A quick guide to manufacturing accounting
Blog //15-07-2021

A quick guide to manufacturing accounting

by Grace Child, Senior Product Marketing Executive

Accounting is an integral task for any business. It’s perhaps not the first activity people think of when picturing a manufacturer’s typical day. But it’s certainly one of the most important.

In this article we look at the importance of accounting in manufacturing, and describe some of the methods that can be used.

We also provide tips on how to generally improve your accounting processes, whilst also detailing how our accounting software can take your finances to the next level.      

What is the importance of accounting in manufacturing?

If your finance team aren’t performing accounting tasks effectively (or they don’t have the proper tools to achieve this), it can have a seriously negative impact on your business.  

A lack of clarity around financial performance means there’s no way of identifying improvement areas, or knowing if danger is around the corner.

If incomings and outgoings are recorded inaccurately (or aren’t recorded at all), it will lead you to make unguided business decisions. It will also mean that you are leaving your fate to chance.  

Costing methods in manufacturing

  1. Standard costing

This is a method whereby manufacturers determine the standard cost of each product. This includes working out the typical rate for the materials and labour needed to create a finished piece.

With this approach you can easily judge when costs deviate from the norm, which may indicate a shift in the industry. Or it could be an indication that your standards have slipped (in terms of keeping costs down).

  1. Job costing

Whereas standard costing is perhaps more suitable for manufacturers that produce items in bulk, job costing is more useful for producing unique items (or a batch of items). This tactic can be used to work out the cost in terms of time, effort and materials used in a batch.  

  1. Activity-based costing

This strategy considers other costs, such as resources used when creating a product. These factors help you to get a sense of how profitable each product is. This method can be used to see how costly production processes are over a set length of time too.

  1. Target costing

This method is more about predicting what costs will look like going forward, and is a proactive approach. Accurate forecasts of impending costs can influence your business direction, and provide an insight into product profitability.

  1. Process costing

This strategy can be used when the production process is completed over many different stages. It can be used to work out the cost for each separate stage. It can also be used to determine the costs incurred by a particular department for a production run. This approach is useful for businesses that perhaps produce large numbers of the same item.

Top tips for manufacturing accounting

Choose the right accounting method

It is important to choose an accounting strategy that is suited to your business requirements. Cash basis accounting is a method that is predominantly used by smaller businesses (or those doing personal finance). It is a simpler approach, whereby profits and expenses are only reported once money has changed hands.

Accrual accounting is more complicated, but is arguably the most used (and widely accepted) method in the manufacturing industry. With this approach, transactions are reported as soon as a sale takes place, regardless of whether the payment has been made yet. This is more insightful, as it provides a more complete picture of finances.  

Put a budget in place

Your finance team should always develop a budget for the coming year. By having a safety net in terms of spend, it takes the pressure off when making an investment. The budget should be determined logically, by looking at factual data. You should look at profits from the previous year, and income / expenditure that is certain to take place over the coming months.   

Invest in financial expertise

You should be sure to hire talented and capable individuals for your finance team, people that will add real value to your accounting processes. Not only this, but you should maintain an environment of continuous learning, and provide the relevant tools / training for each employee to excel in their role.

Record finances meticulously

Your accounting methods should allow you to record financial data with ease, in a way that is structured and easy to monitor. All transactions must be recorded, no matter how small. You should be sure to generate the appropriate invoices and receipts. If you’re late with paying a bill, it could damage your reputation (and see you face legal action). If you’re unaware of the money you are owed, this will impact your income too.

Forecast effectively

The more accurate your data is, the more helpful your forecasting can be. Data has become an essential resource for accountants. By analysing information in complex ways, and reporting on it, you can extract a wealth of knowledge. By looking at current and past performance, it becomes possible to gain insights that will influence successful product pricing and production strategy changes.

Take relevant care with your taxes

If you don’t fulfil your tax obligations, you could possibly be hit with penalties. You should be sure that you have effective methods for calculating tax, and that submissions are made on time. It’s important that you have personnel with expertise in this field, so that mistakes are less likely. With the Making Tax Digital initiative coming into play, you must also ensure that these are submitted via the use of competent software (that is also HMRC approved).  

Carry out regular audits

You should carry out financial audits as often as you can. They act as a risk assessment, rooting out any issues that could do harm to your business. An audit will determine if your financial records are a true representation of actual performance. If the data doesn’t match up, it’s then possible to find the source of the problem, so that changes can be made.   

Scrutinise every investment

With every large financial outlay, you should first analyse the feasibility given your current situation. You should also determine the returns the investment will bring in the long-term. Timing is important too. There are good and bad times to make an investment, which should be apparent if you’re accounting accurately.  

Maintain a healthy cashflow

You should always have an appropriate amount of cash at hand, as you never know when an emergency or unexpected cost will crop up. If all your money is tied up in assets and immovable stock, you may be unable to make an important payment. Where possible, you should make payments over longer periods of time, to ensure money is always in the bank. Effective inventory control aids cashflow too. If you maintain optimal levels of stock, you’ll have less wasted goods and lower storage costs.  

Keep up to date with the latest financial trends

You should ensure that your finance team are given regular time to read about industry updates in the world of accounting. Or possibly pay for team trips to industry events. This way you can keep up with the competition and find new ways to enhance your processes.

Use accounting software

If you implement a sophisticated accounting solution (rather than performing financial tasks manually), you will find it easier to put all the above practices into place. And you’ll achieve better results too. You can save money by hiring less people, that are more highly skilled (and will add real value).   

Benefits of using manufacturing accounting software

  • Save time
  • Less mistakes  
  • Save money
  • More clarity around finances   
  • More accurate information  
  • Insightful reporting  
  • Accurate forecasting
  • Increase of overall efficiency

Traditional accounting software vs cloud-based accounting software

A traditional accounting solution is installed on specific machines, meaning that it can only be accessed on those devices. Installation can sometimes be a lengthy process, with large upfront costs.

Financial data will likely be stored on an on-premise server. It can be expensive to maintain these servers, and the information can be vulnerable to theft / sabotage. If the software ever needs fixing or updating, someone will have to physically come to your location to do this. And you will incur further costs for these services.  

Cloud-based accounting software is accessed via the internet, so nothing needs to be installed locally. As a result, your finance team can access their work at any time and from any place.

Your sensitive information is safer too, as cloud providers usually host their systems on off-site servers. They will ensure your data is backed up regularly, and that the system is utilising the most up to date security protocols.

Cloud-based software is usually purchased via the Software-as-a-Service (Saas) model. This means you pay a monthly fee for the service, rather than needing to pay a large setup fee (which ultimately protects cashflow). Any necessary support / upgrades are included in the monthly cost and can be done remotely. 

What is the best accounting software for manufacturers? 

Manufacturers should look for software that has wide-ranging accounting functionality, and Excel compatibility too. This way you can still export financial data into spreadsheets (if you prefer to report in this way).   

A system that has unified ledger accounting (with all accounts structured in a hierarchical fashion) will remove the hassle of reconciling multiple ledgers. If you wish to do business globally, you should also look for a system that possesses multi-currency accounting.   

If you opt for a solution with customer and supplier invoicing capabilities, you can clearly see where your future income is coming from (which gives you a clearer picture of cashflow). And if it has asset management tools (including a depreciation calculator), you can see the value that is locked up in physical assets.

You’ll need a solution that not only allows you to budget with ease (so that you can keep on top of intended spend), but one that has a payroll aspect too. This way you can ensure staff are paid in an effective and compliant way.  

Advanced’s Manufacturing Software has all of this functionality, but is so much more than just an accounting solution. Its true power comes from the fact that it’s an all-encompassing system. It unifies all your business operations in one place.

This means that the accounting activity is fuelled by highly accurate data from every department. This massively reduces the inconsistencies, inaccuracies and errors that can occur from having multiple systems.

With e-commerce, stock control, production planning, contact management and other features, automation becomes a real possibility. If a sale is made online, a purchase is made from a supplier, or a new production run begins, this is all information that your finance team can tap into.

When combining this cohesive data with the system’s powerful reporting ability, you can see a true picture of your financial health and future prospects. This empowers you to make transformative decisions. Increased efficiency allows you to grow your business as much as you want to. And as the system is designed to be scalable, it’s a comfortable and sustainable expansion too.     

 

If you want to take your accounting to the next level, read more about our cloud-based Manufacturing Software, which is tailored for small to medium-sized manufacturers.   

Blog Manufacturing Business Cloud Essentials
Grace Child

Grace Child

PUBLISHED BY

Senior Product Marketing Executive

Grace joined Advanced in July 2016 and leads product marketing for our Cloud back office solutions across finance and ERP. Grace is responsible for go-to-market activity, sales enablement, product launches, and understanding and articulating customer insights.

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