The Manufacturing sector of India is changing and growing at an accelerating pace. In order to achieve this success, the CEO has to strike a balance between the efficiency of the Manufacturing process and having an effective financial intelligence system. To achieve this, CEOs of Manufacturing Companies must have a good understanding of Financial and Accounting terminology. This understanding will enable them to make more informed decisions, successfully manage their cash flow, and control expenses. Below is a list of 25 key financial and accounting terms that every Manufacturing CEO should know.
1. Revenue
Revenue is the money received from selling manufactured products. For manufacturing companies, revenue is received from domestic, export and scrap sales. It is the starting point for measuring growth of the company.
2. Cost of Goods Sold (COGS)
COGS is the direct cost related to manufacturing. The direct costs include raw materials, direct labour and factory overheads. Decreasing COGS due to improved efficiencies will increase margin.
3. Gross Profit
Gross profit is how much the company earned on the primary manufacturing operations, prior to deducting any administrative or financial costs; that is, revenue minus COGS.
4. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
A standard of financial performance that shows how well the business is operating and is a financial metric used by bankers and investors to determine a company’s financial status.
5. Net Profit
The amount remaining after all expenses, interest and taxes have been deducted from revenue. This is an indicator of the company’s earnings and its ability to remain solvent and continue to operate.
6. Cash Flow
The flow of cash in and out of a company. A positive cash flow allows for the payment of payroll, vendor payments and reinvestment in the business.
7. Working Capital
Working capital is current assets minus current liabilities. It indicates whether the company can meet short-term obligations, which is crucial for manufacturing units with heavy inventory cycles.
8. Accounts Receivable (AR)
The amount of money owed to a business by its customers. A lower AR collection period means fewer cash disruptions, creating a better cash flow.
9. Accounts Payable (AP)
The amount that a business owes to its vendors for goods or services received but not yet paid for. Proper management of AP creates vendor relationships while providing cash flow improvement by reducing APS.
10. Inventory Turnover
Refers to how many times a business sells and replaces its inventory. The faster an inventory is turned over, the more successfully a business produces its products due to increased consumer demand.
11. Fixed Assets
Any long-lived assets such as land, machinery, production equipment and buildings are fixed assets. These are typically used in producing finished goods and, therefore, are an important aspect of the production process.
12. Depreciation
The annual reduction in the value of an asset over time. Depreciation has a significant impact on profit, taxes and replacement planning.
13 . Capital Expenditure (CapEx)
Capital expenditure refers to any purchase or upgrade of a long-lived asset. CapEx should align with a business’s plans for future production capacity and return on investment (ROI).
14. Operating Expenditure (OpEx)
Day-to-day expenses for a business’s operation (utilities, repair, administrative salary and other expenses). Proper control of OpEx is necessary to maintain a healthy margin for the business.
15. Break-even Point
The point at which total revenue equals total costs for a business, meaning that the business’s profit will be zero. Break-even points enable a CEO to establish proper price levels, production levels, and the structure of costs.
16. Return on Investment (ROI)
Calculating the profitability of capital investments such as machinery and technology upgrades using ROI (Return on Investment). Higher ROIs indicate a more effective and productive use of capital.
17. Contribution Margin
Contribution margin is the difference between the selling price and variable cost per unit. It can be utilized for setting prices and will assist in determining which products yield a profit.
18. Budget Variance
The difference between planned financial results and actual financial results is known as budget variance. Variance analysis will help identify inefficiencies in operations and aid in planning better.
19. Financial Audit
A financial audit is an independent examination of the financial statements for accuracy and regulatory compliance. Regular audits provide credibility to an organisation in the eyes of stakeholders.
20. GST Input Credit
GST input credit is a rebate for tax paid on GST for purchases. A well-managed input credit system will reduce tax liabilities and help to maximise cash flow.
21. TDS
TDS, which is a tax deducted at source, applies to certain payments that require withholding taxes. Proper compliance with TDS will ensure that a taxpayer will not incur any penalties and will facilitate filing their taxes smoothly.
22. Balance Sheet
The balance sheet provides a snapshot of an organisation’s assets, liabilities, and owner’s equity at a specific point in time. It provides insight into the financial health and solvency of an organisation.
23. Inventory Valuation
Methods like FIFO, LIFO (where allowed), and weighted average determine inventory valuation. The chosen method impacts profit, taxes, and balance sheet profitability.
24. P&L Statement
The P&L statement shows an overview of the revenues and expenses during a specific period. A CEO will look for revenue and expense trends in order to evaluate an organisation’s performance and profitability.
25. Cash Conversion Cycle
The cash conversion cycle is the time it takes for a business to convert raw material purchases into cash from product sales. A shorter cash cycle will increase the liquidity and operational efficiency of a business.
Gireesh Sharma
Director, Manufacturing Industry