As a CPA serving manufacturing clients, you hold the key to unlocking hidden profitability and driving sustainable growth. By strategically managing the following five financial and operational metrics, you can help your clients navigate industry complexities and achieve long-term success.
In a recent episode of the Best Metrics podcast, Leslie Boyd, a principal at CLA’s Manufacturing Industry Group, shared her expertise on the key metrics CPAs should leverage to help their manufacturing clients thrive. With over 15 years of experience in public accounting, Leslie provides valuable insights into using these metrics to identify opportunities and guide clients toward increased profitability and growth.
EBITDA: The Cornerstone of Manufacturing Profitability
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a critical metric that indicates profitability and cash flow health. Banks and investors rely heavily on EBITDA when assessing a company’s creditworthiness and growth potential.
“If you have a negative EBITDA, it’s probably a pretty clear indicator that you are going to struggle to generate cash flow,” Leslie warns. “And quite frankly, if you’ve got banks looking at you and you’re struggling to generate positive EBITDA, they’re going to be hesitant to lend to you.”
EBITDA also plays a vital role in business valuation and succession planning. With an estimated $140 trillion in wealth expected to change hands over the next several years due to the aging baby boomer generation, manufacturing companies must focus on maximizing their EBITDA to ensure a smooth transition and secure the best possible valuation for their business.
To help your clients improve their EBITDA, consider the following strategies:
- Identify opportunities to reduce costs through operational efficiencies, such as lean manufacturing practices or automation.
- Explore ways to increase revenue through product innovation, market expansion, or strategic partnerships.
- Optimize pricing strategies to ensure competitively priced products while maintaining healthy profit margins.
- Implement effective financial management practices, such as budgeting, forecasting, and cash flow management, to minimize financial risks and maximize profitability.
Employee Retention: The Hidden Driver of Manufacturing Success
While financial metrics like EBITDA are essential, CPAs must also recognize the critical role that employee retention plays in driving manufacturing profitability.
As Leslie Boyd explains, high turnover rates can lead to many challenges that directly impact a company’s bottom line: “If I’ve got turnover, then I’m retraining people all the time. And if I’m retraining those people, then I probably have a lot of training costs, probably have a significant amount of scrap rate as well. And it could also be indicative of the fact that I’ve got culture issues or other underlying issues going on.”
The costs associated with constantly replacing and retraining employees can quickly add up, eroding profit margins and hindering growth. Moreover, high turnover can lead to decreased productivity, increased scrap rates, and potential quality control issues, damaging a company’s reputation and competitiveness.
To help your manufacturing clients improve employee retention, consider the following strategies:
- Conduct employee engagement surveys to identify areas for improvement in job satisfaction, work environment, and company culture. Use the results to develop targeted initiatives that address employees’ needs and concerns.
- Encourage open communication and feedback between management and employees to foster a sense of trust and collaboration. Regularly schedule one-on-one meetings and team discussions to ensure employees feel heard and valued.
- Invest in employee training and development programs to help workers acquire new skills and advance their careers within the company. Offer a mix of on-the-job training, workshops, and external courses to cater to different learning styles and needs.
- Implement competitive compensation and benefits packages to attract and retain top talent. Regularly review industry benchmarks and adjust compensation to ensure your clients remain competitive in the job market.
- Recognize and reward employee contributions to show appreciation and boost morale. Implement a formal recognition program that celebrates individual and team achievements and encourages managers to provide regular feedback and praise.
Inventory Turnover: Optimizing Cash Flow and Profitability
Inventory turnover is another crucial metric that CPAs should focus on when working with manufacturing clients. This ratio measures how quickly a company sells through its inventory, providing insight into its operational efficiency and cash flow management.
Leslie shares a powerful case study highlighting the impact of improving inventory turnover on a manufacturing company’s financial performance: “We had a company that really got themselves into some issues post-COVID. And many companies did. They had $50 million of inventory and we worked it down to 10 million. And you can imagine how much cash that unlocks on your balance sheet when you’re able to do that.”
This example demonstrates how optimizing inventory levels can free up significant amounts of cash, which can then be reinvested into the business or used to improve liquidity. By reducing the amount of money tied up in inventory, manufacturing companies can improve their cash flow, reduce carrying costs, and ultimately enhance their profitability.
To help your clients improve their inventory turnover, consider the following strategies:
- Implement just-in-time (JIT) inventory management practices to minimize the amount of inventory on hand while ensuring that materials are available when needed. This approach involves closely coordinating with suppliers and streamlining production processes to reduce lead times and minimize waste.
- Use data analytics and forecasting tools to predict demand more accurately and avoid overstocking or stock outs. Leverage historical sales data, market trends, and customer insights to develop more precise demand forecasts and optimize inventory levels accordingly.
- Collaborate with suppliers to establish more flexible delivery schedules and reduce lead times. Work with key suppliers to implement vendor-managed inventory (VMI) programs or consignment stock arrangements that allow for more responsive replenishment and reduced inventory carrying costs.
- Regularly review and adjust safety stock levels to balance minimizing inventory costs and maintaining adequate buffer stock. Use statistical methods to calculate optimal safety stock levels based on demand variability, lead times, and service level targets.
- Implement lean manufacturing principles to streamline production processes and reduce waste. Conduct value stream mapping exercises to identify non-value-added activities and implement continuous improvement initiatives to eliminate waste and improve efficiency.
Value Added Revenue and Capacity Utilization: Unlocking Hidden Profitability
Value-added revenue and capacity utilization are often overlooked metrics that can significantly impact a manufacturing company’s profitability. As Leslie Boyd explains, value-added revenue represents the true value that a company creates through its production process, while capacity utilization measures how efficiently a company is using its available resources.
Essentially, value-added revenue focuses on the incremental value a manufacturer generates by transforming raw materials into finished goods, excluding the materials’ cost. By analyzing this metric, companies can identify opportunities to increase the profitability of their products or services by optimizing production processes, reducing waste, or finding ways to add more value for customers.
On the other hand, capacity utilization measures how much of a company’s available production capacity is used at any given time. Many manufacturers operate in a fixed-cost environment, where a significant portion of their costs remain constant regardless of production volume. By increasing capacity utilization, companies can spread their fixed costs over larger units, reducing the cost per unit and improving overall profitability.
To help your clients improve their value-added revenue and capacity utilization, consider the following strategies:
- Conduct a thorough analysis of the company’s production processes to identify areas where value can be added or waste can be eliminated. Use tools like value stream mapping and process flow diagrams to visualize the current state and identify improvement opportunities.
- Encourage the adoption of lean manufacturing principles to streamline operations and reduce non-value-added activities. Implement initiatives like 5S, kaizen events, and total productive maintenance (TPM) to improve efficiency, reduce downtime, and increase value-added revenue.
- Help your clients understand their fixed and variable costs and how they impact profitability at different production levels. Use cost-volume-profit (CVP) analysis to determine the breakeven point and identify opportunities to optimize the cost structure.
- Work with your clients to identify opportunities to increase capacity utilization, such as by accepting additional work or optimizing production schedules. Conduct a thorough analysis of capacity constraints and develop strategies to remove bottlenecks and improve throughput.
- Assist your clients in developing pricing strategies that accurately reflect the value they provide to customers and ensure adequate profitability. Use value-based pricing techniques to capture the full value of the company’s products or services and avoid leaving money on the table.
Becoming a Trusted Advisor: Guiding Your Manufacturing Clients to Success
As a CPA, your role extends beyond crunching numbers and preparing financial statements. By understanding and leveraging the key metrics discussed in this episode, you can position yourself as a trusted advisor to your manufacturing clients, helping them navigate the complexities of their industry and achieve long-term success.
To become an indispensable partner to your clients, consider the following approaches:
- Proactively educate your clients on the importance of metrics like EBITDA, employee retention, inventory turnover, value-added revenue, and capacity utilization. Help them understand how these metrics impact their financial performance and provide guidance on improving them.
- Review your clients’ financial and operational data regularly to identify trends, opportunities, and potential challenges. Use this information to provide insights and recommendations that help your clients make informed decisions and stay ahead of the curve.
- Collaborate with your clients’ management teams to develop and implement strategies that drive profitability and growth. This may involve working with other departments, such as operations, human resources, or sales, to ensure a holistic approach to business improvement.
- Stay up-to-date on industry trends, best practices, and emerging technologies that can help your clients optimize their operations and gain a competitive edge. Share this knowledge with your clients and help them evaluate the potential impact of these developments on their business.
- Foster open and transparent communication with your clients, regularly checking in to discuss their goals, challenges, and concerns. By building strong relationships based on trust and mutual understanding, you can become a valuable resource that your clients rely on for guidance and support.
To Learn More, Listen & Subscribe to “Best Metrics”
To learn more about how you can help your manufacturing clients unlock hidden profitability and drive sustainable growth, listen to the full podcast episode of Best Metrics featuring Leslie Boyd. With her wealth of experience and practical advice, Leslie provides a roadmap for CPAs looking to take their manufacturing advisory services to the next level.