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Common Financial Mistakes in Manufacturing (and How to Avoid Them)

The manufacturing industry focuses on four distinct principles: inventory, forecasting, cost accounting, and production. Even the slightest of improvements in any of these areas can save time and money for a small business in the manufacturing industry.

Unfortunately, some manufacturing businesses can still make common financial mistakes even when they’ve done their best to focus on production efficiency.

Here are some of the most common financial mistakes manufacturing businesses can make and how you can avoid them in the future.

Ignoring employee input

Your employees are on the front-line in your manufacturing business, which means your company relies on them in critical processes. Your workers know first-hand what’s working and what isn’t.

Business owners or management may choose to close themselves off to the rest of the company, but this can be a big mistake. Your employees may be able to identify trends before management and they may also have great ideas on how to improve your company’s processes and products.

In fact, according to a recent study, manufacturing companies estimate that up to 70% of unplanned equipment shutdowns in the last three years were caused by incorrect lubricant management. Employees who work on the production line may have a better idea of when the wrong metalworking fluids are being used to reduce the risk of an unplanned shutdown.

Inaccurate forecasting

A lot of the success that manufacturing companies see depends on a business’ use of resources. This includes resources like skilled employee labor and raw materials. Because materials and labor can be challenging to find, it’s essential to make accurate forecasts.

Compared to the flooring industry, which reported 3.9% growth last year, the manufacturing industry drives 12% of U.S. economic output. Although this is great, large spikes in volume can also lead to resource shortages or drops in customer orders. These drops can result in excess materials or capacity.

That said, it’s recommended that you go through your annual budget process. Update your budget periodically as a live forecast as these spikes and drops occur.

Not managing your business’ cash conversion cycle

A raw material needs to be purchased to start the manufacturing process. That material is altered or assembled into a finished product and then sold to a customer.

Your business’ cash conversion cycle is the time from paying for your raw material until you collect the sales revenue from your customer. If this cycle isn’t managed correctly, you can end up with cash flow issues. Make sure you’re using metrics that can help to manage your cash conversion cycle including Inventory, Accounts Payable, and Accounts Receivable.

Every manufacturing business will make a financial mistake at some point during their run. But by preparing yourself for potential mistakes and catching them, you can keep your manufacturing business ahead of the game.

Photo Credit: stock photo

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