Due diligence is often defined as the investigative process an individual goes through when reviewing a situation, business, investment or other opportunity. This practice is common in the business environment as companies create business relationships and produce consumer goods and services. The manufacturing industry comprises businesses that produce intermediate or finished goods. Due-diligence checklists help owners, managers and auditors reviews businesses for internal or external purposes.
Managerial due diligence is a review of the company’s organizational structure, executive directors or managers, job responsibilities and compensation plans. This review focuses on how the business operates and who is responsible for decisions. Individuals conducting the review process can understand the impact of each owner, director and manager in the company and their experience relating to manufacturing. Publicly held companies undergoing a due-diligence review may also include the board of directors in this process.
Operational reviews include observing the individual production processes of a manufacturer and any ancillary departments that support production. Due diligence focuses on the age of facilities and equipment, use of skilled and unskilled labor, conversion processes for materials and quality-control standards. Interviewing front-line managers and employees may also be a part of this process, along with reviewing standard operating procedures and manuals.
Due diligence in a manufacturer’s financial operations includes the accounting and finance departments. Accounting reviews include internal controls, financial statements, cost allocation reports and budgets. This information allows individuals to understand how profitable the company is and the accuracy of financial information. Finance reviews in due diligence typically focus on financing, such as debt or equity. Forecasts are also important in the finance review. Individuals will look at sales, output and resource availability to determine the relevance of a manufacturer’s estimates.
Economic due-diligence reviews measure a manufacturer’s place in the overall economic market. Market share, supply chain, product reviews and customer demand are a few items of importance during this process. Individuals will also review how well a manufacturer markets its final products to consumers and businesses. The number and strength of economic markets in which the company sells product is also important, since a diversified sales strategy can help the company avoid experiencing fewer profits during localized economic declines.