The manufacturing industry has plenty of room to grow, but financial management can give manufacturers a hard time. This is where well planned financial strategies and the right finance and accounting support can help optimise business processes.
In this blog, we will cover the financial management strategies manufacturers use to protect cash, control costs and plan for growth.
What is financial management in manufacturing?
Financial management in manufacturing is the planning, control and analysis of money across the production cycle: buying raw materials, running plants, holding inventory, selling finished goods and collecting cash. Compared with most industries, it carries three extra demands: large capital investment in plant and equipment, cost accounting that tracks materials, labour and overheads per unit, and working capital tied up in raw materials, work in progress and finished goods.
For a look at how finance and plant operations are converging, read our blog on manufacturing and finance integration.
Financial challenges faced by manufacturers
Financial challenges are inevitable in the manufacturing industry because production ties up large amounts of cash long before customers pay. Here are some of the most prominent challenges to consider:
Upfront costs
The manufacturing industry requires a large upfront investment in machinery and technologies that make manufacturing easier. Manufacturing businesses heavily rely on funds to operate, which is a bigger challenge for small to medium-sized businesses with limited financial flexibility.
Therefore, upfront investment becomes challenging for manufacturers, especially since they have to account for sizable operational costs.
Changing market demands
Changing demands, customer preferences, and economic conditions are a few of the major challenges that every manufacturer faces. A sudden change in demand deeply affects the manufacturing operations and supply chain, which leads to inefficiency and revenue loss. The sudden demand change makes it difficult for manufacturers to analyse customer behaviour and patterns. Consequently, the procurement, supply, and inventory functions of a business often suffer.
Managing inventories
Burdening the inventory with products could risk the manufacturers’ investments. Insufficient inventory can lead to a lack of stock, lost sales, and dissatisfied customers. To address these challenges, manufacturers must understand the demands and flow of raw materials and products and stock up using technologies like demand forecasting.
Volatile input costs
Prices for raw materials, energy and freight can move sharply within a single quarter, squeezing margins when selling prices are fixed by contract. Without timely cost data, finance teams often discover margin erosion only after the month has closed.
Financial management strategies for manufacturers
The quest to address financial challenges starts with better visibility of costs, cash and performance. Here’s how manufacturing businesses could alleviate their financial woes.
Analyse financial statements and key manufacturing metrics
Evaluating financial statements is essential for manufacturers while formulating financial planning in the manufacturing industry. Understanding, analysing, and implementing the balance sheet data can help streamline the financial strategies in manufacturing. It also helps manufacturers make strategic financial decisions with confidence. For manufacturers, the most useful measures include gross margin by product line, cost of goods sold, inventory turnover, days sales outstanding and the cash conversion cycle.
Analyse profits and losses
Analysing profit and loss statements closely is an effective financing strategy that leads to efficient financial management. Calculate your profits and losses to determine the benefits and costs of your current manufacturing strategy. This allows you to determine how things move around and what could be tweaked to generate positive results. As a result, P&L reviews act as a measuring and benchmarking method to determine business performance.
Monitor and create budgets
Budgeting is essential for every manufacturer and is among the most prominent financing strategies in manufacturing along the way. Establishing and managing the budgets will help follow plans of action that lead to achieving the business’s financial goals. You can create a list of budgets by breaking down your team’s work into different elements.
Expense tracking in real-time
By proactively monitoring expenses in the manufacturing business, manufacturers gain a complete view of all financial activities and stand up to effective financial strategies. This is where automated expense management comes into the picture for end-to-end expense tracking in real time. This is an ideal financial strategy that allows manufacturers to get access to expense tracking at their fingertips and finance management made easy.
By leveraging automated expense management, manufacturers can make crucial financial decisions in less time.
Control working capital
Manufacturers hold cash in raw materials, work in progress and finished goods, then wait for customers to pay. Shortening the cash conversion cycle by cutting excess stock, collecting receivables on time and agreeing sensible supplier terms frees cash for investment without new borrowing.
Use accurate cost accounting
Standard costing and variance analysis show where actual material, labour and overhead costs differ from plan. Allocating overheads accurately by product line reveals which products truly make money and supports better pricing decisions.
Manufacturing financial planning: linking finance to production
Manufacturing financial planning works best when the financial plan is built from the same demand and production forecasts that drive the plant. Linking financial planning and analysis (FP&A) with sales and operations planning (S&OP) lets finance see the cash and margin impact of production decisions before they are made. In practice, this means:
- Basing revenue forecasts on the agreed demand plan, not a separate finance view.
- Modelling material, labour and overhead costs for each production scenario.
- Planning capital expenditure on equipment against expected utilisation and payback.
- Running rolling forecasts each month so budgets move with orders and input prices.
How can Infosys BPM help manufacturers?
Infosys BPM supports manufacturers with finance and accounting operations, including accounts payable and receivable, general ledger, record to report, travel and expenses, tax support and FP&A. Combined with supply chain and inventory services, this gives finance leaders timely, reliable numbers across plants and shared services. For example, Infosys BPM delivered $37 million in inventory rebalancing for one of the world’s largest aluminium manufacturers.
Frequently asked questions
Manufacturers use four main statements: the statement of cost of goods manufactured, the income statement, the balance sheet and the cash flow statement. The statement of cost of goods manufactured is unique to manufacturing, showing how materials, labour and overheads turn into the cost of finished goods.
Financial accounting reports overall results to investors, lenders and regulators under set standards. Cost accounting is for internal use: it tracks the cost of each product, process or plant so managers can control spending, set prices and find inefficiencies.
Many manufacturers outsource transactional finance, such as accounts payable, receivables and reconciliations, to a business process management (BPM) partner, while keeping budgeting and strategic decisions in-house. This improves consistency across plants and frees finance teams to focus on analysis.
The most useful enterprise resource planning (ERP) features for manufacturing finance are integrated product costing, inventory valuation, production order tracking, multi-plant consolidation and real-time links between operations and the general ledger.
