Most manufacturing executives dread their annual audits. To them, it’s a purely compliance-based process that adds little organizational value and distracts from management’s priorities.
Despite some time-consuming and “check-the-box” items that are part of every audit due to regulatory and professional standards, a good auditor can be very intentional about the process and use it to bring insights and value to your company and leadership team. Read on to learn how you can get more value from your annual audit process.
Choose the right auditor
The good news is that the industry oversight and professional certification process means there are many qualified firms that can perform financial statement audits in virtually any industry. However, both the client base and broader capabilities of the firm performing your audit can impact their knowledge of your industry and the quality of the insights you receive from the audit.
As you evaluate firms, consider questions such as:
- How many manufacturers (or precision machine shops, injection molders, etc.) does the firm serve?
- What types of capabilities does the firm provide to clients in your industry?
The right firm should bring a good mix of industry specialization and insights that can help address your business challenges.
Engage in the planning process
Request a planning meeting to discuss the upcoming audit and share concerns, questions, and issues that may be on your mind. Your auditors are engaging with your team and reviewing all aspects of your operations in the coming months. Be up front with them by asking them to be intentional about areas where you would like an independent opinion.
Close out with an eye toward the future
Request a closing meeting at the end of the audit to discuss items that can help your strategic planning process. Possible discussion items include:
- Working capital efficiency – Excess working capital has a cost over time and can often be improved with relatively small, but focused efforts. Consider discussing topics like:
- How inventory turnover by component (raw material, work in process, finished goods) compares to both your business model and industry?
- How aggregate receivables collection compares to your stated terms?
- How the cash cycle compares to others in your industry?
- Profitability – What is really driving your profitability and how does it compare with your internal view of where you make your money (i.e., sales vs. operations)? For many manufacturers, there is a disconnect between job-level profit measurement and what ultimately drops to the bottom line. Aligning the perspectives of sales, operations, and finance around the elements that drive profitability can pay big dividends.
- Capacity management – While capacity management impacts how inventories are valued and costing rates are set, it also may be the single largest driver of profitability. If you aren’t already collecting objective data in this area, ask your auditor for their ideas and the metrics they used during the audit process.
- Capital structure – For a privately held business, having the right capital structure is critical to striking a balance between investment return and business risk. Too much or too little debt can both be detrimental and increase business risk. Ask your auditor for key benchmarks and industry data to help develop a balanced approach.
How CLA can help
The above won’t necessarily make your annual audit any more enjoyable, but it can certainly increase the effectiveness and long-term benefits of the time and money you’re investing in the process. And, if you’re still stuck, we’re here to help you transform numbers into accurate, meaningful information —the unbiased, objective, financial resources that your stakeholders demand.