Financial statements help businesses effectively manage their revenue and expenses. Theinsight they provide intofinancial performance is especially important for manufacturing companies, which need tocontend with unprecedentedlevels of volatility in the price of labor and raw materials. With their unit cost of laborrising nearly 5% in thesecond quarter of 2023 alone, manufacturers must constantly adjust their pricing models toensure that they continueto generate profits.
When done accurately, manufacturing financial statements provide managers with a valuablestarting point to analyzetheir business’s performance and set accurate budgets for the future. Though notalways the case,manufacturing financial statements related to inventory may also be audited for tax andgovernance purposes, makingaccuracy even more important.
This article outlines the role and importance of financial statements for manufacturers,breaks down the nuances ofeach type of financial statement and explains how technology speeds up the preparation ofmanufacturing financialstatements while reducing the risk of error.
What Are Manufacturing Financial Statements?
Manufacturing financial statementsare reports that provide stakeholders bothwithin and outside a manufacturing company with up-to-date information on thebusiness’s financialperformance. Internal stakeholders, including accountants and managers, use financialstatements to benchmark theirbusiness’s financial performance, managebudgets and create accurate forecasts for the future. External stakeholders, such asinvestors and lenders, rely onfinancial statements for information on a manufacturer’s profitability, net worth,liquidity and solvency sothey can make sound investment decisions.
Compiling manufacturing financial statements can be a painstaking process when done manually.What’s more,errors when calculating the costs of raw materials or compiling cash flow statements canlead to inaccuratebudgeting, forecasting and planning. These errors, in turn, can eat into revenue and causereputational damage— neither of which manufacturers can afford as they operate on increasingly thinmargins to keep the price oftheir goods competitive in a volatile economy.
Key Takeaways
- Manufacturing financial statements are reports that provide manufacturing companies withvaluable insights intotheir financial performance.
- Unlike retail and other merchandising businesses, manufacturers produce their own goods,which adds complexityto the way they track and cost for inventory.
- Accurate financial statements are essential to inform sound business decision-making,which is why manymanufacturers rely on financial management software to accelerate and eliminate humanerror from the process.
Manufacturing Financial Statements Explained
Manufacturing financial statements are records of a manufacturing company’s activitiesand financialperformance. They serve as a reference for internal stakeholders, who use them to assess thebusiness’sperformance and adjust their strategies accordingly; and for investors, whose contributionswill depend on thebusiness’s current financial performance and future prospects.
In addition to their fixed assets, such as the facilities they occupy and machinery they useto produce their goods,manufacturers typically include three types of inventories in their financial statements:raw materials, work inprocess and finished goods.
While general accounting statements reflect the overall financialperformance of anorganization, manufacturing financial statements measure the financial performance of aproduction facility orcollection of production facilities in companies that manufacture their products in multiplelocations.Manufacturing financial statements are typically used by management and external investorsto informdecision-making, and inventory and sales data may also be subject to regulatory scrutiny.
What Makes Manufacturing Financial Statements Different?
The biggest difference between manufacturers’ financial statements and those ofcompanies in other industriesis that manufacturers produce their own goods, which adds a layer of complexity to theirfinancial statementsbecause they are required to track every cost, from raw materials to production to the pointof sale. In practice,the distinction between manufacturers and, say, retail or merchandising businesses is thatmanufacturing inventoryfalls into the following three distinct categories:
- Raw materials: Raw materials refer to materials or components that willultimately be includedin a manufacturer’s finished products but have not yet been used. For instance,the schedule of rawmaterials for a smartphone manufacturer might include LCD screens and nickel batteries,among other components.To calculate raw material costs over a given period, manufacturers need to know thequantity that was used inproduction during that period.
- Work in process: Work-in-process inventory accounts for the cost ofmanufactured goods that arestill being produced, but not those that are already complete. The cost ofwork-in-process inventory includesthe direct cost of raw materials, direct labor costs and direct overhead costs. Overheadcosts refer to the costof running a manufacturing operation outside of monies spent on production and sales— energy andutilities, for example. For simplicity, some manufacturers combine their schedules ofraw materials andwork-in-process inventory into a single document, known as the schedule of cost of goodsmanufactured.
- Finished goods: Finished goodsrefer to all products that a manufacturer hasproduced over a given period that are now ready to be sold to customers. Manufacturingcompanies track thesecosts in a schedule of finished goods. Accounting for the costs of finished goods ismore complex thanaccounting for typical retail merchandise, which retailers simply purchase from theirexternal suppliers at aset price.
4 Main Manufacturing Financial Statements
Manufacturing companies assess their performance based on four main financial statements: thestatement of cost ofgoods manufactured, the income statement, the balance sheet and the cash flow statement.This is another distinctionbetween manufacturers and merchandising businesses, which typically develop only an incomestatement, balance sheetand cash flow statement. To better understand the particulars of manufacturing financialstatements, it’suseful to walk through the four main types and break down how each of these reports comestogether to paint acomplete picture of a manufacturer’s financial standing.
1. Statement of Cost of Goods Manufactured
The statement of cost of goods manufactured summarizes the total production costs incurred bya manufacturing companyduring a specific accounting period. It typically includes costs related to raw materials,labor and overhead,showing the total cost of goods that were completed and transferred to finished goodsinventory on amanufacturer’s balance sheet.
Below is an example of the statement of cost of goods manufactured for fictitious businessABC Manufacturing. Notethe differentiation between direct costs, such as materials and labor, overhead costs andmanufacturing costs.
ABC Manufacturing
Statement of Cost of Goods Manufactured
For the year ending December 31, 2022
| Direct Materials | ||
|---|---|---|
| Beginning Raw Materials Inventory | $50,000.00 | |
| Inventory Purchases | $20,000.00 | |
| Inventory Available for Use | $70,000.00 | |
| Less Raw Material Ending Inventory | $10,000.00 | |
| Total Direct Materials Used | $60,000.00 | |
| Direct Labor | $30,000.00 | |
| Factory Overhead | ||
| Energy and Utilities | $5,000.00 | |
| Equipment Repairs | $1,500.00 | |
| Total Factory Overhead | $6,500.00 | |
| Total Manufacturing Costs | $96,500.00 | |
| Plus Beginning Work in Process Inventory | $20,000.00 | |
| Total Cost of Work in Process Inventory | $116,500.00 | |
| Less Ending Work in Process Inventory | $30,000.00 | |
| Total Cost of Goods Manufactured | $86,500.00 | |
2. Income Statement
A manufacturer’s income statement recordsthe business’sprofits and losses over a set period, which can be as short as a month or as long as a year.To complete the incomestatement, manufacturers must first establish their sales over a given period and subtractthe cost of goods sold(COGS), which is the total cost incurred by the manufacturer to produce the goods for thatperiod. From that value,they must then subtract operating expenses, such as the cost of selling finished goods andfixed manufacturingoverhead, among others. The final value will either show a net gain or net loss.
While income statements can be very complex, the example below illustrates the basicprinciples manufacturers mustfollow to create this crucial document.
ABC Manufacturing
Income Statement
For the year ending December 31, 2022
| Sales | $50,000,00 | |
|---|---|---|
| Cost of Goods Sold | $20,000,00 | |
| Gross Profit | $30,000.00 | |
| Operating Expenses | ||
| Selling | $10,000.00 | |
| General Administration | $1,500.00 | |
| Fixed manufacturing Overhead | $8,500.00 | |
| Total Expenses | $20,000.00 | |
| Net Income | $10,000.00 | |
3. Balance Sheet
A manufacturer’s balance sheet is an essentialfinancial statement that providesstakeholders and investors with a snapshot of the business’s financial performance ata given moment in time.Accountants and managers use this information to assess their company’s performanceand adjust theirstrategies accordingly. External investors, meanwhile, use the balance sheet as anindication of amanufacturer’s operational efficiency and liquidity, which helps them determine theirpotential return oninvestment.
The balance sheet itself tallies what a manufacturer owns (its assets) and what it owes (itsliabilities). Assetsinclude short-term assets, such as raw materials, work-in-process inventory and finishedgoods inventory, andlong-term assets, such as production equipment. Manufacturers also include fixed assets ontheir balance sheets.Fixed assets are those that are difficult to move — the land and facilities wheregoods are produced, forexample.
Liabilities include short- and long-term liabilities, as well as stakeholder equity.Short-term liabilities mightinclude the financing a manufacturer has received to pay for its raw materials, whereaslong-term liabilities mightbe recurring costs, such as a manufacturer’s mortgage and equipment loans.
Note the example of a balance sheet, below, which shows the total assets and totalliabilities and shareholder equityfor ABC Manufacturing. The ideal scenario for a manufacturer is to finish the designatedperiod with more assetsthan liabilities, though this ratio will vary, based on the business’s priorities. Forexample, a manufacturerthat has just taken out a major loan to overhaul its factory operations will shift thisbalance to liabilities untilit pays off the loan.
ABC Manufacturing
Balance Sheet
For the year ending December 31, 2022
| Assets | ||
|---|---|---|
| Current Assets | $20,000,00 | |
| Fixed Assets | $15,000,00 | |
| Total Assets | $35,000.00 | |
| Liabilities | ||
| Short-Term Liabilities | $10,000.00 | |
| Long-Term Liabilities | $5,000.00 | |
| Total Liabilities | $15,000.00 | |
| Shareholder Equity | ||
| Common Stock | $5,000.00 | |
| Total Liabilities and Equity | $15,000.00 | |
4. Cash Flow Statement
The cash flow statementtells manufacturers how much money is coming in totheir company versus how much money is going out — a ratio known as liquidity, whichis commonly determined bydividing current assets by current liabilities. This information tells manufacturers if theyhave enough cash toboth cover their operating expenses and pay off their debts during a given amount of time.
Cash flow statements also allow investors to assess the financial performance of multiplecompanies using the samecriteria, regardless of which bookkeeping method each uses to do its internal accounting.With an objective view ofeach manufacturer’s liquidity, investors are better positioned to make soundinvestment decisions.
Note the following illustration, in which cash flow is broken into three categories: cashflow from operatingactivities, cash flow from investing activities and cash flow from financing activities. Tocalculate the totalcash-on-hand that a manufacturer has at the end of the reporting period, the sum of thesevalues is added to thecash-on-hand value from the previous reporting period. It’s worth noting that, unlikemerchandising companies,manufacturers don’t treat all their costs as business expenses. Much of their directmaterial, labor andoverhead costs are treated as inventory. In fact, the Financial Accounting Standards Boardmandates specificreporting rules for the allocation of production overhead to inventory as part of itsmission to improve GenerallyAccepted Accounting Principles (GAAP) among American businesses.
ABC Manufacturing
Statement of Cash Flow
For the quarter ending December 31, 2022
| Cash Flow from Operating Activities | ||
|---|---|---|
| Net Ssales Income | $40,000,00 | |
| Increase in Inventory | $10,000,00 | |
| $50,000.00 | ||
| Cash Flow from Investing Activities | ||
| Net Cash from Investing Activities | $5,000.00 | |
| Less Equipment Purchases | -$10,000.00 | |
| -$5,000.00 | ||
| Cash Flow from Investing Activities | ||
| Mortgage Payments | -$12,000.00 | |
| Share Dividends Paid to Investors | -$15,000.00 | |
| -$27,000.00 | ||
| Beginning Cash On hand | $20,000.00 | |
| Ending Cash On hand | $38,000.00 | |
Importance of Accurate Manufacturing Financial Statements
Manufacturing companies have many moving parts to track, manage and optimize. For instance,to produce goods, amanufacturer needs to juggle raw materials, inventory in various stages of development,equipment and employees.That makes business processes, such as planning, budgeting and performancemanagement, particularly complex, which is why manymanufacturers rely on financial statements to analyze and optimize their operations.
Manufacturers also depend on accurate financial statements to be able to adapt theirstrategies and pricing models tostay in line with variable market conditions. For example, a rise in the cost of copper fromChina might drive anelectronics manufacturer to source copper for its wires from another major producer, likeChile. This, in turn,might impact the price at which the manufacturer sells its finished products. Striking abalance between profit andfair market price is no easy task, especially in today’s uncertain economy. Accurateinsights into financialperformance allow manufacturers to make decisions based on granular performance data.
While precise financial statements can show manufacturers where they are performing well andwhere they must adjusttheir operations to optimize profits, inaccurate financial statements can have the oppositeeffect. Manufacturersthat make major financial decisions based on incorrect impressions of their financialperformance risk putting theirvitality and reputation at stake.
Mistakes in Manufacturing Financial Statements
Internal and external stakeholders alike rely on the accuracy of manufacturing financialstatements to make informedmanagement and investment decisions. Not surprisingly, then, errors in manufacturingfinancial statements can havemajor consequences, ranging from poor budgeting to inaccurate inventory valuations. Theseerrors skew amanufacturer’s perception of its costs and revenue, which can lead to poordecision-making and financial loss.For instance, a manufacturer of PVC piping that has chosen a high-volume, low-margin salesstrategy that was basedon a cash flow calculation error may actually lose money on every sale. Given the stakes,manufacturers should doeverything they can to avoid the following common errors in their financial statements.
- Over- or under-allocation of overhead: The over- and under-allocationof overhead costs isrelatively common among manufacturers. Over-allocation occurs when a company’sactual overhead costs arelowerthan their allocated costs. Conversely, under-allocation occurs when amanufacturer’s true overhead costsarehigher than their allocated figures. Both scenarios lead to inaccurate financialreporting, which can throw offimportant decisions involving budgeting, forecasting and pricing.
- Incorrect inventory valuation: Inventory management is a coremanufacturing process, butaccuracy isdifficult to achieve for companies with limited time and employee resources. Indeed,despite advances in the waymanufacturers track and monitor goods as the goods move through their organization,average global inventoriesonhand still grew by 30 days' worth between2004 and 2022 (opens in a new tab). Withthree kinds ofinventory to track, manufacturers face the added challenge of complex inventorycalculations that are especiallyprone to error. Incorrect inventory valuations can lead to poor planning, inaccurateorders, inventorystockouts,dissatisfied customers, financial loss and, in extreme cases, reputational damage.
- Not accounting for work in process properly: The difficulty ofcalculating work in process isthat,unlike finished goods, “work” is not an objective output. That said, work inprocess is a criticalcomponent of a manufacturer’s balance sheet, providing stakeholders and investorswith a complete pictureofthe company’s performance and productivity levels. At the logistical level,inaccurate work-in-processcalculations can cause confusion for procurement teams, which rely on these figures todetermine how much or howlittle inventory to order.
Manage All Your Financial Statements in NetSuite
NetSuite cloudaccounting software provides manufacturers with acomplete view of their financial performance. Real-time access to financial data makes iteasy for businesses togenerate financial statements, dig deeper into the details of their financial performanceand comply with regulatoryrequirements, such as GAAP. What’s more, by automating repetitive tasks, including thecreation of journalentries and reconciliation of financial statements, NetSuite cloud accounting softwareeliminates the need formanufacturers to collect and normalize data from multiple teams to complete theseoperations. In turn, this savestheir finance teams hours each month, which they can refocus on trends analysis and processoptimization.
Checking the Pulse of Your Operations Has Never Been Easier
Manufacturing companies need the insight that timely, accurate financialstatements provide. NetSuite can help. Get your free product tour today to getstarted.
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Manufacturing financial statements are, collectively, a powerful tool that allowsmanufacturers to regularly checkthe pulse of their operations and finances so they can effectively manage their inventory,overhead and employees.By empowering manufacturing decision-makers to accurately track their costs and revenue inone place and in realtime, cloud-based accounting software takes the complexity out of compiling financialstatements, puttingmanufacturers in the best position to meet customer demand, build investor confidence andgenerate profits.
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Manufacturing Financial Statements FAQs
How do manufacturing companies prepare financial statements?
Manufacturing companies prepare financial statements by collecting and analyzing data ontheir costs and revenue.More specifically, manufacturers analyze and compare sales and income with costs, includingfixed assets, inventoryand overhead.
What are manufacturing statements?
The four main financial statements used by manufacturers are the schedule of cost of goodsmanufactured, the balancesheet, the income statement and the cash flow statement.
What are income statements for manufacturing companies?
An income statement for a manufacturer is a financial statement that provides a detailedsummary of a manufacturingcompany’s revenue, costs and profitability over a specific accounting period,typically a fiscal quarter oryear. This statement is a crucial component of a manufacturer’s financial reportingand valuable insights intothe financial performance of its core manufacturing operations.
