The Marketer’s Guide to the Most Important Ratios to Manage in a Manufacturing Company

If you are a marketer who is looking for the most important ratios to manage in a manufacturing company, you are at the right place.

In fact, whether measured or not, these ratios are so important that they are the driving force behind every manufacturing company.

Three of the 16 most important ratios to manage in a manufacturing company are; 1. Gross profit margin, 2. Inventory turnover ratio, and 3. Net profit margin.

But beware, as a marketer you may be thinking it is most important to measure cost per lead (CPL), cost per sale (CPS), number of social media followers or newsletter subscribers, or the cost per thousand (CPM) impressions for your advertising.

While these are important for the marketing department to manage as they provide great intel to manage daily actions, they are not the most important ratios that steer the health of the company. 

The ratios in this list are so important because they act as a necessary roadmap to guide and redirect the company and systems as needed. These numbers reveal how well the marketing department is doing at a high level, but they also measure the efficiency of operations and administration -- and ultimately how well the departments are doing working together.

Let’s now review and define each ratio and run through a couple of examples.

16 most important ratios to manage in a manufacturing company

  1. Gross Profit Margin: Measures the profitability of a company's core manufacturing operations by analyzing the percentage of revenue remaining after deducting the cost of goods sold.
  2. Net profit margin: Measures the amount of net income kept per every dollar of sales revenue collected.
  3. Operating Profit Margin: Evaluates the company's profitability after considering both the cost of goods sold and operating expenses, providing insight into the efficiency of the overall operations.
  4. Return on Assets (ROA): Assesses the efficiency with which a company utilizes its assets to generate profits, indicating the effectiveness of the manufacturing process and resource allocation.
  5. Inventory Turnover Ratio: Measures inventory management efficiency by calculating how many times the company sells and replenishes its inventory within a given period.
  6. Return on Investment (ROI): Determines the return generated by the company's investment in manufacturing assets, such as plants, equipment, and machinery.
  7. Debt-to-Equity Ratio: Evaluate the company's financial leverage by comparing its total debt to shareholders' equity, indicating the level of risk and financial stability.
  8. Current Ratio: Assesses the company's short-term liquidity and ability to meet its current obligations by comparing current assets to current liabilities. 

While not typically an important ratio for the marketing team to manage, the Current Ratio is one of my favorites as it is a crucial ratio for the health of the company as it is an indicator of how well the company can pay its short-term bills.

I typically like to see a current ratio of at least 2 and often 3. Generally, this means that the company has enough cash resources to pay for 2 to 3 years of liabilities.

For more information about this extremely important ratio, go here:

Current ratio for the manufacturing industry (examples) 

  1. Quick Ratio: Similar to the current ratio, but excludes inventory from current assets, providing a more conservative measure of short-term liquidity.
  2. Asset Turnover Ratio: Measures the company's efficiency in generating sales based on its total assets, indicating how effectively assets are being utilized to drive revenue.
  3. Return on Equity (ROE): Measures the profitability generated in relation to shareholders' equity, indicating the company's ability to generate returns for its investors.
  4. Cash Conversion Cycle: Analyzes the time it takes for a company to convert its investments in inventory and other resources into cash inflow from sales, providing insights into liquidity and efficiency in cash management.
  5. Accounts Receivable Turnover Ratio: Determines how quickly the company collects cash from its credit sales, indicating the efficiency of credit policies and potential cash flow issues.
  6. Operating Cash Flow Ratio: Compares the company's operating cash flow to its current liabilities, indicating its ability to generate sufficient cash to meet short-term obligations.
  7. Return on Investment Capital (ROIC): Measures the return generated per dollar of invested capital, including both equity and debt, providing insights into the efficiency and profitability of manufacturing operations.
  8. Dividend Payout Ratio: Evaluates the portion of earnings paid out to shareholders as dividends, indicating the company's policy on sharing profits and potential for future growth or reinvestment.

For your convenience, here is a list (in an image file) of all the manufacturing ratios and their formula:

Here are the ratios and the respective formula in simple text format. 

The marketer's guide to the most important ratios to manage in manufacturing
RatioFormula
Gross Profit Margin(Revenue – Cost of Goods Sold) / Revenue x 100
Net profit marginNet income / revenue
Operating Profit MarginOperating profit / total revenue
Return on Assets (ROA)(Net income / average total assets) x 100
Inventory Turnover RatioCost of goods / average inventory
Return on Investment (ROI)Net income / Cost of investment x 100
Debt-to-Equity RatioNet income/revenue
Current RatioTotal current assets / total current liabilities
Quick RatioCash & cash equivalents + marketable securities + accounts receivable) / current liabilities
Asset Turnover RatioNet Sales / Average Total Assets
Return on Equity (ROE)Total liabilities/shareholder equity
Cash Conversion CycleDIO + DSO – DPO = DIO (Days Inventory Outstanding) + DSO (Days Sales Outstanding) - DPO (Days Payable Outstanding)
Accounts Receivable Turnover RatioNet sales by average account receivables
Operating Cash Flow RatioOperating cash flow / current liabilities
Return on Investment Capital (ROIC)NOPAT / Invested Capital
Dividend Payout RatioNet income/shareholders' equity

The marketer's guide to the most important ratios to manage in manufacturing

As a marketer, you will not need to be managing all of these ratios. A good quality accounting team will no doubt have a handle on these ratios and will keep tabs on what is most important to them.

Most likely, each year the accounting team will focus on 3-5 of the most important ratios from this list and regularly measure in order to improve, based on what the CEO and board of directors want.

For example, maybe the Gross Profit Margin has been identified as being too low, either as compared to others in the industry or the executive team simply wants to focus on improving this ratio in order to gain more gross profit per sale to plan for future increases in fixed costs, or to simply improve the net income margin.

Here is a real-world example from one of our clients:

Retail price: $99

Costs of goods sold: $39

Gross profit: $60

Gross profit margin:  61%

This means that for every 1,000 units sold, $39,000 is taken off the top for COGS.

In the industry they are competing within, gross profit margins hover as high as 85%. A 61% gross profit margin in this industry is an indicator that the company can improve. Leaving a huge opportunity.

Their new target became a gross profit margin of 80%.  This means the new COGS figure needs to be $19, down from $39. 

Or, the pricing structure needs to be tested and improved. 

These are important strategies focused on an aggressive goal.

Here’s what they did. 

They focused entirely on reducing their product manufacturing costs. 

They looked at every possible input, every vendor, and brainstormed over 100 ways to make improvements. 

They took their top 3 ideas and executed them immediately:

  1. They called their primary product vendors to explore ideas to reduce product costs. This ultimately led them to increase their quantity with each order dropping their cost per unit by almost 30%, and immediately and substantially reducing their COGS. 
  2. They improved their product packaging using new, stronger but more lightweight packaging material and reduced their product packaging cost by 50%. They also increased the quantity produced per order, which further reduced their cost per unit and thereby reduced their COGS considerably.
  3. Because they provide free shipping with every order, this contributes to their COGS and provides another massive opportunity for improvement. They explored all options, including, UPS, Fedex, DHL and USPS. In this case, Fedex gave them a better shipping rate by over 20% than their current UPS rate and they reduced their shipping fees, further helping them to reduce their COGS.

The result:

After these three changes, their new COGS is $21 per unit.

A massive improvement of nearly 50%. While they still have some work to do to achieve their gross profit margin target of 80%, this is huge and impressive progress.

These three ideas helped them to reduce their cost of goods sold (COGS) and improve their gross profit margin to 77%. 

The next job is to do price testing which could easily bump them into a new level of profits free cash flow.

For an excellent article on optimizing your pricing structure, go here:

What are the goals of your pricing strategy?

Now that the company has an increased amount of inventory, the next big manufacturing ratio to measure is the Inventory Turnover Ratio.

This may sound like a confusing ratio, but it's super simple.

And it’s crucial to every business that sells products.

The Inventory Turnover Ratio is a measure of how well the company sells and restores its inventory.

Here’s the formula:

Cost of goods / average inventory 

Here’s an example:

Current year Inventory Turnover Ratio:

COGS = $100,000

Average inventory = $300,000

Inventory Turnover Ratio = 33.3%

The turnover ratio is great to know, but it’s only useful when compared to a previous period.

Depending upon your customer’s buying patterns, most companies will measure their Inventory Turnover Ratio on a monthly and annual basis. 

Last year's Inventory Turnover Ratio:

COGS = $50,000

Average inventory = $200,000

Inventory Turnover Ratio = 25%

In this example, the company has increased sales and increased its inventory stock. They have also improved their inventory turnover ratio by 32%. These metrics reveal that the company is growing and becoming more efficient in its sales and operations procedures.

Why are these two manufacturing metrics important to the marketer?

Because they are the driving force behind every marketing plan.

Is the company sitting on too much inventory? 

-- Do an email campaign with a special offer to a targeted list of your most recent customers.

Gross profit margin too lean?

-- Bundle your products with a valuable service and send a letter to your most valuable customers.

Get with your team and identify, then measure the 3-5 most important ratios and let them be the driving force for your marketing campaigns.

Do this and you will truly boost your manufacturing company sales and profits!

You can do it!

For more helpful articles and resources on analytics, metrics and building a better marketing department, go here:

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