LEAN MANUFACTURING A FINANCIAL PERSPECTIVE. A Workshop for Finance, Accounting and Operations Personnel. Presented By: Prakash R. Mulchandani October 12, 2001. Agenda. Course Perspective Objectives of a Firm Financial Statements Ratio / Profitability Analysis Manufacturing Accounting
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LEAN MANUFACTURING A FINANCIAL PERSPECTIVE
A Workshop for Finance, Accounting and Operations Personnel
Prakash R. Mulchandani
October 12, 2001
Objectives of the Firm
-First Time Through
-Overall Equipment Effectiveness
-Manufacturing Cycle Time (DTD)
-Build to Schedule
Summary Financial Reports
-Stockholder, lenders, other stakeholders
-Federal, state, local
Analysis & Control
Cash – Uses of Cash = Net Change in Cash
Quantities sold times the sales prices for all products sold during the period.
Sales quantities times the unit cost of the products sold. Costs change over time and therefore the business has to decide between the first-in, first-out (FIFO) or the last-in, last-out (LIFO) method.
Operating expenses that are driven by sales volume. Examples are packaging costs, and storage costs. If sales volume were to increase 20%, then these costs would also increase by 20%.
Operating expenses that are driven by sales revenue. Examples are sales commissions based on sales prices.
Operating expenses that are relatively fixed for the period. Examples are employees’ salaries, rent, property taxes, and insurance.
Listed separately because it is such an unusual expense. It is a portion of the total original cost of the company’s fixed assets (except land) that is allocated to this period. Calculated using straight line, DDB or SOYD methods.
Depends on the amount of short term and long term debt outstanding during the year and the interest rates on each issue of debt.
Federal, state and local taxes.
The bottom-line profit for the period.
Cash is usually in one or more checking accounts. Cash equivalents such as highly marketable, short-term securities may be included in the cash amount.
Three basic short-term operating assets.
Long-term operating assets whose useful lives range from 3 to 5 years all the way to 30 or more years for buildings. Their cost (except land) is depreciated over their useful life.
Cumulative portion of the original cost of the assets that has been changed to depreciation expense since the date of acquisition.
Non-interest-bearing, short-term liabilities that arise from 2 operating sources: (1) the purchase of inventory on credit, and (2) the acquisition of services and other items charged to expense that are not paid for immediately. In short, these are unpaid bills.
Expenses that have been recorded to match all expenses for the period against sales revenue to measure profit for the period.
Unpaid portion of tax expense, usually due within 2 or 3 months.
Interest-bearing liabilities from borrowings. Short-term means one year or less; long-term can be up to 20 or more years.
Owners’ equity arises from 2 sources: (1) capital invested by the owners for which they receive shares of stock; and (2) profit earned but not paid out as a dividend, which is retained in the business.
Net income is the starting point.
All three of these short-term operating assets increased; their ending balances were more than their beginning balances. These increases decreased cash flow.
All three of these short-term operating liabilities increased; their ending balances were more than their beginning balances. These increases increased cash flow.
This is the net total impact on cash flow due to changes in the company’s short-term operating assets and liabilities.
Depreciation is not a cash outlay in the year recorded as expense. The cash outlay occurred years ago when the assets being depreciated were bought.
The business is free to do anything it wants to with this cash flow.
These purchases are called capital expenditures.
The company raised capital from these three sources during the year.
The company paid cash dividends of this amount during the year, which is about one-third of net income.
A measure of the ability to control accounts receivable. Measures how rapidly collections occur.
Turnover = Credit Sales
Average Accounts Receivable
= $12,038 = 11.35 turns
Days to Collect Receivables = 365 days
Accounts Receivable Turnover
= 365 = 32.2 days
A measure of assessing capital tied up in raw material, work-in-process and finished goods inventory. Measures how rapidly inventory is converted into sales.
Inventory Turnover = Cost of Goods Sold
= $7,824 = 4.3 turns
A measure of asset efficiency, or use of assets to generate sales.
Asset Turnover =Net Sales
= $12,038 = 1.87 turns
A measure of coverage of short term debt (solvency).
Current Ratio =Current Assets
= $3,859 = 1.90
Amount of assets provided by creditors for each dollar of assets provided by stockholders.
Debt to Equity = Total Debt
= $3,130 = .79
Measure of firm’s operations which provide protection to the long term creditor.
Times Interest Earned = Income before Interest & Taxes
= $942 = 6.16
Measure of how well assets have been employed.
ROA = Net Income
= $521 = 8.1%
$.5 (6,928 + 5,945)
Sometimes use operating income divided by average net operating assets
ROA = Operating Income
Average Net Operating Assets
= $942 = 18.2%
$.5 (5,748 + 4,606)
Measure of how well the stockholders equity has been employed. Usually higher than ROA due to financial leverage.
ROE = Net Income
Average Stockholders Equity
= $521 = 14.8%
$.5 (3,798 + 3,266)
Measure of profitability as a function of sales.
ROS = Net Income
=$521 = 4.3%
A broad gauge of profitability. Engineered products have high margins, while commodities have low margins.
Gross Margin Percentage = Gross Margin
= $4,214 = 35.0%
These 4 basic types of manufacturing costs are called product costs. They became attached to the product and thus are not charged off to expense until the product is sold.
The cost of the 1,000 units manufactured but not sold is added to the inventory asset account.
Cost-of-goods-sold expense equals the sales volume times the unit product cost.
Both sales-volume- and sales-revenue-driven expenses are shown here in one total amount.
These expenses are non-manufacturing cost, i.e., not part of the production process. They are called period costs because they are charged off to the period in which they are recorded and do not become part of product cost.
Est. total manufacturing overhead costs
Estimated direct labor hours
= $25 / direct labor hour
24,000 hours @ $15/hr
$25 / direct labor hr.
Mfg. Cost of goods sold
@ $10 / unit
@ $30 / unit
@ $30 / unit
@ $20 / unit
= 280 units
Build to Schedule
Inventory $, Turns +DOH
Market Share and Growth
ROI and ROA
Manufacturing Cycle Time
Quality and Safety
Total units in inventory of control part
“End of line” production rate
95% Non-production time
5% Manufacturing Time
units built per week of control part
production hours per week (plant)
EOL rate =
end of line rate
MCT production hours =
Units entering process minus defective units
Units entering process
OEE is a measure of the availability, performance rate, and quality rate of a piece of equipment and a capacity measure for constraint operations.
OEE = Availability X Performance X Quality
= Operating Time / Net Available Time
= (Ideal Cycle Time X Total Product Run) / Operating Time
= (Total Products Run – Defective Parts) / Total Products Run
Build to Schedule reveals how well a plant executes plans to produce precisely what customers want, in the proper sequence and mix.
BTS = Volume X Mix X Sequence
actual number of units produced
scheduled number of units
actual units built to mix
lower of actual units produced or scheduled
= the number of units built that are included in the daily production schedule (no overbuilds)
actual units built to sequence
actual units built mix
= the number of units built on a given day in the scheduled order (only units after the first having a sequence number larger than all predecessors)