Organizational financial planning for manufacturing has been rigorously tested by COVID-19. In the face of a significant and singular disturbance, predictions and models based on conventional historical data were unsuccessful. Although anticipating cash flow is crucial to a company’s future, finance and accounting departments quickly withdrew and turned their attention elsewhere. Could more have been done?
Inventory, machinery, and employees must all be used efficiently by manufacturing organizations to produce and deliver goods. So, they must assess their company using the following financial indicators and make plans for higher growth rates. The effectiveness of operations and the viability of the manufacturing processes for the upcoming fiscal year, 2023–2024, can also be assessed using these ratios.
Hence, to grow and create a successful corporate, manufacturing enterprises need to utilize its inventory, equipment, and staff effectively.
Businesses employ a variety of financial criteria to assess their true level of efficiency. Manufacturing businesses‘ financial ratios include their inventory turnover rate, the ratio of their maintenance costs to their expenditures, and their revenue per staff member.
Turnover of Inventories
The inventory turnover ratio gauges how well a company’s manufacturing process is working. This ratio demonstrates how frequently a business sells and replaces its inventory over a given time. It is calculated by dividing the average inventory balance by the cost of goods sold.
This ratio can be used by businesses to prepare for future inventory orders more efficiently as well as make better price, production, and company’s strategy.
A low value suggests that a manufacturing company is holding too much inventory, which may result in losses after the peak point. As a result, the producing company has a greater risk of inventory obsolescence. Hence, the production units need to look out for a high inventory turnover ratio.
Ratio of maintenance costs to overall expenses
Equipment or machinery may be used by a manufacturing company to produce its products. Comparing servicing and upkeep expenditures to overall spending is a crucial indicator of how long-term operations will remain viable.
Low maintenance costs as a percentage can mean one of two things: First, a business has long-lasting capital assets that don’t need a lot of upkeep. Second, a business may decide to merely replace outdated heavy equipment with more modern, dependable models. In either scenario, the businesses should have a clear understanding of how management intends to use the existing systems and other resources in its long-term strategic planning.
Ratio of revenue per employee
The revenue per employee of a manufacturing company is calculated by dividing the total revenue by the total number of employees. Every manufacturing business must compute its revenue per employee ratio, which not only improves financial planning but also accounts for each employee’s productivity and performance. Organizational turnover affects a company’s revenue per employee.
Another new fiscal year is about to begin in India. Hence, the fundamental query that must be addressed before we start a new fiscal year is: Is it acceptable to carry over the same strategies and methods that were employed and put into practice the previous year?
The obvious response to this is NO!
Hence, the organizations must consider these three financial indicators to plan strategically with the available statistics and should approach future opportunities with a better and more realistic method going forward.
However, it should be noted that these financial indicators are not exhaustive. There might be several other factors that can get added depending on multiple factors like industry, sector, segment, geography and many others.
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Written by Faber Aleena Thomas