Disruptions lingering from the COVID-19 pandemic created a host of problems extending deep into the manufacturing industry, profoundly impacting both individual and company finances. The top three disruptions manufacturing businesses are still facing involve labor shortages, supply chain disruption and significant inflation.
Job Openings and Labor Turnover Survey data statistics indicated that about 50.5 million workers quit their jobs in 2022. Some retired early, others left the workforce to start their own businesses. While the “Great Resignation” slowed considerably in 2023, it had a huge impact on the supply chain, which has created a negative domino effect on many areas.
Many theories have developed about why the “Great Resignation” has occurred, but experts believe it boils down to four main reasons:
- Pent-Up Resignations. People were afraid to leave their jobs during the beginning of the pandemic. They were facing financial uncertainty, and many people who otherwise would have left their job in 2020 stayed a bit longer to curb some of the financial risks of switching jobs during the height of the pandemic.
- Burnout. Many workers quit or made a switch simply because they were burnt out. That burnout could have been smoldering for some time, or it could have been because of the increased demand necessary to cover other workers who had to take off because of COVID-19.
- “Terror Management Theory.” Psychologists believe that many people who are confronted with death or the threat of serious illness or harm start thinking about their lives differently. They consider what really makes them happy and make changes to increase their overall contentment. This theory is essentially based on the thinking that “life is short” and workers do not want to spend their time stuck in a job they really do not like.
- Autonomy. Many workers were forced to work from home during the height of the pandemic. Some really liked the freedom of working without a boss hovering over them. When workers were asked to come back to the office, they looked for other jobs that would offer them some flexibility to work from home regularly.
To retain your current labor force and attract new workers, you may need to make significant changes. Higher wages, bonuses and unique benefits are all ways that employers can help curb resignations.
There are potential accounting implications of the increased costs in retaining and attracting labor, so consider contract bonuses or other increases over time, deferring the actual cost on the books rather than incurring those costs immediately.
Inflation increased costs for business owners virtually across the board.
The COVID-19 pandemic put a great deal of stress on the global economy, including in the United States. Couple that with the start of the war involving Russia and Ukraine in February 2022, inflation rates topped out at 8.5% in 2022. According to the U.S. Labor Department, the annual inflation rate for the United States for the 12 months ending in January 2023 is 6.4%, still much higher than the pre-pandemic 1.76% inflation rate of 2019.
To help offset rising costs due to inflation, manufacturing companies may want to consider changes to their cost structure to take advantage of any additional saving opportunities. Transitioning some staff to salaried positions or working in fixed material costs to a contract are a few examples.
Investments might also significantly impact financial reporting because of inflation, so make sure you have a very clear picture of where all your investments are and how they’re currently performing.
Finally, inflation affects pension liability. When the discount rate increases, the recorded pension liability decreases. While this may seem helpful, you may need to factor in an additional liability to adjust for the actual pension obligation in the future.
Supply Chain Disruptions
Moving goods through the supply chain is more expensive today because of significant supply chain disruptions. This increased cost affects the cost of inventory, cost of sales and even a company’s overall profitability. As the cost of inventory rises, price increases may be necessary to keep up with expenses.
Having a specific cut-off procedure during the supply chain will help your manufacturing company realize complete revenue—which can help deal with some of the challenges that supply chain disruptions are forcing on a company’s books.
Appropriate financial reporting of finished goods requires considerations about timing.
- When does the buyer assume ownership of the goods?
- When does the company assume ownership of the raw materials to create the products?
- When is it appropriate to “cut off” ownership throughout the supply chain?
With the current challenges facing businesses, having the right financial reporting help is more important than ever.
Additionally, it’s important to diversify your supply network where you can. At the very least, keep up with the different suppliers available to you in key categories so in the event that your manufacturing company needs to switch, you’ve already got a few other options ready to contact.
Corrigan Krause Specializes in Manufacturing Accounting:
If your manufacturing business could use some guidance, the Manufacturing Services group at Corrigan Krause can help. Email firstname.lastname@example.org for more information and sign up for our Manufacturing Services newsletter here.