Shammika Wijewardena
Senior Consultant, FP&A, ACA, ACMA (UK), CGMA, ACCA, MBA, BBA in Finance
In the dynamic world of manufacturing, tracking Key Performance Indicators (KPIs) not only drives financial performance but is essential to success and helping ensure sustainable growth across the organization.
These days, manufacturers operate with disparate systems for different functions, such as production, inventory, and finance. Integrating these systems to provide a holistic view of their financial performance can be a significant challenge.
If you are a manufacturer and are encountering multiple challenges when it comes to managing and optimizing your financial KPIs, this is not unusual. These challenges usually stem from the complex nature of the manufacturing industry, the intricacies of your financial processes, and the ever-changing business landscape.
Many manufacturing companies struggle to collect financial data in a timely and accurate manner from multiple sources, including production floors, supply chains, and various departments.
Business Intelligence (BI) tools like Grow, an Epicor solution, excel at tracking and visualizing operational KPIs, while financial solutions like Epicor FP&A can perform advanced calculations involving finance KPIs and metrics. When you use these two tools together—Grow and FP&A—you get a powerhouse for informed decision-making.
Financial KPIs and metrics monitor financial viability—they are measurable values that demonstrate how effectively your company is achieving its financial objectives. These indicators can help you set and reach targets, understand performance trends, and make informed decisions.
Below are common financial KPIs in manufacturing.
Unit Contribution refers to the amount of revenue generated by each unit of a product or service after deducting variable costs associated with producing or delivering that unit. It represents the portion of revenue that contributes to covering fixed costs and generating profit.
Profitability, on the other hand, refers to the ability of your company to generate earnings or profits from operations over a specific period. It measures the efficiency and effectiveness of your company's business activities in generating returns for the shareholders or owners. This includes ratios such as gross profit, operating profit, net profit, EBITDA, return on assets (ROA), return on equity (ROE), and return on investment. The tracking, reporting, and forecasting of these should be supported within your FP&A solution.
COGS represents the direct costs incurred in producing goods, including materials, labor, and overhead. Robust financial tools allow you to track and analyze COGS in real time, helping provide insights into production efficiency and cost-effectiveness.
These KPIs provide insights into your allocation of expenses within your company's financial structure. Both KPIs are useful for assessing cost efficiency, identifying areas for improvement, and making informed decisions to optimize your operational performance and financial outcomes. By tracking these KPIs over time and benchmarking against industry standards or historical performance, you can identify trends, set targets, and implement strategies to enhance your company's cost effectiveness and overall financial health.
This KPI measures the percentage increase in your revenue over a specific period. Your FP&A solution should help provide tools for forecasting and budgeting, allowing you to predict revenue growth and align financial strategies accordingly.
These KPIs track how quickly you can sell your inventory within a specific period.
Optimizing these KPIs is essential for maintaining lean operations, improving cash flow, and enhancing profitability. Effective inventory management helps ensure timely production, minimizes excess stock, and enables better responses to market demands, ultimately enhancing your customer satisfaction and competitive advantage.
The right financial solution enables you to monitor inventory levels and turnover, facilitating better inventory management and optimizing cash flow.
Liquidity and leverage provide insight into your company's financial health, risk profile, and ability to meet your financial obligations.
With liquidity, you can evaluate your ability to meet short-term obligations based on how fast you can convert assets to cash — this is crucial for managing day-to-day operations and for helping ensure financial stability. Leverage measures your long-term financial health by evaluating reliance on long-term debts.
By tracking liquidity and leverage, you can gain insights into your ability to handle and sustain debt levels, assess risk exposure, and predict potential financial. In the long run, this can help you take proactive measures to ensure sustainability and smooth operations while making informed decisions and maintaining a balanced capital structure. Further, diligent oversight of your loan covenants can help you mitigate collateral risks associated with borrowing activities, contributing to a more secure financial landscape.
The operating cycle is the time it takes for your organization to convert raw materials into finished goods, sell them, and collect cash from customers. The cash-to-cash cycle extends the operating cycle by considering the time it takes to pay suppliers for raw materials. It starts when the organization pays for raw materials and ends when it receives cash from customers.
A shorter operating cycle indicates efficiency in turning inputs into cash, while a shorter cash-to-cash cycle signifies effective working capital management. Both these KPIs are crucial as they reflect operational efficiency and liquidity. A streamlined operating cycle and cash-to-cash cycle can enhance your cash flow, reduce financing needs, and improve overall financial health.
Operating Cash Flow (OCF) is the net amount of cash generated or used by a company's core operating activities within a specific period.
Cash Flow Productivity is a KPI that measures how efficiently you utilize cash to generate value, often expressed as a ratio of revenue to operating cash flow. These metrics help you assess your financial health and efficiency. OCF reflects your company's ability to generate cash from primary operations, while Cash Flow Productivity provides a comparative measure, indicating how well you can transform revenue into operating cash flow.
The operating cycle includes converting raw materials to finished goods, selling them, and collecting payment. Extending this, the cash-to-cash cycle also considers paying suppliers for raw materials, starting from procurement and ending with customer payments. Shorter cycles denote efficient cash conversion and working capital management, crucial KPIs indicating operational efficiency and liquidity. Streamlining both cycles enhances cash flow, lowers financing requirements, and boosts financial health.
Shareholder Earnings refer to profits distributed among your company's shareholders through dividends and capital appreciation. Market KPIs are metrics used to evaluate the company's performance in the market, such as market share or stock price. These measurements help you gauge financial health, growth potential, and market competitiveness, enabling you to make informed decisions to optimize operations, attract investors, and drive shareholder value.
Monitoring these KPIs enables you to gauge financial stability, identify areas for improvement, and optimize cash utilization for sustained performance.
Epicor FP&A, our financial solution, enables you to see all your financial data in one place, bringing together information from various sources within the organization. This integration reduces data silos, helping ensure consistency, accuracy, and real-time access to critical financial information. It enables you to monitor KPIs, offering a dynamic and up-to-date view of your financial performance. With FP&A, you can monitor your KPIs both at entity and group levels. This visibility allows you to respond quickly to changes, identify trends, and make informed decisions.
Although FP&A is not a BI tool, it offers customizable dashboards to help with reporting. These dashboards empower you to create visual representations of key metrics, making it easier for team members to understand complex data and trends.
To get the most value, FP&A comes pre-equipped with robust budgeting, planning, and forecasting features. These features allow you to set realistic financial goals and track progress against them. FP&A also facilitates scenario planning, helping you anticipate potential outcomes based on different variables.
In the fast-paced world of manufacturing, you must leverage advanced tools like FP&A to stay ahead. By tracking the right KPIs accurately and effortlessly performing advanced calculations, you can enhance financial performance, streamline operations, and make data-driven decisions quickly and efficiently.
FP&A can empower you and your finance team to monitor and analyze KPIs seamlessly, helping ensure a more strategic and informed approach to financial management.
