A profit & loss, a balance sheet, a statement of cash flows. These are the three most commonly used reports that business owners will look at each month to tell them how their business is performing, but there are better ways to see how your business is doing. Here are three key performance indicators (or KPIS) for manufacturing companies that will help you turn financial data into better decisions.
- Gross Profit Margin (Gross Profit / Sales)
The gross profit margin measures the profit a company has after subtracting the direct costs of producing its goods or services. For a manufacturer a good gross profit margin is 27.8%. If your ratio is less than that you can try increasing your revenues by focusing on increasing sales volume on higher margin products or increasing your prices. You can also decrease cost of goods sold by renegotiating with your suppliers or improving your efficiency and reducing waste.
- Inventory Turnover (Cost of Goods Sold / Average Inventory)
This ratio represents the frequency that a business sells and replaces its stock of goods during a given period, usually a month. For a manufacturer the target ratio is about 4.83 meaning you are replacing your inventory due to sales almost 5 times a month. If your inventory turnover is significantly lower that can mean you have poor sales performance, are holding too much inventory, or you inventory management is ineffective. You might consider holding less inventory, streamlining supply chains, and focusing on better demand forecasting.
- Working Capital (Current Assets – Current Liabilities)
Working capital is considered what a business has for daily operations. As long as working capital is a positive value you are in a good position because it means you can pay bills, have short-term stability, and can cover your daily needs without borrowing. This is a very important ratio to monitor because growth can starve a business without working capital visibility. To improve this ratio, monitor accounts receivables to keep up on collections, negotiate longer payment terms with suppliers, and only have inventory on hand you need.
Contact us today to find out how these KPIs and more can help you turn financial data into better decisions!