Running and managing the finances of a business is a tricky ordeal that requires you to monitor, track, and organize a company’s transactions, expenditures, and purchases. Among all the different performance measures, monitoring the way a company is performing in regard to sales, inventory levels, advertising or marketing, and profitability are a few of the important metrics that companies need to keep an eye on.
This is especially important for those companies that are handling physical goods and inventory levels, and managing concepts like lead time, COGS or shipping expenditures, since these have become a whole new element to their financial and operational management, and make up a set of costs that companies need to be aware of.
Transforming Raw Material or Goods
The process of turning the raw materials or goods into a finished product, more often than not, requires time, energy, resources, and personnel to help along the way. These elements, minding the fact that the cost of these finished products has to factor in all these different costs incurred during the transformation, affect the financial statements such as balance sheet, income statement, or statement of cash flow.
The factoring and allocation of all these costs itself, on the other hand, also plays a role in the financial success of the company. One last thing to keep a close eye on is the speed at which costs rise, and the speed at which products are selling, which will allow to keep the company in check financially and maintain the type of growth they are experiencing.
Managing Inventory Levels
Fulfilling the orders which have been made requires the necessary inventory on hand, so the number of orders or demand for a product play an important role when it comes to managing the level of inventory.
While it is difficult to forecast the exact number of orders a company might have, over the course of running the business and its operations, the company can have a sense of the level of inventory they need to have on a daily, weekly and monthly basis. And not only that, but they also need to be aware of the storage costs and opportunity cost related to keeping said inventory level, in order to find the optimum.
Another thing to keep in mind when it comes to managing inventory levels is the lead time or the time involved to obtain or produce new inventory. The lead times associated with a product or with a company are often one of the barriers it faces to fulfilling orders and ramping up production, since sometimes there is only so much a plant, a factory, or a system can produce, and it takes time for a new order, a new batch, or a new shipment to be processed. This lead time has an indirect but important effect in costs, and especially in liquidity, since it extends the period of time from when the order is placed to when the payment is received.
Shipping of Freight Costs
The shipment of a good or the transportation of it comes with a financial component or a financial cost as well. There are different factors that partake into this role: the weight and dimensions of the product, the speed at which the good needs to be transported or shipped, or even whether the buyer or the seller is paying for the shipping.
The machinery, equipment, and real estate a business needs are capital outlays that can sometimes be major and very significant in regard to the business, its operations, and its allocation of costs. Whether it is by buying or leasing, each company needs to be aware of the fixed costs it needs to incur in order to continue its operations.
Employees and Payroll
On the flip side of human capital, is the payroll component. And with employees, there’s also the cost of hiring people, the onboarding process, and even the cost associated with firing people or having employees leave. All these costs have to be taken into consideration to maintain the financial wealth of the company.
Managing the finances behind a business that deals with physical products is an interesting and complex dynamic. Whether you’re looking at the prices of current inventory, the types of sales, orders, or demand that’s in the near future, or the expenses the business or company incurs during its operations, they all factor into the financial aspect of the business.
Howie Bick is the founder of The Analyst Handbook. The Analyst Handbook is a collection of 16 guides created to help current and aspiring Analysts advance their careers. Prior to founding The Analyst Handbook, Howie was a financial analyst.