Expert verified A manufacturing firm in India has to deal with invoices, taxes, and compliance chaos daily. SOPs for finance in manufacturing sector can help with that.
This guide breaks down what SOPs you need as a manufacturing firm and the best practices to adopt in preparing and implementing them.
Why do Manufacturing Companies Need Specialised Finance SOPs?
Manufacturing companies require specialized Finance SOPs due to these unique operational, regulatory, and financial complexities:
Complex Cost Structures
Manufacturing involves layered costs like raw materials, labor, and logistics. SOPs ensure accurate cost tracking, real-time waste monitoring, and compliance with Ind AS 2 and CAS.
Regulatory Compliance
Manufacturers have to navigate GST, customs duties, and labor laws. SOPs assist in managing payroll compliance, export claims, and tax filings in order to prevent fines.
Working Capital Intensity
The procurement-to-sales cycle ties up cash. SOPs optimize inventory, receivables, and payables to improve liquidity.
Supply Chain Risks
Disruptions from vendors or imports can hurt operations. SOPs cover vendor financing, forex risks, and input cost volatility.
Fixed Asset Management
Heavy investment in machinery needs strict controls. SOPs oversee impairment testing, capital expenditure approvals, and depreciation in accordance with Ind AS 36.
Production-Linked Incentives (PLI)
PLI schemes need precise financial documentation. SOPs ensure claim readiness and separate cost tracking for audits.
Quality & Waste Control
Finance must track rework and scrap costs. SOPs align budgeting with quality standards like ISO.
Tax Efficiency
Location-based subsidies and export incentives require planning. SOPs support SGST refunds and duty-free schemes like RoDTEP.
Fraud Prevention
Inventory and billing fraud are key risks. Stock audits and three-way PO, GRN, and invoice matching are mandated by SOPs.
Core Areas Covered by SOPs in Manufacturing Finance
Here are the core functional areas covered by specialized Finance SOPs in manufacturing companies:
Purchase Order (PO) Processing
Standardizes procurement to prevent overspending, fraud, and compliance gaps.
- Verify vendor GST/MSME status
- Mandatory 3-way match (PO, delivery note, invoice)
- Approval rules based on order value
- Auto-flag GST reverse-charge cases
Vendor Payments
Maintains input tax credits and maximizes cash flow by making sure payments are made on time and legally.
- Pay MSMEs within 45 days (legal requirement)
- Reconcile GST credits before paying
- Auto-deduct TDS from payments
- Prioritize payments using cash forecasts
Sales & Receivables
Manages credit risk, ensures tax-compliant invoicing, and accelerates collections.
- Set credit limits using customer history
- Auto-generate e-invoices and e-way bills
- Escalate overdue invoices after 60/90 days
- Reserve funds for bad debts (>180 days)
Tax Compliance and Reporting
Avoids penalties by automating statutory filings and reconciliations.
- File monthly GST returns
- Deduct/file TDS quarterly
- Track duty drawbacks for exports
- Reconcile book vs. tax profits
Payroll Processing
Accurately allocates labor costs and complies with labor statutes.
- Split wages (production vs. admin staff)
- Auto-calculate overtime and bonuses
- Deduct PF/ESI and file returns
- Link attendance to output data
Inventory Valuation & Accounting
Reflects true inventory costs and prevents GST credit reversals.
- Value stock via FIFO/weighted average
- Monthly stock counts for key items
- Write off obsolete stock quarterly
- Reverse GST credits on scrapped items
Fixed Asset Accounting
Manages the capex lifecycle and tax-efficient depreciation.
- Track depreciation (company vs. tax rules)
- Audit assets annually
- Capitalize major repairs
- Test the asset value yearly
Accounts Payable and Receivable Management
Optimizes working capital through disciplined payment/collection cycles.
- Schedule payments using cash forecasts
- Send automated payment reminders
- Reconcile vendor/customer accounts monthly
- Offer early-payment discounts
Cost Sheet & Budgeting
Tracks production costs and variances to protect margins.
- Compare actual vs. standard material/labor costs
- Assign overheads using machine-hour rates
- Track scrap rates and energy use weekly
- Monitor budgets for incentive schemes (e.g., PLI)
Bank Reconciliation & Cash Management
Prevents fraud and ensures liquidity through real-time fund control.
- Reconcile bank accounts daily
- Forecast cash needs 3 months ahead
- Audit the petty cash monthly
- Track loan deadlines
Structure & Frequency of Reviewing Finance & Accounting SOPs for Manufacturing Firms
Covering the above core areas, there can be separate SOPs for each area.
Every finance & Accounting SOP should include:
1. Objective
A short statement describing why this SOP exists.
Example: To ensure timely and accurate processing of vendor payments with appropriate checks and documentation.
2. Scope
Define what this SOP covers and who it applies to.
Example: This SOP applies to all vendor payments for raw material purchases across all plant locations.
3. Roles and Responsibilities
Clearly list who is responsible at each stage—accountant, manager, finance head, etc.
Example:
- Accounts Officer: Invoice verification
- Finance Manager: Payment approval
- CFO: Final release
4. Process Flow (Step-by-Step)
List the exact steps, like a checklist.
Example: Vendor Payment SOP:
- Receive invoice with supporting documents.
- Match the invoice with the PO and GRN.
- Forward to the finance manager for approval.
- Verify TDS applicability.
- Initiate NEFT payment and update the ledger.
5. Documentation Required
List every document needed to complete the task.
Example:
- Approved Purchase Order
- Invoice
- Delivery Challan
- GRN (Goods Receipt Note)
6. Timeline / Frequency
Mention how often the process should occur or what the timeline is.
Example: Vendor payments to be processed within 7 days of invoice approval.”
7. Controls & Approvals
State what controls are in place to avoid fraud or errors.
Example:
- Dual-level approval for payments above ₹1,00,000
- Invoice auto-numbering in ERP
- Reconciliation checks monthly
8. Exceptions / Escalations
Define what to do if something goes wrong.
Example: If invoice and PO values differ by over 5%, escalate to the Procurement Head.
9. ERP / Software Integration
Describe which ERP module handles this and how data is recorded.
Example: All payments must be logged in Tally Prime under Vendor Ledger with TDS applied.”
10. Compliance & Audit Checklist
Include what legal or audit items this SOP helps with.
Example:
- GST Return Matching (GSTR 2B vs Books)
- TDS deductions under Section 194C
How Can PKC Help With Finance SOPs for Manufacturing?
✅37-year proven track record in manufacturing consultancy
✅Manufacturing-specific financial SOPs for complex production environments
✅ERP integration specialists streamlining financial process documentation
✅Automated workflow SOPs reducing manual finance dependencies
✅Cost reduction protocols through systematic procurement SOPs
✅Production efficiency SOPs linking finance to manufacturing KPIs
✅Compliance-ready documentation meeting regulatory audit requirements
✅Employee training programs ensure seamless SOP adoption
✅Continuous monitoring systems keep SOPs relevant and practical
Best Practices for Drafting Finance & Accounting SOPs in Manufacturing
Start with Process Mapping
Visualize end-to-end workflows (e.g., procurement-to-payment) to identify control gaps. Aligning diagrams with production cycles ensures SOPs reflect shop-floor realities.
Embed Regulatory Triggers
Automate India-specific compliance (e.g., GST/TDS rules) within templates. System alerts for deadlines (like 45-day MSME payments) prevent penalties.
Use Role-Based Language
Assign clear responsibilities (e.g., “Store Manager verifies stock counts”). Avoid ambiguity by specifying authority limits (e.g., “CFO approves capex >₹50L”).
Integrate Operational Data
Require production data (e.g., scrap reports) for cost sheets. Sync machine logs with overhead allocation to ensure accurate costing.
Standardize Templates
Adopt uniform formats for documents (e.g., GST invoices, cost sheets). Consistency across plants simplifies audits and training.
Set Quantifiable Thresholds
Replace vague terms with measurable benchmarks (e.g., “Provision 50% for inventory >365 days”). Numbers enable consistent execution and audits.
Automate Controls
Use ERP rules for error-prone tasks (e.g., 3-way PO matching). Auto-alerts for variances (e.g., scrap >5%) enable quick corrections.
Link to Audit Trails
Mandate document IDs and digital sign-offs for traceability. Store records for 8+ years to satisfy Indian tax authorities.
Train with Real Scenarios
Use practical examples (e.g., “Processing export incentives”). Contextual learning drives faster adoption by staff.
Built in Continuous Review
Update finance SOPs quarterly for regulatory changes (e.g., GST updates). Incorporate shop-floor feedback to maintain relevance.
Frequently Asked Questions
1. Why are Finance & Accounting SOPs important in manufacturing accounting?
SOPs prevent financial errors, fraud, and missed tax deadlines. They bring consistency and efficiency to accounting processes.
2. What financial areas should be covered under SOPs?
Your SOPs should cover purchase processing, vendor payments, payroll, inventory, tax compliance, receivables, budgeting, and asset accounting. This ensures full control over cash flow and cost structures.
3. How often should SOPs in finance be updated?
Review and update SOPs every 6–12 months or whenever there’s a change in tax laws, ERP tools, or business processes. Keeping them up-to-date avoids compliance risks.
4. What tools help implement SOPs in Indian manufacturing?
TallyPrime, SAP Business One, Zoho Books, and Marg ERP are popular choices. They allow integration of SOPs with automation and reporting workflows.
5. What are the common mistakes in finance SOPs?
Vague steps, missing approval flows, or outdated tax references are the most common mistakes. These flaws can cause real-world problems during audits.
