Introduction to CFO Metrics for Manufacturing Companies
In manufacturing sector, Virtual Chief Financial Officers (CFOs) play a critical role in managing the companies to help them achieve the financial success. As the business evolves, the need for CFOs also increases to monitor various financial metrics which provide relevant information about operational efficiency, profitability, and overall financial health of the manufacturing company.
In this blog, we'll explore the top metrics that every CFO in the manufacturing sector should measure, how to calculate them, and their real-life application.
Various Financial Metrics every CFO should Track
1. Gross Profit Margin
- Formula : Gross Profit Margin= ((Revenue−Cost of Goods Sold) / Revenue) * 100
- Gross Profit Margin indicates the percentage of revenue that exceeds the cost of goods sold, reflecting the efficiency of production.
- In a high-volume manufacturing plant, maintaining a gross margin of 45% - 75% helps ensure cash flow for reinvestment into new machinery.
2. Inventory Turnover Ratio
- Formula: Inventory Turnover = (Cost of Goods Sold / Average Inventory) * 100
- Inventory Turnover ratio helps to measures number of many times inventory is sold and replaced over a particular period, indicating inventory management efficiency.
- An Ideal manufacturing company should have its inventory turnover from 3x to 6x which will help them with reduction in holding costs and better cash flow management.
3. Operating Cash Flow
- Formula: Operating Cash Flow=Net Income + Depreciation + Changes in Working Capital
- Operating Cashflow reflects the cash generated from operations, crucial for meeting short-term and near-term liabilities for manufacturing companies.
4. Cash Conversion Cycle (CCC)
- CCC = Days Inventory Outstanding + Days Sales Outstanding − Days Payable Outstanding
- Cash Conversion Cycle helps to understand the time taken for a manufacturing company to convert its inventory into free cash flows from sales.
5. Break-Even Point (BEP)
- BEP = Fixed Costs / (Selling Price per Unit−Variable Cost per Unit)
- CFO in Manufacturing Companies should measure break even point. It is the point where total revenue equals total costs, indicating no net loss or gain.
6. Current Ratio
- Current Ratio = Current Assets / Current Liabilities
- Current Ratio is liquidity ratio and it measures the company's ability to pay short-term obligations to the outside lenders and vendors.
7. Debt to Equity Ratio
- Debt to Equity Ratio = Total Liabilities / Shareholder Equity
- Debt to Equity Ratio helps to understand the leverage position of the company. Company should ensure Debt to Equity ratio is within predefined limite of not more than 1.5x of total equity.
8. Return on Assets (ROA)
- Formula: ROA=Net Income / Total Assets×100
- Return on Asset KPI Indicates how efficiently a company uses its assets to generate profit.
- Company should compare ROA with their competitor. A ROA of more than 5% is considered good, > 20% is excellent.
9. Days Sales Outstanding (DSO)
- Formula: DSO = (Accounts Receivable / Total Credit Sales) ×Number of Days
- DSO is an effective measure to understand the average number of days it takes to collect payment after a sale.
10. Return on Investment (ROI)
- Formula: ROI= (Net Profit / Cost of Investment) ×100
- ROI Assesses the profitability of investments made in the manufacturing process and absolute return earned on the investment.
11. Capacity Utilization Rate
- Formula: Capacity Utilization= (Actual Output / Potential Output)×100
- This utilization rate formula helps CFO in manufacturing companies to understand how much of the manufacturing capacity is being utilized, helping to remove operational inefficiencies.
12. Net Profit Margin
- Formula: Net Profit Margin = (Net Income / Revenue) × 100
- Net Profit or PAT Margin helps to measures how much net profit a company makes for every rupee of revenue, helping in assessing overall profitability of the company
13. Budget Variance
- Formula: Budget Variance = Actual Budget−Planned Budget
- Tracking Budget for Manufacturing Companies helps in evaluating performance against financial plans, indicating areas that require attention.
FAQ
1. What is the most important financial metric for manufacturing companies?
Gross margin is one of the most important metrics for Manufacturing Companies. It helps to measures the fundamental profitability of the company.
2. How often should CFOs review these metrics?
Top CFO in manufacturing Companies ensure to review financial metrics on a monthly basis as this would help CFO to monitor the operational and financial health of the company.
3. How does inventory turnover impact profitability?
A higher inventory turnover rate state that company is able to sell quickly and is a sign of effective inventory control, ultimately boosting cash flow.
4. What is a healthy current ratio for manufacturing companies?
We at Jordensky acting as CFO to top manufacturing companies has seen that current ratio of 1.5 to 2.0 is healthy ratio, as this shows enough liquidity to pay short-term obligations.
Virtual CFO Services from Jordensky
Jordensky has helped more than 120 companies and startup and is providing as Virtual CFO to Startups and Manufacturing Business in India and USA. Jordensky team of CFO are seasoned professional with each CFO possessing more than 10+ years of experience in managing bookkeeping, accounting and taxes for manufacturing companies in India and Mumbai. Jordensky has been one of the most reliant and professional CFO service firm in India and provide cost effective and most reliable CFO services for manufacturing companies.
Services Offered by Jordensky Virtual CFO’s
- Annual Budgeting and Monthly Financial Analysis
- Preparation of SOP and Implementation for Companies
- Budgeting and forecasting along with Rolling Forecast
- Assistance in Fundraising
- Accounting and Bookkeeping Support
- Audit Support for Large Manufacturing Companies
Conclusion
CFOs in the manufacturing sector should use these KPIs to support strategic planning and help them making well-informed decision-process. CFOs with the help of KPI can ensure that their companies stay adaptable, competitive, and financially sound in a market which is always changing by concentrating on key performance metrics.
Contact Jordensky for assisting you with Virtual CFO services for your manufacturing business and assist you to streamline the finances for the company.
