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the job because of that low bid , but later realize that the margins are far smaller than they predicted . Locked into a bad contract of their own making , the business doesn ’ t have the resources to go after other bids and fuel growth .
Low inventory valuation can also stunt growth by impacting a manufacturer ’ s credit . Banks will often calculate a company ’ s borrowing base by looking at its assets . If inventory is undervalued , the available money will be lower than necessary as well .
Manufacturers seeking acquisition can run into problems from undervalued assets , too . One obvious case is the asset-only deal . In such a deal , the value of the inventory is the deal , and any undervaluation will result in a loss .
It is also a problem for manufacturers who maintain a large balance of inventory and who hold that inventory long enough that its value is intrinsic to the value of the company . For companies that make things that are labor and material intensive and take longer to build , often under sophisticated long-term contracts – hydraulics for submarines , say , or diesel engines – missing an indirect cost can strip real money from a deal . often overlooked as well . And what about the people who come in after hours and clean the executive offices ? Do not forget about them .
Those are the more straightforward overheads . Things can get more complicated when you factor in fractionalized costs for something like rent and utilities . If you use 25 percent of a building for the actual manufacture of a particular product , then a quarter of that cost needs to be allocated to inventory . Things get far more complicated when you are producing multiple distinct products .
The best way to fight human nature and successfully account for all these expenses is to bring in an accountant . But even accountants can miss these kinds of expenses . Manufacturers should make sure they hire someone who understands their business . A CPA who has multiple manufacturing clients is ideal . It ’ s important that your accountant understands inventory and has experience auditing manufacturing projects , not just businesses .
Remember that an accurate accounting of indirect costs is crucial to your business . Every manufacturing operation is unique . Its overhead rate should be too . ■
Easy-to-overlook overheads
What is required is a deep dive into all the overhead costs that have a direct or indirect impact on the cost of goods . Only when a manufacturer understands all those costs can they build an accurate overhead rate .
Simple enough . But identifying indirect costs , in particular , isn ’ t always that easy . Out of sight , out of mind isn ’ t just a saying ; it ’ s human nature . Often a manufacturer will factor in rent but forget about the property tax . I ’ ve seen operations fail to take insurance and even utilities into account . Fees for lawyers and engineering consultants are
Michael Trinks www . fmlcpas . com
Michael Trinks is a partner in assurance and advisory services at Fiondella , Milone and LaSaracina , a USbased multidisciplinary advisory firm . He specializes in audit and consulting for clients primarily in the manufacturing , technology , biotech , construction and service sectors . His experiences include stepping into both manufacturing and technology companies in an interim CFO role and managing audits under International Auditing Standards .
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