The Numbers Don't Lie (But Your Accounting System Might)
Last week I was sitting in a manufacturer's office in Surrey, looking at their financial statements, and something felt off. Revenue was up 20% year-over-year. They'd landed three major contracts. But their bank account was shrinking, and the owner couldn't figure out why.
Took me about thirty minutes to spot the problem: their inventory valuation was a complete fiction, their overhead allocation was from 2019, and they had no idea what their products actually cost to make. They were profitable on paper and broke in reality.
This wasn't a badly-run business. They made excellent products. Their customers loved them. But their accounting system was telling them stories that had nothing to do with what was actually happening on the production floor.
Manufacturing accounting is its own beast. If you're tracking numbers the same way a consulting firm or retail shop does, you're flying blind. And in BC, where we've got our own special flavour of tax complexity, getting it wrong compounds fast.
Three Types of Inventory, Infinite Ways to Screw It Up
Raw materials, work-in-progress, finished goods. Every manufacturer deals with all three, but most accounting systems treat them like they're interchangeable. They're not.
Raw materials sitting in your warehouse have one value. The moment they hit the production floor and become WIP, that value changes because you're adding labour and overhead. Finished goods have yet another value because now you've got the full cost built in.
I've seen businesses using the same unit cost for materials whether they're in receiving or assembled into finished products. Then they wonder why their gross margins look great but they're losing money.
What actually works: perpetual inventory tracking that follows materials through every stage. Not end-of-month adjustments. Real-time tracking that updates as materials move through production.
Physical counts quarterly at minimum. Yes, it's disruptive. Yes, production managers hate it. Do it anyway. The alternative is making business decisions based on numbers that are 15-20% off from reality.
And waste tracking needs its own category. That 3% material loss you estimated? Go actually measure it. It's probably double that, and every percentage point is coming straight out of your profit.
Job Costing: The Thing Everyone Does Wrong
Here's what happens in most shops: someone quotes a job based on estimated hours and estimated materials. Production runs the job. Some vague overhead percentage gets added. The invoice goes out. Everyone moves on.
Nobody goes back to compare actual costs versus quoted costs. So when jobs that should be profitable somehow aren't, there's no data to figure out why.
I worked with a fabrication shop that was consistently underbidding jobs by 30% because their labour estimates were based on their fastest worker's times, but most jobs got assigned to newer people. They were losing money on three-quarters of their work and didn't realise it until we started tracking actual hours against estimates.
Time tracking has to be mandatory. Every hour logged against specific jobs. Not rounded. Not estimated at the end of the week. Logged as it happens.
Overhead allocation needs to reflect actual cost drivers. If you're still using "150% of direct labour" because that's what you've always done, your numbers are wrong. Calculate it quarterly based on real expenses and real production volume. Machine hours, labour hours, square footage: whatever drives your actual overhead costs.
Review variance reports monthly. Anything over 5% variance between estimated and actual costs needs investigation. If you're consistently off by 10% or more, your pricing is broken at the fundamental level.
Cash Flow: The Slow-Motion Crisis
Manufacturing timing is brutal. You buy materials today. You pay for them in 30 days. You manufacture the product over the next few weeks. You ship it. You wait 30-60 days to get paid.
Meanwhile, payroll happens every two weeks regardless of whether customers have paid you yet.
I've watched businesses with full order books and positive P&Ls go under because they couldn't bridge the cash flow gap. Revenue on paper is meaningless if you can't make payroll next week.
Build a 13-week rolling cash flow forecast. Update it weekly, not monthly. Track every payment in and every payment out with actual dates, not accounting periods.
Your cash conversion cycle needs constant monitoring. How long from paying suppliers to collecting from customers? If that number is growing, you've got a problem developing.
Negotiate payment terms with suppliers that actually align with when your customers pay. If your customers pay in 60 days but your suppliers want payment in 30, that gap has to be funded somehow. Supply chain financing exists specifically for this situation.
COGS: Where the Real Costs Hide
Direct materials and direct labour are easy to track. Manufacturing overhead is where things get complicated and where most businesses just... guess.
Rent, utilities, equipment depreciation, maintenance, quality control, indirect labour, shipping supplies, small tools. All of it needs proper allocation to cost of goods sold. Miss any of it and your gross margins are wrong, which means your pricing decisions are wrong.
Most businesses either overcomplicate overhead allocation (seventeen different cost pools with complex allocation bases) or oversimplify it (one blanket rate for everything). Both approaches lead to bad data.
Calculate your overhead rate quarterly based on actual expenses and actual production volume. Don't carry forward last year's rate. Your costs changed. Your volume changed. Your rate needs to update.
If you're consistently overapplying or underapplying overhead by more than 10%, something in your allocation method is fundamentally broken.
BC Tax Compliance: A Special Kind of Headache
Now we get into the fun part. BC manufacturers deal with PST, GST/HST, CRA requirements, and a bunch of credits and exemptions that most accountants miss because they're not thinking about production environments.
PST exemptions matter more than most people realize. Production machinery? Exempt. Materials that physically become part of your finished product? Usually exempt. But you need registration and documentation. No documentation means you shouldn't have to pay PST.
GST/HST input tax credits need monthly reconciliation. Not quarterly when you feel like it. Monthly. If you're importing materials and paying GST at the border, those credits need proper claiming. I've seen businesses leave tens of thousands of dollars in unclaimed ITCs on the table because nobody was tracking imports properly.
Capital Cost Allowance for manufacturing equipment. Class 53 runs at 50% declining balance, and the Accelerated Investment Incentive lets you claim larger deductions in early years. When you're buying expensive machinery, this timing difference matters significantly for cash flow.
SR&ED credits are where BC manufacturers leave the most money behind. If you're developing new products, improving manufacturing processes, or solving technical problems, you're probably doing SR&ED-eligible work. But you need documentation: timesheets showing who worked on what, project descriptions, technical challenges you faced, how you solved them.
"We made our process more efficient" doesn't count. You need specifics about what technical uncertainty you faced and how you systematically addressed it. CRA audits these claims heavily because there's a lot of abuse in the system, so your documentation has to be rock-solid.
Federal SR&ED credits run at 15% for CCPCs, plus provincial credits on top. For a manufacturer doing serious R&D work, this can be six figures annually. But claiming without proper real-time documentation is asking for an audit you'll lose.
WorkSafeBC assessments are based on payroll classification. Production workers have different rates than office staff. Different manufacturing activities have different rates. Misclassification costs money.
Exporting products? Export sales are GST/HST zero-rated. You don't charge tax, but you still claim ITCs on your inputs. Keep the shipping documents and customs forms, as the CRA will eventually ask for proof that the goods actually left the country.
The Actual Problem
Manufacturing accounting in BC requires understanding both production operations and Canadian tax law. Most general accountants understand neither. They'll try, but they're missing context that only comes from actually working in manufacturing environments.
The cost of getting it wrong (pricing based on bad cost data, missing tax credits, cash flow crises, failed audits) is substantially higher than the cost of getting proper help from someone who actually knows production accounting and BC tax requirements.
Your numbers are probably wrong right now. The real question is how wrong, and what's it costing you every month?