Accounting for Manufacturing Startups: The Complete Guide

New to running a manufacturing startup business and find yourself stumped by accounting? You’re not alone.  

The good news is you don’t need to master accounting. You just need a solid grasp of the fundamentals. We’ll work through them with you below.  

Choose a Manufacturing Startup Business Accounting Method  

There are a variety of different accounting methods that can be used for manufacturing startups, and selecting the right method is dependent on your business sector.  

However, there are essential similarities in each method as they are all required to keep track of and allocate expenditures related to labor, overhead, and other costs while providing an in-depth perspective of the financial performance of the manufacturing process. 

Below are the two most common manufacturing startup business accounting methods: 

Standard Costing 

Standard costing is the most simple accounting method because it uses predetermined costs for materials and labor.  

While this method produces consistent, easy-to-compute information, it can be inaccurate if things change after the standard has been set.  

Job Costing 

Job costing is great when every job has a different cost as it takes into account direct and indirect costs. 

This method is typically the most accurate. However, it can also be the most time-consuming as it requires tracking and allocating expenses on an individual job basis.  

Understand the Three Primary Financial Statements 

Understanding the three primary financial statements in manufacturing accounting will help you identify areas where your company can improve efficiency, reduce costs, and increase profitability.  

Income Statement  

The income statement, also known as the Profit and Loss Statement, shows a business’s revenue and expenses over a period of time. For manufacturing businesses, this statement will show:  

• Revenue generated from the sale of products 
• Cost of goods sold 
• Operating expenses related to producing and selling those products  

The information collected from this statement shows the manufacturing startup’s profitability.  

Balance Sheet 

The balance sheet shows a business’s assets, liabilities, and equity at any point in time. For manufacturing businesses, this statement will show:  

• Value of inventory, property, plant, equipment, and other assets 
• Accounts payable and loans  
• Owner’s equity in the business  

The balance sheet will show the financial position of the business and outline its ability to meet financial obligations.  

Cash Flow Statement 

The cash flow statement shows the money flowing into and out of the business over a period of time. For manufacturing businesses, this statement will show:  

• Cash received from the sale of products 
• Cash paid for direct materials and labor 
• Manufacturing overhead costs associated with producing products  

The cash flow statement will show the business's ability to generate cash from operating activities and meet its short-term financial obligations.  

Use the Right Manufacturing Accounting Software  

Bookkeeping for startups, especially in manufacturing startups, is not an exciting task. But it’s essential, which is why you need the right accounting software to automate and simplify the process.  

Here are some of the key factors to consider when searching for accounting software for manufacturing:  

• Inventory management 
• Job costing 
• Financial reporting 
• Ease of use 
• Scalability 
• Security and compliance 
• Location  

At Katana, we recommend QuickBooks Online or Xero. Both easily integrate with our cloud manufacturing platform to streamline accounting, inventory, and production.  

Hire the Right People for Your Accounting Team 

The accounting team is an essential element in a manufacturing business. Their work provides you with the information you need to make strategic business decisions.  

As you begin your search, whether it be for an in-house or outsourced team, there are a few things you need to keep in mind.  

• Industry-specific experience  
• Because there are specific nuances to manufacturing accounting, it’s important your team has the knowledge and experience to handle them.  
• Technical skills 
• Again, manufacturing accounting is different from traditional accounting. There are different sets of tools and software needed for them to be successful.   
• Communication 
• The accounting team will need to work closely with other teams to ensure everyone is on the same page. They have to be able to explain complex topics and strategies to people who may not be financially savvy. 

Fundamental Manufacturing Startup Business Accounting Tasks 

Before you hit the ground running with all of this information, here are a few final fundamentals of manufacturing accounting:  

• Inventory management 
• Your inventory has to be managed efficiently to ensure you have everything you need to produce your goods. You’ll need to:  
• Track inventory levels 
• Order materials when needed 
• Ensure inventory is properly recorded on the balance sheet 
• Budgeting and forecasting 
• This helps your business plan for future expenses and revenue. You’ll need to:  
• Forecast sales 
• Estimate production costs 
• Create a budget for each stage of the production process 
• Tax compliance 
• There will be taxes that apply to your business at the federal, state, and local levels. To ensure you’re always in compliance, you’ll need to:  
• Prepare and submit tax returns 
• Track tax payments 
• Keep up with changing tax laws and regulations 

Keeping all of this information in mind, you can ensure that your manufacturing startup business accounting is doing what it needs to do to help you manage a successful business.