Article:

Three-way financial modelling for manufacturers

03 December 2021

Suzy Munt, Associate Director, Business Services and Family Business |

The manufacturing industry is highly complex, with many moving parts, tight profit margins and unique scaling challenges. Financial modelling for manufacturers can help increase stability and facilitate growth, allowing data-driven decision making and providing a solid foundation for funding or grant applications.

What is three-way financial modelling?

Three-way financial modelling uses specific information, data and assumptions to build a 360-degree view of a business’ financial future through the following reports:

  • Profit and loss
  • Balance sheet
  • Cash flow.

By using these three reports to create a clear budget and forecast modelling, the resulting data can be analysed to help drive decision-making and optimise production, revenue and profit.

Data that contributes to the model includes information on inputs and outputs to the production line, and can be as specific as required. Models based on this data can be manipulated to discover where adjustments could improve returns, and whether it’s time to start scaling - or if changes need to be implemented first. 

Why manufacturers need financial modelling

Without data driven decisions, manufacturers can miss out on opportunities to increase throughput or scale-up to meet increased demand. Financial modelling examines optimal workflows for improved margins, balance demand and delivery for different customers; and examines pricing from different vendors to discover which production choice will maximise profit.

For example, a factory making a specific type of water bottle can pull all relevant data from the three reports. Who is buying the bottles? At what price? Where do the materials come from? Is there a better deal to be obtained from a different vendor? Does it make sense to retool to produce a different size of bottle?

Financial modelling looks at all the detailed data that plays into the various factors, and assesses how these can be fine-tuned to manipulate and forecast outcomes. 

When a financial model is built every factor becomes a unique moving part, each of which affects the others. These parts can be individually manipulated, and therefore the outcome of each change can be assessed.

Ways to manipulate financial models for manufacturers

One way to modify the reaction of the financial model is to address labour input. What happens if the factory changes from two 12-hour to three eight-hour shifts? How would that impact the cashflow, profit and the balance sheet of the business?  Labour costs might go down due to decreased overtime, but how does that compare to the increased cost from the shift change; and is production throughput also affected?  Using the financial model can help make this decision.

Another option might be to look at the layout of the manufacturing facility, and create process maps that follow the entire manufacturing journey from start to finish, down each production line. By determining which processes can be automated, several of the easiest options can then be tested by converting and measuring them to see if overall throughput improves.

Vendor choices can also affect ability to scale, even if the vendor sells the materials for a higher price. For example, a bottle label from one vendor might cost a cent more than a label from another; however, the machine used to apply the first label might allow for a higher throughput per hour. If demand for the bottle accommodates the new, higher rate of supply, the increased sales could make the slightly more expensive label a better choice.

Successfully implementing financial modelling 

Many companies are hesitant to begin a change process because they think it might mean they have to commit to changing everything. Financial modelling isn’t about completely transforming a manufacturing facility; it’s about ensuring that all manufacturing processes are aligned with the company strategy and business goals. 

When a three-way financial model is applied to a manufacturer, every aspect of operations can be examined to ensure it is completely optimised and contributing to the end goals of the business. Some processes may need to be revamped. Others can be automated. Still others will remain at or near their original state.

Our manufacturing team works with owners and managers to help create alignment between the manufacturing operation and the overarching business goals. We continue to work with our clients through repeated iterations: for example, as production lines are added or removed, vendors are evaluated and workflows automated. As the data going in changes, so too does the forecasting. 

The ultimate goal with financial modelling for manufacturers is to achieve optimal productivity and profit. The inclusion of cash flow in financial modelling sets our approach apart, allowing a clearer picture of where cash is going and the impact this has on the business. This can be critical when trying to apply for financing or grants to expand operations.

To find out more or get started with financial modelling, contact one of our team today.