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

By Corazon Gritar

financial mistakes in manufacturing

For businesses that must deal with financial mistakes in manufacturing, it’s important to understand that the manufacturing industry focuses on four distinct principles: inventory, forecasting, cost accounting, and production. The good news is even the slightest of improvements in any of these areas can save time and money for a small business.

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

So it is possible for manufacturing managers to reduce the risk of making these critical mistakes that can harm the bottom line? Of course; but they must strive to be vigilant. With that in mind, 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, manufacturing companies estimate that incorrect lubricant management was responsible for up to 70% of equipment shutdowns. 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

Believe it or not, 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 difficult to find, it’s essential to make accurate forecasts.

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 important to go through your annual budget process. Consistently update your budget as a live forecast when 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 made 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. Incorrect cycle management may lead to cash flow issues. Make sure you’re using metrics that can help to manage your cash conversion cycle. For example, it’s important to track inventory, accounts payable, and accounts receivable.

Although the best managers do their best to avoid them, every manufacturing business makes financial mistakes. But by preparing yourself for potential mistakes and catching them, you can keep your business ahead of the game.

Photo Credit: stock photo

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