Internal Controls in Manufacturing

In accounting terms, internal controls are the process of having a reliable and efficient process to report accurate financial information. However, internal controls are more than that for many businesses, specifically manufacturers. They are an integral part of their day-to-day accounting and operational processes to become more efficient in all aspects of their business. Implementing effective internal controls can add significant value to manufacturing companies. Effective internal controls will translate into more reliable information that is vital for any company’s decision-making to achieve its goals. Two of the key controls for manufacturers that drive business are inventory controls and cost controls.

Key Controls for Manufacturers

Inventory controls are the process of optimizing inventory levels to ensure the company has the proper resources to sell goods to meet demands, avoid excess costs of manufacturing unnecessary goods, and eliminate additional overhead costs. Many manufacturers are still experiencing supply chain issues where there are added costs to carry the needed inventory to fulfill orders on a timely basis or are missing out on sales due to the inability to carry the needed inventory. Another aspect of inventory control is the process of accurately taking a physical inventory count. This can be challenging for manufacturers and additional controls may be added to ease the process to be more streamlined and efficient to ensure a more accurate inventory count process. A precise inventory count, especially at year-end, is vital to have accurate financial and operational data to plan for expected growth and to evaluate if financial and operational goals were met by the company.

Cost controls are the process of reducing business expenses through the analysis of financial data to make more accurate projections, and to decrease costs in certain areas that have been highlighted for overspending. For many manufacturers, this will lead to working with specific vendors that can lock in prices for goods and services while building stronger relationships with those vendors. If manufacturers can effectively implement a cost control framework, it will lead to reliable reports that reflect whether expectations are being met, useful metrics to meet future goals, and continued feedback on trends of costs and profitability.

Design and Implementation

The design and implementation of internal controls can be challenging for manufacturers, especially if there are not many controls and safeguards in place. It is important to keep in mind the five key components of internal control while implementing new processes. The five components consist of a thorough risk assessment, creating an effective control environment, ensuring control activities are carried out, sharing detailed information and communication throughout the company to establish control standards, and monitoring to verify controls are operating efficiently. For manufacturers to get to this stage in design and implementation they should consider the following:

Manufacturers should consider the internal controls necessary for their business to ensure that reliable information can be obtained, and good business decisions can be made. For help understanding the controls best suited for your business or for support in designing or implementing those controls, contact a member of HBK Manufacturing Solutions at manufacturing@hbkcpa.com or 330-758-8613.