The Number Behind the Number
Most manufacturing businesses report the same handful of figures every month. The numbers that explain why the business performs the way it does are usually one level down, and they rarely appear in the management accounts.
This series takes one of those numbers at a time. Each entry explains what the measure shows when it is examined properly inside a manufacturing or engineering business, and ends with a question worth asking of your own figures.
The series first ran weekly on LinkedIn. The 30 entries are grouped here by theme.
Cash and working capital
Debtor Days
Debtor days measures how long, on average, it takes a business to collect payment after invoicing. Most businesses watch it as a credit control metric.
In manufacturing, it is more usefully read as a relationship metric. When debtor days are high and stable, the finance process is usually fine. The commercial relationship is the constraint.
How much of your debtor position reflects contractual terms, and how much reflects conversations that have not been had?
Invoice to Cash Cycle by Customer.
Invoice to cash cycle measures the full span from raising an invoice to the cash landing in the bank. At business level it is usually close to debtor days. Broken down by customer, it often tells a different story.
A handful of customers frequently account for most of the delay, whether through slow approval processes, disputed queries, or payment runs that only happen once a month regardless of terms. Those customers are, in effect, being financed by the business, interest free, and the cost rarely appears anywhere except in the working capital line.
Which of your customers takes the longest from invoice to cash, and has anyone worked out what that delay actually costs?
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Supplier Payment Days Versus Contractual Terms.
Supplier payment days measures how long, on average, a business actually takes to pay its suppliers. Contractual terms state how long it is entitled to take. The two are rarely the same number, and the direction of the gap tells you something different depending on which way it runs.
Paying consistently later than terms without agreement is often the first visible sign of cash pressure, well before it shows up anywhere else in the accounts. Paying consistently earlier than terms, with no early payment discount attached, is cash left on the table for no commercial reason at all.
How does your actual payment behaviour compare to what your contracts say, and which suppliers would tell you if it did not?
Stock Turn
Stock turn measures how many times inventory cycles through the business in a year. A higher number generally indicates leaner, more efficient stock management.
In manufacturing businesses with long lead times or bespoke components, stock turn often reflects purchasing decisions made by operations rather than finance. Slow-moving inventory is cash on a shelf. It appears on the balance sheet as an asset. It behaves like a liability.
When did finance last have a substantive conversation with operations about what is in the warehouse and why?
Inventory Days by Category.
Inventory days at business level is a single blended figure covering raw materials, work in progress and finished goods across every product line. It tells you how long stock sits before it turns into cash, on average.
Split it by category and the average usually stops meaning much. One product line might turn stock every three weeks while another sits for four months, and the blended figure hides both. In engineering businesses holding safety stock for legacy spares or long lead time components, this gap is often widest exactly where the working capital tied up is hardest to justify.
Which category of your inventory is furthest from the average, and why is it still held at that level?
Cash Conversion Cycle
The cash conversion cycle measures the time between paying for inputs and receiving cash from customers. It combines stock days, debtor days, and creditor days into a single figure.
In a growing manufacturing business, all three components of the cycle tend to expand simultaneously. Stock builds to support growth. Debtors drift as customer relationships mature. Creditor days are squeezed as suppliers tighten terms. The result is a cash conversion cycle that lengthens almost unnoticed whilst revenue grows visibly.
Has your cash conversion cycle lengthened in the past two years, and does your board know by how much?
Working Capital as a Percentage of Revenue
Working capital expressed as a percentage of revenue gives a normalised view of how much cash the business requires to support its trading activity. It allows comparison across periods of different scale.
When this ratio increases during a period of revenue growth it means the business is becoming less efficient at converting sales into cash. In manufacturing, this is common and often unnoticed because the absolute working capital figure grows in line with the business and nobody questions it.
If your revenue has grown by 40 per cent in three years, has your working capital grown by more or less than that, and do you know what is driving the difference?
Costing and production
Overhead Absorption Rate
Overhead absorption allocates fixed costs across production output. It is a standard costing mechanism and in most manufacturing businesses it is set annually at budget.
The problem arises when volume assumptions change during the year and the absorption rate does not. Under-absorbed overhead sits in the accounts as a variance. It is often small enough to be noted and moved on from. Cumulatively, across a year of volume shortfall, it can be significant.
Does your board understand the overhead absorption variance in your current management accounts and what it means for the true cost of your product?
Overhead Recovery Rate by Cost Centre.
Overhead recovery rate measures how much of a cost centre's overhead is actually absorbed into the products or jobs that pass through it, based on the recovery rate applied and the volume achieved. At business level, total overhead usually reconciles. By cost centre, it frequently does not.
A machine or department running below the volume assumed when the recovery rate was set will under-recover overhead every month, and that shortfall has to land somewhere, usually spread across everything else without anyone deciding it should be. Products costed through that cost centre look cheaper to make than they actually are, and pricing decisions get made on the wrong number without anyone tracing it back to the cause.
Which of your cost centres is running below the volume its overhead recovery rate assumes, and what is that doing to product cost?
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Machine Utilisation Rate
Machine utilisation measures the proportion of available capacity that is generating productive output. In a capital-intensive manufacturing business it is one of the most important numbers on the shop floor. It rarely appears in the management accounts.
Low utilisation is a fixed cost problem. The depreciation, the maintenance, the space and the energy costs continue regardless of whether the machine is running. When utilisation is low those costs are being spread across less output, which means the true cost per unit is higher than the standard cost assumes.
Do you know the utilisation rate of your key production assets, and does your board understand what it means for unit economics when that rate falls?
Production Run Length Versus Unit Cost
Unit cost in manufacturing is not fixed. It varies with run length. Setup costs, tooling changes and line downtime are spread across however many units are produced in a run. A short run carries a higher cost per unit than a long one, often significantly higher.
This matters when pricing is based on standard costs that assume average run lengths, and the actual order pattern delivers something different. A customer who orders frequently in small quantities may appear profitable at the quoted price. When the true cost of short-run production is allocated properly, the picture can look quite different.
Does your pricing model reflect the actual cost of the run lengths your customers order, or does it assume an average that your order book does not support?
Labour Efficiency Variance
Labour efficiency variance measures the difference between the hours a job was expected to take and the hours it actually took, valued at the standard labour rate. It is a standard management accounting measure. In many manufacturing businesses it sits in the monthly accounts as a single line, noted and moved past.
The number behind it is where the variance is coming from. A business running a persistent adverse labour efficiency variance is either estimating incorrectly, experiencing a skills or supervision problem, or absorbing rework and rectification that is not being captured separately. Each of those has a different cause and a different remedy.
Does your business track labour efficiency variance at job or cost centre level, and do you know what is driving it?
Scrap and Rework as a Percentage of Turnover
Scrap and rework costs appear in most manufacturing businesses. In few of them do they appear clearly. They are absorbed into material costs, labour variances, or overhead, and the aggregate figure is rarely visible as a single line in the management accounts.
When it is calculated properly, it frequently surprises. A business running at two or three percent of turnover in scrap and rework is carrying a cost that, at £10m revenue, represents £200,000 to £300,000 a year. That is before the indirect costs of the delays, the customer relationship strain, and the management time absorbed in resolving failures.
What does scrap and rework cost your business as a percentage of turnover, and when did you last calculate it properly?
Quoted Margin Versus Actual Margin by Job
The margin at which a job is quoted and the margin at which it closes are rarely the same figure. In most engineering and manufacturing businesses the gap between the two is known informally but rarely measured systematically.
Scope creep absorbed without a variation, materials priced at budget rather than actual, labour hours that overran without anyone adjusting the job cost: each of these erodes the margin between quotation and completion. Individually they may be small. Across a year of trading they represent the difference between the margin the business thought it was making and the margin it actually made.
Do you have a clear view of quoted versus actual margin by job, and does the pattern tell you anything about where your estimating is consistently optimistic?
Warranty and Returns Cost as a Percentage of Revenue
Warranty and returns costs are often treated as an operational nuisance rather than a financial metric. In most businesses they are managed by the operations or customer service function and the aggregate cost is not reported clearly at board level.
Expressed as a percentage of revenue, the number gives a cleaner picture. It allows comparison over time, identifies whether the trend is improving or deteriorating, and creates a basis for understanding the true margin on the products or contracts generating the most claims.
A business that knows its warranty cost as a percentage of revenue is in a position to price for it, manage it and improve it. A business that does not is simply absorbing it.
What does warranty and returns cost your business as a percentage of revenue, and is that figure trending in the right direction?
Revenue per Employee
Revenue per employee is a simple productivity metric. Divide total revenue by headcount. It is used as a broad efficiency benchmark and for sector comparison.
In manufacturing businesses, it is more useful as a trend indicator than a point-in-time measure. When revenue per employee falls during a period of growth it usually means headcount has been added ahead of productive output. That is sometimes deliberate and sometimes not. The distinction matters for margin and for the business’s capacity to sustain its cost base if revenue plateaus.
Is your revenue per employee higher or lower than it was three years ago, and do you know why?
Customers, delivery and pricing
Gross Margin by Customer
Gross margin at business level is a standard management accounts figure. Most businesses of any scale can produce it without difficulty.
Gross margin by customer is rarer. When it exists, it frequently reveals that the largest customers by revenue are not the largest contributors by margin. Volume and value are not the same thing, and in engineering businesses the gap between them is often significant.
Do you know which of your top five customers is the most profitable, and which is the least?
Margin by Customer Rather Than by Product
Product margin is a standard management accounts figure. Customer margin is rarer, and more revealing.
Two customers buying the same product at the same price can generate very different margins once the cost to serve is properly allocated. One orders in large regular volumes with clean specifications and pays on time. The other orders in small batches, generates a disproportionate share of queries, requests frequent modifications and pays in sixty days. The product margin looks identical. The customer margin does not.
Do you know which of your customers is the most profitable once the true cost to serve is included, and which is the least?
Revenue Concentration: Top Three Customers as a Percentage of Total
Revenue concentration is one of the most straightforward risk metrics in a manufacturing business and one of the least frequently reviewed at board level. The calculation is simple. The implications are not always comfortable.
When the top three customers represent fifty percent or more of total revenue, the business has a structural dependency that affects almost every other financial decision: investment, hiring, pricing, borrowing capacity and exit value. Lenders and acquirers will identify it immediately. Boards often do not discuss it until one of those conversations forces the issue.
What percentage of your revenue comes from your top three customers, and has that concentration increased or decreased over the past three years?
Price recovery rate on cost increases.
When input costs rise, the relevant question is not whether prices were increased but by how much of the cost increase was recovered. Full recovery maintains margin. Partial recovery erodes it. No recovery compounds the problem with every subsequent price movement.
In practice, most manufacturing businesses recover some but not all of their cost increases. The gap between cost inflation and price recovery is rarely quantified clearly. It accumulates quietly in the margin over time and surfaces when a business that has grown its revenue finds its profitability has not kept pace.
Over the past two years, what percentage of your input cost increases have you recovered through price, and what has the unrecovered balance cost your margin in aggregate?
Contract renewal rate and average contract length.
Contract renewal rate measures the proportion of contracts that are retained at renewal. Average contract length indicates the stability and predictability of the revenue base. Together they give a picture of commercial durability that revenue figures alone do not provide.
A business with high revenue growth but a declining renewal rate is building on an increasingly unstable foundation. A business with a short average contract length is repricing its revenue more frequently than it may realise, with all the margin risk and management cost that entails.
What is your contract renewal rate, and does your board review it alongside the revenue figures?
New customer revenue as a percentage of total.
New customer revenue as a percentage of total measures how much of the business's income comes from customers won within a defined recent period, typically the last twelve months. It indicates the rate at which the business is genuinely growing its customer base rather than deepening existing relationships.
In manufacturing businesses with strong incumbent customer relationships, this figure is often lower than expected. That is not always a problem. It becomes one when existing customers are declining, consolidating or reducing spend, and the pipeline of new customers is insufficient to compensate. By the time that dynamic is visible in the revenue line, it has usually been developing for some time.
What percentage of your current revenue comes from customers won in the last twelve months, and is that proportion growing or shrinking?
On-time delivery rate and the true cost of failures.
Most manufacturing businesses track on-time delivery in some form. Fewer track the cost of the failures behind the headline figure.
A late delivery has a direct cost: expediting, premium freight, overtime, and sometimes contractual penalties. It also has an indirect cost that rarely appears anywhere: the management time spent managing the consequences, the commercial goodwill consumed, and the pricing concessions made at the next renewal to repair the relationship.
The headline delivery rate tells you how often you are late. It does not tell you what being late is actually costing you.
What is the true cost of your on-time delivery failures, and is that number visible to your board?
OTIFEF: on time, in full, error free.
Most manufacturers track on-time delivery and report a figure that sounds respectable. OTIFEF applies two further conditions simultaneously: the delivery must also be in full and error free. A shipment that arrives on time but short by one component fails the measure. One that is complete and punctual but carries an incorrect document fails it too.
The composite pass rate is almost always materially lower than the on-time delivery figure alone. A business reporting 94 percent on-time delivery may find its OTIFEF rate is closer to 75 or 80 percent once the in-full and error-free conditions are applied. That gap is what its customers are actually experiencing.
What is your OTIFEF rate, and how does it compare to the on-time delivery figure you currently report?
Resilience and capital
Fixed cost cover.
Fixed cost cover measures how many months of fixed costs the business could sustain from current cash and liquid assets if revenue stopped tomorrow. It is a stress test rather than a trading metric.
Most manufacturing businesses do not calculate it. Those that do are often surprised by the answer. In a business with a high fixed cost base, significant WIP, and 60-day debtors, the number can be lower than the MD expects.
If your largest customer paused orders for 90 days, how many months of fixed costs could the business cover without drawing on external facilities?
Fixed Cost Cover at Current Volume.
Fixed cost cover measures how comfortably current sales volume clears the fixed cost base before a business starts making a genuine contribution to profit. It is closely related to break-even, but framed against where the business actually sits today rather than as an abstract calculation.
The number that matters is not the ratio itself but how it has moved. A business running at 115 percent of fixed cost cover this year against 140 percent two years ago is more exposed to a downturn than its profit and loss account suggests, even if profit itself has barely changed, because the margin of safety has narrowed while nobody was watching that particular number.
How far above fixed cost cover is your business running at current volume, and how has that margin moved over the last two years?
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Interest Cover in Cash Terms.
Interest cover is usually calculated as operating profit divided by interest charges, a standard bank covenant measure. It answers a reasonable question using an imperfect number, because operating profit is an accounting figure and interest is paid in cash.
In a business building working capital, particularly one growing quickly or carrying long production cycles, operating profit can look comfortably ahead of interest while the cash actually available to pay it is much thinner. The covenant passes. The bank account tells a different story.
Recalculate interest cover using cash generated from operations instead of operating profit, and the gap between the two versions is usually the more honest number.
Have you ever compared your covenant interest cover with the cash version, and were they close?
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Capex as a Percentage of Depreciation.
Depreciation is the accounting estimate of how much value the asset base loses each year through use. Capex is what the business actually spends replacing or renewing it. Compare the two and you get a rough but useful test of whether the asset base is being maintained, or run down.
A ratio persistently below 100 percent means the business is spending less than its own accounts say the assets are losing in value. That is sometimes a deliberate choice ahead of a sale or a downturn. More often it is a habit that formed during a difficult year and was never revisited, and it shows up later as machinery reaching the end of its useful life all at once.
What has your capex to depreciation ratio looked like over the last three years, and was the pattern a decision or a drift?
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ROCE by Product Line or Business Unit.
Return on capital employed at business level is a familiar figure, and a reasonably comfortable one for most manufacturers to report. Broken down by product line or business unit, it is rarely calculated at all, because allocating capital employed across the business is more work than allocating revenue or cost.
Where it has been done, the result is often uncomfortable. A product line generating healthy revenue can be absorbing a disproportionate share of capital through inventory, tooling or debtor exposure, and returning a fraction of what the headline ROCE implies. Meanwhile a smaller, less celebrated line can be the one actually outperforming it on the number that matters most to an investor.
If you calculated ROCE by product line tomorrow, do you know which line would come out on top, and would it surprise you?
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Group Intercompany Trading as a Percentage of Revenue.
In multi-entity manufacturing groups, a meaningful share of revenue and cost can sit between related businesses rather than with external customers. This figure measures how much of group turnover is generated by one part of the business selling to another.
A high proportion is not inherently a problem. It becomes one when the pricing between entities was set for convenience rather than commercial accuracy, and nobody has revisited it since. At that point, individual entity accounts can show margins that bear little relation to where value is actually created in the group, and decisions about investment, closure or expansion get made on figures that were never designed to support them.
What percentage of your group's revenue is intercompany, and when was the transfer pricing basis last reviewed on commercial rather than compliance grounds?
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