Fractional CFO for Manufacturing Companies
Manufacturing margin is built on the shop floor and consumed by working capital. A fractional CFO ties standard costing, capacity, and inventory together so a manufacturer can price and invest with a clear view of cash.
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A manufacturer's most important number is the cost of one unit, and it is almost always wrong. Material and direct labour are usually close enough. Overhead allocation is where it breaks: a rate set years ago, applied on a basis that no longer reflects how the plant runs, spread evenly across products that consume machine time and setup time very differently. The result is a low-volume, high-setup product that looks profitable and a high-volume runner that subsidizes it.
The second half of the problem is that manufacturing profit sits in inventory rather than in the bank. Raw materials, work in progress and finished goods all absorb cash, and the longer the cycle from purchasing to collection, the more working capital every additional dollar of sales requires. A manufacturer growing quickly with a slow inventory turn is consuming cash at exactly the moment its profit and loss statement looks strongest.
What we watch
Gross Margin by SKU
How it is built: Selling price less full unit cost: material, direct labour with burden, machine time, setup, and an overhead allocation that reflects actual consumption.
Why it matters: Plant-wide margin averages a product that pays well with one that loses money. Only the per-part view tells you which products to push, reprice, or stop making.
Inventory Turns
How it is built: Cost of goods sold divided by average inventory, calculated separately for raw materials, work in progress and finished goods.
Why it matters: The blended figure hides where cash is trapped. Splitting it shows whether the problem is purchasing too far ahead, work stalling on the floor, or finished goods that are not selling.
Capacity Utilization
How it is built: Productive machine and labour hours divided by available hours, with setup, changeover and downtime shown separately.
Why it matters: It answers whether the next order needs new equipment or better scheduling. Capital spending decided without this number is frequently spent solving a scheduling problem with a machine.
Working Capital
How it is built: Inventory plus receivables less payables, tracked as a movement over time rather than a single balance.
Why it matters: It quantifies how much cash each additional dollar of revenue demands. That ratio determines how fast the business can grow before it needs financing, which is usually the real growth constraint.
Common financial pain points
- True unit cost is buried in overhead allocation guesswork.
- Inventory and raw materials trap cash on the balance sheet.
- Pricing has not kept pace with input and labour costs.
- Capacity and capital decisions are made without a model.
- Scrap, rework and downtime never reach the cost of the part.
How a fractional CFO helps
- Build standard costing and analyze the variances that matter.
- Manage inventory turns and the working capital cycle.
- Reprice against current material and labour costs.
- Model capacity, capital spend, and the return on it.
- Report gross margin by product line and customer.
- Push scrap, rework and downtime into the unit cost where they belong.
The first ninety days
- 01
Days 1 to 30: rebuild unit cost
Rebuild standard cost with a defensible overhead basis reflecting machine time and setup. Push scrap, rework and downtime into cost where they belong. Produce gross margin by part and by customer.
- 02
Days 31 to 60: release the cash
Split inventory turns across raw materials, work in progress and finished goods to find where the cash is trapped. Map the full working capital cycle. Set purchasing and stocking policy against it.
- 03
Days 61 to 90: price and invest
Reprice against current material and labour cost. Model capacity against forward demand, with the return on any capital purchase laid out. Install monthly margin and variance reporting.
What you receive
- Standard cost model with a defensible overhead basis
- Gross margin by part number and by customer
- Inventory turns split across raw, work in progress and finished goods
- Working capital and cash conversion analysis
- Capacity model and capital return analysis
- A live dashboard your numbers flow into
Fractional CFO for manufacturing: common questions
How do I work out the true cost of a manufactured part?
Material, direct labour including payroll burden, machine time at a rate covering ownership and maintenance, setup and changeover time amortised over the run length, and an overhead allocation based on what the part actually consumes. Add expected scrap and rework. The overhead basis is where most costing systems fail, because it is set once and rarely revisited.
Why is my manufacturing business profitable but cash poor?
Because the profit is sitting as inventory. Raw materials are bought and paid for, work in progress absorbs labour and overhead, finished goods wait to ship, and then the customer takes their payment terms. Every one of those stages holds cash, and a growing manufacturer funds a larger version of that cycle each month.
What is a good inventory turns figure?
It varies far too much by product and process for a universal benchmark to be useful. What is useful is splitting the figure across raw materials, work in progress and finished goods and watching the trend in each. That split names the specific stage where cash is trapped, which a single blended number cannot do.
When should a manufacturer reprice?
Whenever input costs have moved materially since the price was set, and on a scheduled review regardless. The practical problem is that most manufacturers cannot reprice with confidence because they do not trust their unit cost, so the costing work has to come first. Rebuilding cost usually reveals that some parts have been underpriced for years.
How do I decide whether to buy new equipment?
Start with capacity utilization, separating productive time from setup, changeover and downtime. A plant losing hours to changeovers often has more capacity available through scheduling than through purchase. If the capacity genuinely is not there, model the machine against incremental margin from the work it enables, its full operating cost, and the cash timing of the purchase.
Should scrap and rework be in the cost of the part?
Yes. Treating them as a general overhead spreads the cost of a difficult part across every part, which makes the difficult one look better than it is and every other one worse. Expected scrap and rework belong in the unit cost of the part that generates them, and the variance against expectation is what you manage.
Can a fractional CFO help with a lender or an equipment facility?
Yes. A lender wants inventory they can verify, a costing basis that holds up, margin by product line, and a forecast showing repayment out of operations rather than out of hope. Preparing that before the request is made, rather than assembling it under deadline, is what usually determines both the answer and the pricing.
Ready to see your numbers clearly?
Book a call to talk through your manufacturing business and what the first ninety days would cover.
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