Manufacturing
A manufacturer makes money on throughput and loses it on inventory, downtime and products that were costed wrong. Standard costs set years ago, overhead applied by a rate nobody has checked, and a shop floor that runs on tribal knowledge produce an income statement that does not explain itself. We bring product-level and plant-level finance to manufacturers across British Columbia, working alongside their CPA and their operations lead.
How the money works
- Product cost is only right if the overhead rate, the labour standard and the material cost are current, and all three drift
- Inventory sits in three places, raw material, work in progress and finished goods, and each holds cash for a different reason
- Capacity is the constraint, so the margin per hour of the bottleneck decides which orders to take
- Equipment purchases are large, infrequent and financed, and the wrong term or the wrong timing costs for years
The moves we make
- A product costing model rebuilt from current material, labour and overhead, with the overhead rate reviewed annually
- Contribution per bottleneck hour by product and by customer, so order acceptance and pricing follow throughput
- Inventory reporting across raw, work in progress and finished goods with turns and targets for each
- Capital expenditure models with payback, financing options and the cash impact in the forecast
Where cash and margin leak
Margin leaks in quotes built on a standard cost that no longer matches the shop, in overhead applied by a rate set when the plant was busier or quieter, in rework and scrap that is not tracked, in setups that eat capacity on small orders priced as if they were large, and in customers who order often, change often and pay slowly.
Cash leaks in raw material bought ahead of orders, in work in progress that waits for a part or an approval, in finished goods made to a forecast that did not arrive, and in equipment bought outright when a term loan would have matched its life.
The numbers to watch every week
Shipped sales and backlog in weeks. Contribution per bottleneck hour. Scrap and rework as a percentage of output. On-time delivery. Inventory days in raw, work in progress and finished goods. Receivable days by customer. Capacity utilisation at the constraint. Cash low point over thirteen weeks against open purchase orders.
These connect the shop floor to the bank account in a way the monthly income statement never does, and they are the basis for the pricing, the scheduling and the purchasing decisions made each week.
How pricing works in manufacturing
Pricing is built from material at current cost, labour at the real standard, overhead at a rate that recovers the plant's fixed cost at a realistic volume, and a margin. The second layer is throughput: when capacity is the limit, the right price is the one that earns the most contribution per hour of the constraint, which can mean turning down work that looks profitable on a unit basis.
Setup time, minimum order quantities, tooling and rush charges all belong in the price. We rebuild the costing model, put the contribution per hour on the quote and set the rules for the orders the plant should and should not take.
Questions from manufacturing owners
Our standard costs are years old. Where do we start?
With the overhead rate and the labour standard, because they are usually the furthest from reality. We rebuild both from the last year of actuals, reprice the top products first and roll the rest through as orders come in. Your CPA is involved so inventory valuation at year end agrees.
How do we decide whether to buy a new machine?
From a model that shows the extra throughput or the saved cost, the price and the financing, the payback and the effect on the cash forecast. The term of the financing should match the life of the asset. We build the model and prepare the lender conversation.
Which orders should we take when we are at capacity?
The ones with the highest contribution per hour at the bottleneck, which is not always the ones with the highest margin per unit. The costing model answers this order by order, and the sales team quotes from it.
Start with a finance review.
Ninety minutes with Ali on your cash, margin and pricing. You leave with the four numbers to watch and the two or three moves that change them, whether or not we work together.