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Mistakes Manufacturing Companies Make

Mistakes Manufacturing Companies Make

Job costing, cost accounting, manufacturing costs, what does all of this mean? Oftentimes, job costing, cost accounting, and manufacturing costs are used interchangeably. As a manufacturer, it does not matter what you call it. But it is critical that as a manufacturer, you capture all of your conversion costs. Simply put, you are taking raw material and converting it to a finished good that is ready for sale. You need to capture 100% of those cost of converting the raw material. Most small companies start with the most basic bookkeeping, and that’s okay. But there are two huge mistakes manufacturing companies make that you need to avoid.

 

Eventually, you need to have proper accounting transactions and systems to capture all of those manufacturing costs to have accurate margins. Accurate financial statements and margins will allow you to correctly price your product and will allow you to make adjustments to your business. This is helpful when you have a change in prices of materials or labor, or if your volume throughput changes for whatever reason.

Mistakes Manufacturing Companies Make

In my career, I have seen two recurring mistakes manufacturing companies make that are related to accounting process, procedures and systems.

First, a company may not want to spend the time and money to improve their cost accounting and systems. As a result, this company will struggle forever. The managers of that business will not have accurate financial reports, and they will likely feel the pain when markets turn or are in a high growth situation. Remember, cash gets tight when in either a growth or decline pattern, especially if it’s not managed well.

Second, a company wants to improve the manufacturing cost accounting, but they overdo it. They want a report that tracks every penny and part, and they install a massive expensive system. Many times, they install the wrong system for their company because it was marketed as the best accounting system. This happens when companies do not spend the money to go through a system selection process. They all end up spending much more than the cost of the professional system selection and bust their budget.

Best Practices for Manufacturing Companies

As a manufacturing company, please consider the following as a best practices for your leadership to abide by.

Analysis Paralysis

You DO have to capture 100% of your costs to take raw material and manufacture a finished good. However, this does not mean you need a separate dashboard or KPI for every cost item. If it is not material and the outcome of the cost is not going to change your mind or cause you to make a business decision, then you may reconsider trying to measure it. Remember, everything you want to measure has a cost itself of measuring it. Not capturing 100% of the costs can be devastating to your company.  Remember the quote from Benjamin Franklin, “A small leak will sink a great ship.

Many business owners and financial leaders want to measure everything. But you should limit your key  performance indicators to those that will lead to business decisions! Click here to access our KPI Discovery Cheatsheet to identify those indicators that really drive value.

Margins

When you manufacture a product, you have your obvious direct materials and direct labor – measuring Cost of Goods Sold. This is absolutely crucial in a manufacturing company. But there are other costs that you need to measure. I am referring to your indirect expenses, especially your sales, general and administrative expenses. You also want to measure your gross margin and/or contribution margin and your Earnings, Before, Interest, Tax, Depreciation and Amortization (EBITDA). Consider the implementation of analyzing trends based on a trailing twelve months (“TTM”). This will help you spot trends in your business and financially lead your company. Do not forget your balance sheet. Everything ultimately affects cash and working capital.  Without cash and working capital, you will create a financial disaster. Do have KPIs for your balance sheet items that you want to measure.

Systems

Systems are an important part of having a productive and efficient accounting department. It seems that every year there is a new operating system that comes in to the market, and it seems that the developers of these systems want to expand into every market – beyond manufacturing and accounting. With all of these choices and with all of the talented sales people, you need to understand what the choices are for your business. It is worth spending the money to go through a system selection process.

Timing

Timing is everything in manufacturing. Consider the following timing of:

  • Throughput
  • Delivery of the finished good
  • When you modify your standard costs
  • How quickly you close you books and generate financial records that are accurate and serve as a tool to help you run your business
  • Collections so you have cash to place that next order of raw material

Employee Turnover

I recently quoted in a past blog that employee turnover in the U.S. has an average cost of $65,000 per year per employee lost. The number in a manufacturing environment is actually higher because there are often specialty skills that need to be acquired in manufacturing. So keeping a close watch on employee turnover is crucial in a manufacturing company.

Inventory

For whatever reason, inventory seems to be the “Achilles Heal” in many manufacturing companies. Companies either do not properly manage inventory, they have bad practices, or it just seems that it is never right. Once you establish a good process and reconcile inventory, it should be more of a maintenance routine if your people know that they are doing.  Consider the following for inventory:

Be Realistic About Inventory

Be realistic about what is obsolete inventory and good inventory. I know that companies, especially public companies hate to write off inventory.  But you are just kicking the can down the road by not dealing with it now.

Clean Up

Get rid of the junkyard! So many companies I have seen have a junkyard behind the manufacturing facility.  It has been there for years and all it does is accumulate rats, snakes and rust.  Liquidate it and get a scrap dealer to take it off of your hands. You can use that cash for door prizes at the next company party!

Stay Focused

Stick to your business and stay focused. Especially in closely held companies, some business owners waste money on the craziest things. I have saw hundreds of old mopeds (remember, these are bicycles with a weed eater motor) in the back of a large industrial manufacturer. The owner got a “great deal” on them, so he purchased them to resell. The problem is that the initial transaction happened 7 years ago. I also saw a massive specialty machine that cuts steel in the back of a pipe manufacturer because the owner thought he could open a new line of business cutting huge pieces of steel. This machine was two stories tall and weighed thousands of tons. Still to this day, I have no idea how they ever moved it. In addition, the owner never got the new line of business started because there is not a building big enough on his property. The machine has not run in 10 years.

Physical Count

Establish strict physical counts quarterly or at least annually. Have the right team of people conduct the physical count.

Adjustments

Make adjustments to your inventory, and get it over with. Write it up or down in your accounting records.

Segregate Inventory

Segregate your inventory. There is something beautiful about walking into a manufacturing facility and seeing exactly where the raw material, work in process, and finished goods are. Keep obsolete inventory in a separate area that is clearly marked off. Tag and count everything!

Hire a Good Cost Accountant

Cost accounting is a specialty area within the accounting profession. Unfortunately, not every accountant or controller knows cost accounting. Yes, hopefully most accredited accounting programs at universities cover cost accounting, but that does not mean the person you are hiring is a cost accountant. Someone with good manufacturing experience and understands cost accounting is worth his weight in gold. This person will add value to your bottom line.

In the meantime, start measuring and tracking your KPIs. Download our free KPI Discovery Cheatsheet and start tracking your KPIs today!

Mistakes Manufacturing Companies Make
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Mistakes Manufacturing Companies Make

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Mistakes in Troubled Times

There’s never a good time to make a mistake. However, errors during times of distress can be especially crippling. As we enter month 17 of the oil crisis, even minor missteps can have devastating consequences. To help you stay vigilant, we’ve detailed some common mistakes in troubled times that organizations make and how to avoid them.

Mistakes in Troubled Times

Changing Too Slowlymistakes in troubled times

Regardless of what kind of trouble they’re experiencing, companies tend to linger in their old ways for longer than they should. Failure to react quickly and an “everything’s fine” mentality will cause more damage the longer it’s sustained.

In month 17, have you already started to adjust to the economy? Instead of sticking your head in the sand, process information and take actionable steps to maintain a) a positive cash flow and b) the longevity of your organization.

Unrealistic Expectations

I’ve said it countless times to my coaching participants over the past year “the marketplace thought this oil crisis would last for 3-6 months, but economists project it to last 18-36 months.”

In this extended period of financial stress, it’s imperative to maintain a positive cash flow. Find holes in your business where you are bleeding. Here are some examples of what actionable steps some companies have taken to maintain positive cash flow:

  • ask employees to work 4 days instead of 5 days
  • give employees a pay cut with the promise that their position will be maintained
  • streamline your company by removing any job positions that do not return a profit for the company

This length of economic downturn is an opportunity for your company to regroup and create an action plan that could be a catapult for success after recovery.

(NOTE: Do you know the direct costs to a single unit? By downloading the free Know Your Economics tool, you will be able to shape your economics to return a profit. Click here to learn more.)

Overreacting

If you projected in June of 2014 that the economic downturn would last 6 months and are now sitting in month 17 with little to no cash, you’re not alone.

Because they waited too long, panic sets in causing many companies to overreact. Massive lay-offs, budget cuts, and cheaper quality materials are typically the cuts made at a moment’s notice. Before you know it, you’ve cut all your upper management leaving one junior account manager with the responsibility of 15 senior managers.

Reacting quickly and carelessly can have major repercussions. Instead, first gather adequate information. Before considering making a decision, think about how that decision is going to affect your organization in the long term.

Does your organization value experience or does what you do not require an experienced work force?  Those few thousand dollars saved by hiring cheaper, less-experienced people could make a major difference in your company’s survival.  But if your organization’s success is based upon relationships, it might be best to consider keeping the more expensive person.  People (both employees and customers) tend to follow people that they like.

Does your organization stand on producing quality product? If the materials for your product are expensive, then there may be a less expensive vendor with the same quality. But if your organization stands on its quality, do not react quickly by cutting the quality of your product. Stand on what your organization was built on and continue that legacy by looking at it from multiple angles. If you take a Rubik’s Cube and try to solve it by only looking at one side, you aren’t going to be able to solve the cube (I’m assuming you’re not a Rubik’s genius here).

Lack of Transparency

Often, senior management becomes tight-lipped when things get tough out of embarrassment or a desire to protect the team from bad news.  In times of distress, transparency with your team is more important than ever.  People are much more likely to work with you when they have the whole picture and understand how they fit into the solution.

If your organization has already downsized employees and cut costs, it’s time to bring the team together to brainstorm.  Some of your front-line employees might see things differently than the executives. Take some time and listen to them. Here are some tips to consider when bringing the team together.

  • Spread out the facts for every employee to see
  • Do not undercut your paying customers
  • Translate every action into a dollar value

Transparency will go a long way. If management proves to the front-line employees that they are fighting for the company (and thus the front-line employees), loyalty will be dramatically higher.

There are many options to ride out an economic downturn with your employees: limiting unnecessary resources, reducing pay and work hours, and scrutinizing every process before a decision is made. Do what’s best for your company, but know that you work with real humans.

It’s tempting to nickel-and-dime customers when times are tough for your company (I’m looking at you, airline industry).  But, your paying customer should not suffer due to your company’s distress. If cash is tight, focus on providing excellent customer service to your loyal customers. This is your most valuable resource! Improve your service, go out of your way to serve your customer without nickel-and-diming them. Just like you’re trying to create loyalty with your employees, create loyalty with your customers.

Failure to Understand Your Company’s Economics

One of the most common mistakes I see companies make is taking action without investigating the impact on the firm’s economics.  How will reducing your sales price in an effort to increase volume impact your bottom line?  Have you decreased overhead costs correspondingly?  If you reduce the cost of your materials and product quality suffers, how much do you need to sell to still cover fixed costs?

Knowing your economics is crucial to preventing mistakes from happening in troubled times. Translate every actionable item into a dollar item. This will help streamline what items can be tweaked, thus increasing your chances for success.

(NOTE: Want to double-check that you know your company’s economics? Download the Know Your Economics tool here.)

mistakes in troubled times

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mistakes in troubled times

Whatever decisions you make, be honest with your management, employees, and customers. It’ll benefit you in the long run.

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Separation Of Duties

Separation of Duties Definition

Some circles refer to separation of duties as segregation of duties. It refers to a concept that leads to greater internal control within a company. The accounting separation of duties definition is a theory that the job of an employee should provide a reasonable evaluation for the job of another employee. In layman’s terms, no one person has too many responsibilities rested on him/her. What this does is prevent mistakes and fraud which could bring detrimental consequences upon the company as a whole as well as the individual.

Separation of Duties Example

A separation of duties example could be the relationship that exists between an accountant and a cashier. This policy maintains that the accountant should not update the cash balance on the cash as well as keep track of the cash on his person. Contrarily, the cashier should not have both those responsibilities either. It upholds that the accountant should keep track of the cash books while the cashier accepts responsibility for the cash that’s on hand. At the same time, separation of duties works for constructs other than business types. Our government has Legislative, Judicial, and Executive branches. The “duty” of running an efficient and successful government is spread over three entities.

Accounting Separation of Duties

While it is intelligent for there to be some sort of accounting separation of duties when it comes to jobs in general, it is paramount to efficiency and success. In fact, keep accounting completely separate from the rest of the operations divisions in the company. This remains constant for all aspects of production and financing. Therefore, there should be no individuals in the work-in-progress section that are keeping track of products in the finished goods section.

Why Is Separation Of Duties Important?

Obviously, as said before, duties maintains an efficient balance of work that ensure the accuracy and correctness of jobs. The work of one man, in turn, checks the work of another. Overall, this keeps a company or organization running as smoothly as possible. In addition, it produces accurate product and financial information. Separation of duties also creates jobs for more individuals. If one person was expected to be responsible for multiple jobs, then there would most certainly be fewer jobs for others. This spreading of responsibility allows for a more manageable workload. In addition, it allows for more available responsibilities for others to take.

separation of duties, Accounting Separation of Duties

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Designing an Internship Program

5 Steps to Designing an Internship Program

Internship programs are a great way for your organization to bring in new talent and fresh ideas with motivated and knowledgeable interns. Many companies offer internship programs for college students. Both the organization and the interns benefit from the value of an internship experience. Establishing successful intern programs involve several key steps that are simple to implement and maintain. Following are five steps to designing an internship program:

1. Planning your Internship Programs

The first step to designing successful intern programs is to plan ahead. Decide on your company’s goals and expectations for your internship programs. Do this by creating an internship job description, establishing intern responsibilities, and planning on internship projects. Setting an internship plan of action will facilitate the accomplishment of both your company’s and your intern’s goals and expectations. As an employer, you should decide on the conditions of your internship program. Establish clear terms for the intern’s work schedule and the internship time frame so that both the organization and the interns are in agreement for how long the internship program will last. In addition, determine whether your internship program will be paid or unpaid. Follow the Fair Labor Standards Act for more information about unpaid internship legal requirements.

2. Internship Program Orientation

Establish internship orientations before your interns start their internship programs. Intern orientations introduce the interns into the company and ease the interns’ transition into the workplace. Company cultures vary across organizations. Internship orientations enhance interns’ awareness of the company culture, introduce your interns to the company and to other employees, and offer an inside look into the workplace environment. It is important for you to clarify in your orientation the internship program policies and procedures and to address the interns’ initial questions or concerns. Interns will work better for you and your company if you offer them insight into decision-making processes and organizational culture. In addition, organizations should develop intern training plans during the intern orientation process to help the interns identify, develop, and learn the skills that will be necessary to excel in the internship program.

3. Intern Supervision and Mentorship

Provide internship program supervision and mentorship throughout the internship experience. Coordinate a designated employee to be the intern programs supervisor. Most interns are new to the workplace environment, so organizations should offer direction and support to maximize interns’ productivity. However, it is also important to offer interns autonomy and responsibilities. If the interns don’t know how to do something, you should instruct them to go and figure it out. The interns will improve their skills and learn to problem solve on their own. Young interns are high on energy and are excited to learn new things. Give the interns meaningful and internship responsibilities and projects with foreseeable deadlines in order to build a sense of task accomplishment and completion. This will motivate the interns to think outside the box and bring fresh, creative ideas into the organization.

Communicate and meet with the interns regularly to review progress and plan ahead. Communication is the key to building trust between the interns and the employers so that the interns can effectively make progress and accomplish tasks. Interns are eager to receive affirmation that you are pleased with their work. Mentor and support the interns to maximize the interns’ potential and to maximize the value of the internship program for both the organization and the intern.

4. Internship Program Problems

Prepare for internship problems or issues ahead of time! Things might go wrong, so it is important for you to create back up plans for urgent issues. Identify problems early and designate someone to get involved to create effective and easy to implement solutions.

For example, if interns are overwhelmed or intimidated by a task or project, offer them the support and guidance to come and talk to you about it. If the interns have any questions or concerns, make it clear that there is always someone in the organization to be their internship supervisor. Internship mistakes are bound to occur during the internship experience. Turn interns’ mistakes into constructive feedback and learning. You don’t want your interns to lose confidence in their abilities or motivation to do things. Learning from mistakes leads to improvement and lays the foundation for future success.

5. Internship Program Mistakes

Avoid these common intern program mistakes:

– Some employers do not communicate, offer feedback, or provide support for the interns. They seem to throw their interns into the deep end and then expect them to figure out a way to survive on their own. Internship communication and mentorship are vital to instilling interns’ dedication to their work. If you do not communicate or offer feedback, how can interns feel confident that they are doing a good job?

– Another intern program mistake is that the organization provides the interns with busy work rather than meaningful internship projects. Do NOT establish internship programs for “cheap labor.” Instead, design internships to bring in new perspectives, ideas, and skill sets to enhance your organization. An effective internship program will have value for both the interns and the organization.

– There are some organizations that push the interns into a corner and segregate them from other employees. If full-time employees do not know the first name of the interns, the interns become demoralized and feel like outcast within the organization. Employers should introduce the interns to other employees and invite them into some meetings so that the interns feel like they belong. When you encourage dedicated interns to be involved and active within the organization, it leads to increased intern productivity and creativity.

Determine which candidates are the right fit for your company by downloading our 5 Guiding Principles For Recruiting a Star-Quality Team.

designing an internship program

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designing an internship program

See also:
Recruiting a Winning Team

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3 Things – Selecting Advisory Board Members

Discover 3 things you should know about Selecting Advisory Board Members. In the video Jim Wilkinson, President and founder of The Strategic CFO discusses 3 useful tips you should know about selecting members for an Advisory Board.

Selecting Advisory Board Members

Watch the following video to learn about selecting advisory board members.

1. Do Not Add More Board Members You Are Willing To Impress

You must be able to share mistakes and shortcomings. Adding board members that you want to impress is counterintuitive. The purpose of the Advisory Board is to help and guide – not affirm and praise.

2. Pick Board Members With Unique Talents

Pick board members that have unique talents that are different from your own. For example, if you are strong in accounting and not in sales, consider selecting a member that is strong in sales. Also, consider picking board members that have been there, done that. Another option is having a former customer on your board to provide a different perspective.

3. Do Not Be Afraid To Swap Out Board Members

Unfortunately, not everyone is going to contribute equally. Some members are simply going to be “duds”. Do not be afraid to swap out that member for another that will be more valuable to you.

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Selecting Advisory Board Members

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