Manufacturers may perceive that they are saving money through their use of manual accounting systems, but when examined closely, the level of actual savings will be far less than anticipated. Many manufacturing owners or production managers do not realize how much profit is actually being lost due to their reliance on spreadsheets and paper-based systems, which will generally be far greater than any money saved by using manual accounting systems. Let’s look at some of the hidden costs associated with lost profits when relying on manual accounting methods.
The Hidden Price of Human Error
Mistakes made in accounting are often caused by human error. When accounting staff enter data manually into their accounting programs from production sheets, inventory sheets, and purchase orders, errors can and will occur. Examples of such errors include:
- Invoice disputes with respect to both suppliers and customers
- Mistakes in calculation of taxes resulting in potential penalties
- Incorrectly predicted production costs, which affect pricing assumptions
- Errors in inventory records make stock shortages or excessive amounts of stock on hand
It is estimated that as much as 1% to 4% of all data entered manually will contain errors due to human error. In a manufacturing operation that has tens of thousands of transactions processed monthly, this translates to hundreds of very costly mistakes every single month. Every one of these errors will result in the need for an accounting supervisor to review the error, research the cause of the error, and correct it, taking away valuable time from activities that help the finance staff develop strategic plans for their business.
Time Wastage That Drains Resources
Resources that are wasted due to time spent on repetitive tasks your accounting staff does by hand but could do automatically include: Recording daily production expenses, matching purchase orders to invoices, reconciling inventory with financial records, preparing monthly financial statements, and chasing after missing documents or information from various departments.
Your average manufacturing accountant is spending 60-70% of their time working in data entry and/or verification. With most salaries within the $45,000-$65,000 range annually, you are paying a highly skilled professional to perform tasks that would otherwise be done by computer in an instant.
Delayed Decision-Making Costs
Making quick decisions based on current data is critical in manufacturing. If you’re using manual accounting to obtain accurate financial information about your business, it may take days or even weeks to get that information. This delay has many consequences including:
- Cash flow management – If you don’t know how much cash you have on hand, you cannot negotiate favorable payment terms or take advantage of early-payment discounts.
- Production Planning – You may continue to manufacture items that are losing money because you don’t have up-to-date cost information.
- Pricing Strategy – If you use outdated cost information to set prices for your products, you may under-price or over-price your products.
- Resource Allocation – You may miss out on opportunities to shift resources to the more profitable product lines.
For each day that you have to operate your business without current financial data, you are making decisions based on guesswork rather than fact.
Compliance and Audit Nightmares
The manufacturers are subject to very stringent regulatory requirements as they relate to their inventory valuation, cost accounting and tax compliance. Manual systems will exponentially add to the difficulty of achieving compliance.
- The difficulty of creating and maintaining a paper trail will leave a lot of the trail untraceable.
- Month-long preparation for an audit will add to the preparation of the audit.
- When deadlines for reporting arrive, the stress of preparing for those deadlines is overwhelming and creates rushed work.
- In order to prove compliance during an audit, an extensive manual documentation trail is usually required.
Depending on the violation that has occurred, the cost of being found in violation of regulatory requirements may be hundreds of thousands of dollars or more. In addition, the stress and overtime incurred during the auditing process will add to these costs.
Scaling Limitations
As the size of your manufacturing company gets bigger, manual bookkeeping becomes less viable. When you add products, build new buildings, or expand into new territories you add layers of complexity that spreadsheets cannot support in an effective way.
Here are some common problems manufacturers experience when growing:
- More people need to be hired to manage rapid growth in transactional volume.
- Poor communication between sites.
- There is little to no consistency between locations on how to perform processes.
- Consolidating financials for company wide financial reporting has become cumbersome and inefficient for manufacturing companies to do.
For these reasons, many manufacturing companies find that their accounting system is not capable of supporting their growth.
The Real Cost Calculation
To help provide some context as to the cost associated with these hidden costs of a mid-size manufacturer:
- Error correction – Suppose there are 10 hours of corrections per week at $30/hour – 10hrs/wk x $30/hr x 52 wks = $15,600/year.
- Excess staff – For instance – Have 2 additional accountants at $55,000 each = $110,000/year.
- Delayed decision making due to missed opportunity & inefficiency – Estimated at $50,000+/year.
- Audit & compliance; additional preparation time and/or consulting fees = $25,000/year.
- Inventory discrepancies; such as writing off vs. rushing orders = $40,000/year.
- Total cost of this to the manufacturer on an annual basis is $240,600+.
The above numbers do not include the opportunity cost of not being able to make real-time decisions based on accurate insights to optimise the operations of the manufacturer.
Moving Beyond Manual Processes
Manufacturers today require accounting tools that can keep up with the speed of their factories. A manufacturing software development company can design applications that combine finance with production to provide a single source of truth for their company.
Custom ERP software eliminates manual data entry by providing automatic transaction capture from production systems, warehouse management systems, and sales systems. This integration provides immediate visibility into all aspects of costs, margins, and profit across all operations.
About Arobit
The challenges manufacturers encounter with financial management are thoroughly understood by Arobit. Our team has developed accounting and ERP (enterprise resource planning) solutions for textile mills, automotive component manufacturers, food processing facilities and other production facilities. We have proven through our own experience that the right software can eliminate hidden costs associated with manual accounting and will provide manufacturers with the information they need to profitably grow their businesses.
With over 13 years of experience providing solutions to the manufacturing industry, we build our systems to support your operations—rather than requiring you to adapt to our systems. Our solutions are flexible enough to support your business as it grows, ensuring that accounting capabilities do not limit growth.
You can stop losing money due to inefficient processes. The cost of remaining with your current accounting systems is substantially greater than the investment required to implement proper solutions.
