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glevi Blog Inventory, Manufacturing, Margins

Manufacturing Accounting: Busting the 80% COGS Myth and Unlocking Profitability

In the world of manufacturing, a common belief persists: Cost of Goods Sold (COGS) will inevitably hover around 80%. But does this have to be the reality? Absolutely not. Strategic manufacturing accounting can be a powerful tool to challenge this assumption and unlock significant cost savings.

Understanding the COGS Breakdown

Before diving into cost reduction strategies, it’s crucial to understand what comprises COGS. For manufacturers, this typically includes:

Direct Materials: Raw materials, components, and sub-assemblies used in production.
Direct Labor: Wages and benefits for employees directly involved in manufacturing.
Manufacturing Overhead: Indirect costs like factory rent, utilities, and equipment depreciation.

Challenging the 80% Benchmark

While 80% COGS might be the norm in some sectors, it’s not an immutable law. By implementing strategic accounting practices, manufacturers can gain valuable insights and identify areas for improvement:

Activity-Based Costing (ABC): This method provides a more accurate picture of costs by assigning them to specific activities, revealing hidden expenses and areas of inefficiency.
Lean Accounting: Aligned with lean manufacturing principles, this approach focuses on eliminating waste, optimizing processes, and improving flow to reduce costs and increase efficiency.
Inventory Management: Implementing robust inventory control systems, such as Just-in-Time (JIT), minimizes holding costs, reduces waste, and improves cash flow.
Supply Chain Optimization: Negotiating better prices with suppliers, sourcing alternative materials, and streamlining logistics can significantly impact direct material costs.

Beyond the Numbers

By challenging the 80% COGS assumption and implementing these strategies, manufacturers can gain a competitive edge, boost profitability, and achieve sustainable growth.

Is This Your Situation: You Need a Manager at Your Manufacturing

glevi Blog HR, Leadership, Management

Hiring a manager is different from hiring other staff positions, and it is particularly important. Managers not only are harder to find, but also are harder to evaluate. Some manufacturing managers have tons of experience but lack true leadership skills. Others are the opposite — they’re great leaders but don’t have a great deal of experience within the industry. How can you tell if a candidate has the potential to be a great manager in your organization? Here are five key traits to look for.

Confidence

No manager should be overly nervous in an interview. Sure, they might be a little jittery, especially if they haven’t been in the job market in a while. But for the most part, managers should show confidence in their ability to present ideas. Furthermore, they should be exceedingly comfortable speaking about their skills, experience, and accomplishments within the manufacturing space.

Character

Managers can have all the experience in the world, but if they don’t have the character to match, they’ll have a hard time making a true impact within your organization. Someone with strong character will give you a sense of reassurance and trust right from the start. But don’t confuse confidence with arrogance or you could find yourself making the wrong hiring decisions.

Composure

Things can get hectic in a fast-paced work environment like a manufacturing floor. When everyone else is in a panic and frustrated, the manager is the one who should remain calm. In this position, you need someone who not only can keep their composure during stressful situations, but also can find solutions to problems at hand.

Conflict Resolution

In line with composure is conflict resolution. When everyone is sharing ideas and working toward common goals, there will be disagreements. This may be especially true among less-experienced staff whose may not have the maturity to balance emptions in the way that more-seasoned workers can. Managers must be able to mediate and resolve situations for themselves and others alike.

Customer Service

In the end, your customers matter most. When you have a manager who can communicate effectively with customers, it’s a huge advantage. You will have the peace of mind that comes from knowing your company is represented well. Customer service often can require its fair share of conflict resolution, just like any level of management.

There is so much involved in hiring a manager for your manufacturing business. Contact us today, and we’ll gladly assist you with the logistical aspects of your prospective new hire.

Inventory Management: Key to a Lean Operation

glevi Blog Cash Flow, Inventory, Liquidity, Manufacturing

Longer timelines are often a natural part of manufacturing anything. Unlike ready-made items or services, there are multiple steps — you may spend months sourcing raw materials. You have to make it, build your assembly line or manufacturing method, and actually produce it.

There may be delays in quality control and retooling, as well as labeling and packaging. Complex manufacturing timelines mean that the accounting process is more complicated than for other enterprises. You need to take into account not just one inventory but perhaps many — for both parts or materials and the finished product.

There are accounting decisions to be made that affect how your business is perceived; for example, some businesses consider inventory an asset. But inventory requires cash — how you handle this in your books and in practice can make a difference on your bottom line.

If you run lean and purchase only as much inventory as you need to have on hand, you’re more cash-rich — not committing your finances until you need materials. Think about the costs of materials and the costs to convert those materials into products. This is necessary in order to understand the amount of inventory you hold.

Direct material inventory is a calculation of all the materials your manufacturing business is using to make your product — all the materials consumed or identified with your product. This is often listed in a bill of materials that itemizes quantities and costs of the materials used in your product.

On a typical manufacturing balance sheet, you should have raw materials, work in process and finished goods as part of your inventory calculation. You’ll want a perpetual inventory system to track how many products you have in your production line at any time.

Inventory management is crucial — you’ll want to have a value associated with the number of goods in your inventory. Valuing your inventory will help establish the costs of goods sold and how much profit you’re making. Having a shortage or excess inventory directly affects production and profitability.

Inventory is continually being sold and restocked, so make a cost flow assumption.

First in, first out, or FIFO — Products are sold in the order they are added to inventory. It’s a popular way of costing inventory, especially if you have products with a shelf life.
Last in, first out, or LIFO — Operates under the assumption that the final product added to a company’s inventory is the first one sold.
Average cost — Weighted average of all products to determine and track inventory. It works where it’s difficult to assign costs to specific or individual products.
Specific ID — Tracks individual items of inventory with a serial number or RFID tag, but not too many manufacturers have items identified like this. It works better with high-value items that need differentiation than it does for interchangeable items.

An accountant can help you figure out an inventory plan to ensure you have enough raw materials on hand without breaking the bank to stock them. You can find cloud-based platforms to manage inventory, but then you’ll have data stored on your own servers and some elsewhere. If one element of the systems is down, you lose your accounting flow chain.

But the positives of cloud-based solutions include being able to access your data via the internet. Your accountant will be able to view your accounts with you in real time and be able to explain the implications of indirect taxes to address, such as managing use tax accruals on inventory movements, for example.

You may buy items into inventory without knowing how or where those things will be used. If you have a tax accrual process in place, you’ll minimize audit exposure. Automating procure-to-pay processes could prevent tax overpayments and save money.

While U.S. manufacturers don’t pay sales tax on raw materials used in a final product, you may be responsible for indirect taxes on purchases of equipment and supplies like machines, conveyor belts and forklifts.

The challenge is to know whether the goods or equipment you’re purchasing will be used in a manufacturing or R&D process, which is usually tax exempt or reduced rated. These taxes can be very complex to track and manage; the burden is on the manufacturer. In some states, manufacturers get credits for R&D, other states have exemptions for manufacturing equipment. You need to know which regulations apply to your operations.

Even slight errors in purchasing can have a big financial impact. Inventory management helps optimize how you use inventory and provides alerts when stock needs replenishing. You don’t want to have too much or not enough inventory to fulfill your customers’ requirements.

Lean manufacturing is all about minimizing waste while maximizing productivity. The extra complexity of calculating inventory can be assuaged with software that extracts data and analyzes trends. Let your accountant help you choose the best one for your manufacturing business.

IRS Announces Mileage Change For 2025

glevi Blog Compliance, Rates

At the end of December, the IRS announced standard mileage rates for 2025. Below are the deductions, if you are using an automobile for approved purposes:

Self-employed and business: 70 cents/mile (up from 67 cents in 2024)
Charities: 14 cents/mile (unchanged from 2024)
Medical: 21 cents/mile (unchanged from 2024)
Moving (military only): 21 cents/mile (unchanged from 2024)

It gets complicated

Before making your claim, you need to read the find print. For example, the IRS says that if you use your car only for business purposes, you may deduct its entire cost of ownership and operation (subject to various limits). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.

The IRS explains that you can generally figure the amount of your deductible car expense by using one of two methods: the standard mileage rate method or the actual expense method. If you qualify to use both methods, you may want to figure your deduction both ways before choosing a method to see which one gives you a larger deduction.

Further details are available on the IRS site, Topic no. 510, Business use of car. You should discuss your situation with a tax professional.

Pro Tip

glevi Blog Budgets, Business Tips, Goals, Growth, planning, pro tip

Happy New Year! Everyone wants to start the year off right, how can we approach that? For us, it is all about planning:

1. Consider where you want to go.

2. Plan out a realistic path to achieve your goal(s) using historical data and assumptions.

3. Consider what resources (in particular people) are required for your path.

4. Understand the impact on cash of your growth trajectory. Do you need to adjust your path or find additional funding to make it possible?

5. Think about the next goal after this one, at least broadly.

6. Set incremental goals to track progress.

Set yourself up for success in 2025!

UPDATED–Season’s Greetings: BOI Rules Reversed Again

glevi Blog Compliance

All over the business world, accountants, lawyers, financial executives and journalists have been scrambling to keep up with the latest soap opera in the financial community: what’s happening with the Corporate Transparency Act and its ownership reporting rules.

The key message: As of Dec. 26, the CTA’s BOI reporting requirements are suspended indefinitely. Affected businesses can breath a sigh of relief.

How did we get here?

In brief: The much-debated CTA imposed heavy reporting requirements on a wide range of companies, starting in 2025. The businesses had to report beneficial ownership information to the Financial Crimes Reporting Network. But then we get to the back-and-forth:

On Dec. 3, a federal court issued an injunction suspending the law. The reporting requirement was put on hold.
On Dec. 23, the Fifth Circuit Court overruled the original federal ruling, putting the CTA back in action. As the AICPA said on its website: “On Dec. 23, 2024, the Fifth Circuit Court lifted the injunction, allowing FinCEN to enforce BOI reporting.”
On Dec. 26, the Fifth Circuit apparently had a change of heart and went back to suspending the requirements. So there is currently no mandate to file BOI reports.

FinCEN confirmed this on Dec. 27 with the following statement:

On December 26, 2024, however, a different panel of the U.S. Court of Appeals for the Fifth Circuit issued an order vacating the Court’s December 23, 2024 order granting a stay of the preliminary injunction. Accordingly, as of December 26, 2024, the injunction issued by the district court in Texas Top Cop Shop, Inc. v. Garland is in effect and reporting companies are not currently required to file beneficial ownership information with FinCEN.

Why did the court “relent”?

In a short statement, the Fifth Circuit wrote that “in order to preserve the constitutional status quo while the merits panel considers the parties’ weighty substantive arguments, that part of the motions-panel order granting the Government’s motion to stay the district court’s preliminary injunction enjoining enforcement of the CTA and the Reporting Rule is VACATED.”

However, this is not necessarily the last word. There’s no certainty when the court will make a more permanent ruling. Congress could even decide to repeal the law. Because changes have been happening so quickly, be sure to keep in touch with your financial and legal advisors.

Federal Court Strikes Down Overtime Rule

glevi Blog HR, Staffing

The Department of Labor announced in April 2024 that it would increase the salary threshold required to exempt a salaried bona fide executive, administrative or professional employee from federal overtime pay requirements. According to a DOL release, “Effective July 1, 2024, the salary threshold will increase to the equivalent of an annual salary of $43,888 and increase to $58,656 on Jan. 1, 2025.” In April, the annual salary threshold was $35,568. The release further stated, “Starting July 1, 2027, salary thresholds will update every three years by applying up-to-date wage data to determine new salary levels.”

But that is no longer effective. As the National Law Review reported, “On Nov. 15, 2024, Judge Sean D. Jordan of the United States District Court for the Eastern District of Texas ruled that the DOL exceeded its rulemaking authority by raising the minimum salary for exemption as an executive, administrative, or professional (EAP) employee under the Fair Labor Standards Act.”

So, where are we?

The entire DOL rule seems to be gone, including the upcoming January increase and the three-year plan. Especially interesting is that the July raise has also been retroactively rolled back. In theory, employers that granted increases based on that change could now cancel those salary changes. However, such reductions may lead to employee resentment, so they may not be worth any savings.

Also, for many employers the issue may be moot: Some state and local jurisdictions already have higher salary thresholds in place, and this federal ruling has no effect on them.

The ink on the ruling is still wet, and lawyers are currently reviewing the lengthy ruling. We’ll have more guidance as it becomes available. For now, the best advice is not to make any changes until you’ve spoken with qualified advisors.

Lonely Leaders

glevi Blog HR, Leadership

Harvard Business Review reports that at least half of managers and top executives feel isolated and disconnected, while 61% of those surveyed reveal that the alienation hinders their job performance. Anyone with elevated status, not just the CEO or others in the C-suite, may find it challenging to interact with subordinates.

We should distinguish between solitude and loneliness. Solitude is often prized by busy, active leaders. A few minutes or hours with their thoughts may be a welcome interlude. Loneliness on the other hand takes a psychological toll, even on middle managers, who find themselves in no man’s land between their teams and senior brass.

Why do managers become isolated?

Moving up to management should be something to celebrate, but it might turn out to be a poisoned chalice.

Hierarchy and power dynamics in any organization set up an automatic gulf between team camaraderie and the boss. Once they become authority figures, managers may discover they cannot hang out with the team the way they used to. Suddenly, your reports may start to act differently, perhaps unconsciously.

You are always “on” and under unrealistic pressure to be infallible. As a superior, you become more visible, with less wiggle room, and are judged by harsher standards. Your moods and behavior will now have a wider impact on your former teammates. Although life at the top of the food chain certainly carries its advantages, it also entails obligations and challenges.

Making decisions may become burdensome when you shoulder them by yourself. You must address new interpersonal frictions, like holding team members accountable, dealing with poor performance or resolving conflicts. Where can you turn for support? Your office dilemmas may not be well appreciated at home. You now probably have fewer peers with whom to commiserate. Compounding the quandary, you may now be restricted in what confidential information you can share. The team may regard your decisions as illogical, not being privy to full details.

It would be normal to harbor fears. Impostor syndrome is the private suspicion that your success is undeserved. You may fret that your team is unhappy, that you lack the right skill sets or that you must prove your promotion. You may be distanced from your former office friendships but have not yet developed new peers.

Fight back!

When you recognize your loneliness, you can take constructive action. The unfortunate reality is that many organizations provide little leadership training, so managers are left to fend for themselves.

You will feel more secure if you can establish a peer support group that can perform as a sounding board for you in a safe, confidential setting. Fellow managers can come together to share their experiences and insights. The learning curve can be steep for almost anyone. Remember that all experienced managers had to start somewhere and likely felt lonely themselves once.

You may have to construct a peer network on your own. It may take some time and patience, as it is normal to build trust gradually. Invite them to lunch, organize brainstorming sessions, and schedule regular catch-ups.

Peer groups — sometimes known as “mastermind” groups — at all levels can reinforce each other. Individual members meet in groups of about half a dozen to give and receive advice, share ideas or even discuss personal matters. As members of a supportive community, they elevate one another’s strengths and encourage each other.

Loneliness hacks

Practice some simple habits to keep managerial blues at bay:

Keep up some outside hobbies to preserve a healthy work-life balance.
Solicit feedback regularly.
Ask HR about a mentoring program — or start an unofficial one.
Find an objective person to offload on, ideally not a family member or partner.
Choose one challenge a month to increase your confidence.
Show empathy to other new managers. You have been in their footsteps.
Ask for help when you need it.

Accepting and acknowledging your inner feelings can be a comfort. Maintaining a façade of self-confidence to conceal your insecurities will only wear you down.

Pay Transparency: Laws and Policies

glevi Blog HR, Staffing

Did you know that 13 Canadian laws regarding pay transparency have been passed between 2004 and 2016? Designed to protect the rights of workers and enable them to ask about the salaries of co-workers, researchers found that these laws were associated with a 2% drop in wages across the board.

Ultimately, the authors of this study attributed their findings to a decrease in bargaining power on the part of applicants during the hiring process. But how is this possible? Shouldn’t pay transparency laws favor job applicants and prioritize equality among employees?

In theory, yes — this is true. However, while the concept of pay transparency is that it grants workers with more power when it comes to renegotiating pay and lowering pay discrepancies, it often shifts the bargaining power to the employers instead. According to the researchers of the aforementioned study, wages typically end up being more equal, but the main issue is that the average pay rate is also lower.

Differences in pay transparency laws across the U.S.

Now that we’ve covered trends regarding pay transparency laws in Canada, let’s take a look at five states and what pay transparency laws say in each location.

California

In California, employers are deterred from asking job applicants about pay history. This means you cannot inquire about the current or former salaries and pay rates of people you’re thinking about hiring.

Colorado

As of 2021, Colorado became the first state to require pay transparency. Something known as promotion transparency also exists in the state of Colorado, and it essentially requires employers to make everyone aware of work-related opportunities, like promotions and advancements.

Hawaii

Hawaii’s pay transparency law only applies to organizations that employ more than 50 people.

Illinois

Illinois has a pay transparency law that is set to go into effect in 2025. At that time, employers with 15 workers or more will be required to provide a general description of workplace benefits in their total compensation statement. These details must include bonuses, stock options and other financial incentives.

New York

In New York City, the state’s pay transparency law applies to nearly every employer. Only those with fewer than four employees are exempt. Furthermore, employers who violate the pay transparency law could face fines upward of $250,000.

Data has shown that a mere 58% of job ads posted for work based in New York City within the first two months of the law being enforced included pay ranges. The New York City transparency law went into effect in November 2022, and companies looking to hire employees are obligated to disclose a minimum and maximum salary range for both internal promotions and transfer opportunities.

However, bonuses, tips and paid time off do not have to be included in job descriptions. The law covers office-based work, fieldwork and remote work from an employee’s home for jobs performed within the city.

To an extent, these new pay transparency regulations are supposed to let job applicants know which companies and positions pay more as well as which ones pay less. In theory, this might lead to more efficient matching between job-seekers and employers.

Questions to ask yourself about pay transparency laws

When it comes to pay transparency laws, you should ask yourself how they will affect you. For instance, do you work in an industry with unpredictable pay rates?

Similarly, do you find it hard to keep your compensation offers competitive compared to other companies in your industry? Overall, experts suggest using a benchmark, implementing a solid core strategy and developing an understanding of market trends.

But what should you do if you have employees who know they are being paid differently from one another? As you can imagine, this dynamic can result in tension among team members, with those receiving less compensation left to feel undervalued and unappreciated.

It can also call major issues into question. That’s why your compensation strategy not only needs to cultivate equity, but it must also address favoritism and biases in the hiring process.

How to ensure compliance with your state’s pay transparency policies

Research current pay transparency laws to see how they could affect your company. Conduct market research on pay ranges for each position.

Look at businesses that operate in the same industry as you to ensure that you are offering competitive pay ranges. Evaluate any existing pay transparency regulations and make sure you’re in compliance. This may require you to adjust your salary, offer more benefits, set up bonus structures or incorporate other forms of compensation.

All in all, employers should pay attention to transparency laws and regulations, both those that already exist and those that are soon to go into effect. With a well-thought-out compensation strategy, you can establish a solid foundation that prioritizes pay transparency laws and policies.

Will My Noncompete Agreement Hold Water?

glevi Blog Legal Considerations, Staffing

You may want to require employees to sign noncompete agreements to keep them from working for rival companies. Will these protect the business? The answer is … maybe. Over time, courts have become less willing to uphold strict provisions. Indeed, President Biden has issued an executive order for the Federal Trade Commission to examine abusive noncompete agreements. That order will have little direct impact, but it indicates which way the wind is blowing — toward a more employee-friendly approach. Although no current laws have changed, employers are likely to face more scrutiny.

One size does not fit all

In many states, noncompete agreements are unenforceable. Period. In at least one jurisdiction, the District of Columbia, laws not only ban noncompete agreements but even grant people the right to work simultaneously for multiple employers.

Some states are also distinguishing between higher- and lower-paid staff, acknowledging that it may not be fair to curtail the job opportunities of rank-and-file employees such as those of upper management.

Where noncompetes are permissible, however, similar principles apply:

Is it necessary to protect an employer’s legitimate business interest?
Does it cause undue hardship for an employee? Courts do not want employees to be utterly blocked from finding new work.
Is a public interest involved? Certain industries such as medicine and education are so important that public policy supports them.
How long and how far does an agreement extend?

With a variety of industries and firms operating across the board, you must drill down into the provisions regarding each situation. The broader the time span and geographic area at stake, the less likely the agreement is to be enforceable. Reasonable duration and scope may differ greatly from one company to another. It may be excessive to demand national or global restrictions for a local, in-state business. Many noncompetes are typically drafted to remain in force for one or two years — indeed, judges tend to frown on lifelong prohibitions.

The crux is an employer’s legitimate interests. The object is to prevent employees from harming their employers by introducing their best customers to a competitor, sacrificing hard-earned goodwill or disseminating confidential knowledge and trade secrets. The former boss does not want their employees to start their own breakaway company or develop competing products, let alone recruit other former coworkers to a new rival venture.

Consider consideration

Contract law generally requires a quid pro quo to validate an agreement, and noncompetes are no exception. A legitimate contract requires something of value to which the other party is not already entitled.

Although a job offer may be contingent on a prospective employee signing a noncompete, how about those employees you are already employing? If you want them to sign new noncompetes, they need something extra now to count as consideration. That something can take diverse forms, from more money or new job responsibilities to a fancier title or increased benefits such as vacation time. It need not be very valuable, but it must be concrete.

A short checklist for business owners

Watch out for common pitfalls when you are structuring and maintaining your noncompete agreements.

Enforce your agreements evenhandedly and without exception across your workforce to avoid any discrimination charges.
If you operate in multiple states, be careful about conflicting state laws.
As a buyer or seller of a business, be sure to receive noncompetes from the other side for relevant employees.
In case your noncompetes eventually get struck down, use confidentiality agreements for additional backup.
Include noncompete language in employment contracts to cover fired employees.
Tactfully remind any departing employees about any noncompetes they may have signed.

The law of noncompete agreements depends on a host of specific conditions and circumstances. Be sure to consult with industry experts for advice in drafting or interpreting your agreements.