Posted on Friday 29 June 2018 by Ulster Business
Catherine Martin, partner at CavanaghKelly, looks at the importance of accurate, timely management information in allowing businesses to understand performance in real time
While every business strives to have a strong order book, a focus on sales alone can blur the lines between being busy and being profitable.
Many businesses are facing difficulties in recruiting and retaining skilled labour. In order to retain their best staff, employers are offering unforeseen pay increases. With material costs also on the increase and the unknown financial impact of Brexit, there is a risk of working around the clock fulfilling orders… but at what cost?
It is unlikely that all of the rising costs will always be captured – it is just not possible. However, what is possible is to prepare accurate, timely and relevant management information to identify these as early as possible.
In business environments such as manufacturing, where the final overall cost is made up of multiple factors, cost control is vital so that margins are not eroded. The latest management information should be used to give up to date information on these costs:
Materials: as well as basic materials used in the main production process, it is essential to include the costs of additional production stages such as paint shop, galvaniser etc.
Wages: normally includes direct labour for processing materials through various stages of production. Each employee should be accounted for, based upon hours spent and hourly rate. The accurate recording of time spent on jobs can also be a challenge but an area worth investing in to enable accurate comparisons of budget versus actual costs.
Sub-contractors: if elements of the final product are outsourced, these up to date costs should be accurately reflected.
Transport: delivery costs, whether shipping or road haulage, which are not borne by the customer directly must be factored in.
Overheads: these include costs incurred for insurance, rent, rates, telephone, electricity, indirect office wages, for example. An overhead allocation rate should be calculated on a regular basis.
Waste: consideration should be given to how wastage levels are recorded and monitored.
Rework and warranty: quality and getting it right first time can have a significant impact upon costs and profitability.
Ad-hoc production: understanding the difference between ‘one off’ jobs and established products is important, as hidden costs of producing ‘one off’ job may have a significant negative impact on margin.
Currency: this can be a volatile area, the forward buying of currency is something that businesses with significant exposure to currency fluctuations should consider.
The way in which we do business is constantly evolving, whether it’s the use of robotics on the shop floor, material optimisation software, or an ERP system. Businesses need real time information to control costs, maximise profitability and make informed decisions on the next phase of development.
CavanaghKelly is well-positioned to review and implement solid financial management reporting systems to allow you to see how your business is performing in real time. Please call 028 8775 2990 for more information from Catherine Martin.