if the offer really is too good to be true. You can also use this approach when trying to decide whether to buy, lease, replace or repair other business assets.
Capital Budgeting for Maintaining & Growing
To maintain your business’s growth, or grow even more profitable, capital budgeting is key. Every business, in every sector needs the right accounting reports and financial statements to truly understand their cash flow and to budget accordingly.
If this isn’t your forte, don’t worry—it’s ours. At Froehling Anderson, we’ll help you conduct a cash flow analysis to determine where your cash flow is healthy, and where there’s an opportunity for improvement. We can also help you determine whether it’s the right time to purchase new machinery, whether you’ll need to finance it and what your cash flow will look like for the next 12–18 months.
Capital Budgeting – Understanding Outlays
OK, so you’re ready to buy a new piece of equipment. How are you going to pay for it? How can you encourage business owners to purchase or lease the equipment, and how will they pay it back? Does it make more sense to repair the existing equipment, instead? Understanding capital outlays can help answer these questions for you.
You’re probably already familiar with the fixed assets your manufacturing business relies on to conduct business—like your buildings, vehicles and machinery. Of course, owning these assets means fixing or replacing these assets from time to time. These expenses are capital outlays. And we can help you make sense of them, so you can understand what you can afford now and what you’ll be able to afford down the line.
An Outsourced CFO Service Can Benefit Your Sector
Manufacturing is unique, so you deserve an accountant who understands the intricacies of the business. From taking inventory of raw materials, work-in-progress and finished goods to helping you decide whether now is the right time to buy, sell, repair or maintain your machinery, we’ll help make the tough decisions a little easier.
Our experienced manufacturing accountants are experts in lean accounting. Let us take on the accounting, so you can focus on the manufacturing. When you outsource your CFO, you get the freedom to work in your business instead of on your business.
