Advanced Financial Management for Manufacturers – Driving Sales and Profitability

Profitability and sales in manufacturing companies can be increased through the use of sophisticated cost accounting, operational and financial management tools and strategies. Understanding true product and customer costs and margins, developing accurate overhead rates, analyzing labor, using cost-volume-profit analyses and devising purchasing and pricing strategies are some of the tools a B2B CFO® Partner experienced in Advanced Manufacturing  Operations and Finance uses to drive manufacturing profitability and sales. These concepts can be applied to any manufacturer, even those that are already profitable.

Most small and mid-market manufacturing firms do not maximize sales and profitability because their bookkeepers, controllers and even their CFO’s have not been educated and trained on advanced financial and operational strategies for manufacturing and their CPA’s do not have the hands on operational knowledge and experience to help them.

Rick Perrin is a Madison based Partner with B2B CFO®,  a national firm of over 200 trusted advisors, with over 1,000 clients with combined gross revenues of $16.8 billion.  He has worked and consulted with over 20 manufacturing companies in the last 35 years. Rick played a lead finance and operations role in doubling sales and profits at two mid-market manufacturers, each in four years. As a trusted business advisor, Rick helps companies with and without CFO’s to improve profitability, sales, cash flow and financial management and trains their financial staff.  He also uses these concepts to help owners sell their companies for a higher value.

Troy Berg, prior WMEP and WMC Board Member and owner of Dane Manufacturing, an INC-5000 winner, wrote: “Dane was recognized as an INC- 5000 company three years in a row, 2007-2009 and once again in 2013 (fastest growing, privately held companies in America). This could not have happened at Dane without Rick Perrin’s talents and the B2B CFO® business model.”

If your profitability is not at the top of your industry, or your Controller or CFO need help in applying advanced financial and operational strategies to improve your manufacturing sales and profits, please contact Rick for a free business analysis.  A 2-3% increase to your bottom line will improve cash and the value of your company, especially important if you are looking at exiting or selling your company in the next 1-5 years.

 

CASE STUDIES

$20 Million Equipment Manufacturer

The company designs and manufactures large engineered-to-order water treatment systems and smaller stock water treatment machines for industrial plants. Financial statements were prepared outside of the company by a small CPA firm. Management had little insight into margins and profitability as the only costing was material related.

  • Brought accounting in-house in two months.
  • Developed costing practices to identify and improve low margin stock products.
  • Developed new overhead rate methodology for ETO equipment to more accurately cost large systems.
  • Implemented dual rate costing to allocate overhead using both material & labor for more accurate pricing.
  • Developed strategic pricing models.
  • Developed a profit plan system to manage expenses and tie costing and pricing to reach a profit goal.
  • Created easy to assemble financial & operations reports with detailed financial analysis and KPI’s.
  • Trained the accountant to understand advanced cost accounting and help management drive profitability.

Benefits: Increased sales, profitability and Company value. Accountant trained on advanced financial concepts including margin optimization and financial reporting to improve profitability.  He now has many of the skills of an advanced level CFO.

$7 Million Metal Plating Company

The company has ten + process lines for applying various metal coatings to customer parts. Metals include gold, silver, nickel, tin and others. The large plant includes an expensive water treatment facility. Financial statements and reports provided little insight into profitability. In its 50-year history, management, outside CPA’s and consultants had not been able to develop methodology to efficiently and effectively allocate the substantial costs, so management had little insight into the profitability of their processing lines and products.

  • Improved labor and material tracking to lines.
  • Began tracking overhead rates on a monthly basis.
  • Developed methodology for and began tracking the profitability of each manufacturing line and type of finish.
  • Gained an understanding of where margin is earned and they now can take actions to enhance profitable products and improve poor lines and products.
  • Improved inventory management and control.
  • Developed comprehensive monthly financial and sales reports for driving profitability improvement.

Benefits: Increased sales, profitability and Company value. Strengthened financial management. Internal accountant was trained on advanced financial management and handles everything on his own.

Fast Growing Food/Pharma Company

The company was 10 years old and growing fast. The plant has multiple rooms with expensive equipment for processing customers’ pharmaceuticals and food products. Plant/equipment/overhead costs were 75% of Cost Of Goods Sold. Equipment cost, utilities and room size varied greatly by job and there was a lot of excess capacity. No methodology had been developed to allocate all of this overhead to jobs so there was little to no understanding of job profitability and how to price jobs.

  • Developed unique overhead allocation method for allocating the vast overhead to jobs.
  • Built a robust quoting and pricing model to more accurately cost and price jobs.
  • Gained a better handle on expenses.
  • Built a profit plan to tie everything together to hit a profit target.

Benefits: Easier, more accurate pricing and a better understanding of job profitability. Ability to understand cost relationships and allocations as capacity and volumes change. Improved long-term profitability and company value.

 

IMPLEMENTATION PROCESS

As a Madison based CFO and business adviser who has worked and consulted with over 20 manufacturers over 35 years, I have learned that three things, from a financial standpoint, have the greatest impact on increasing the profitability, sales and valuation of manufacturing companies:

  1. Understanding the true profitability of products and customers. (Many get it wrong or just don’t understand it.)
  2. Accurate and comprehensive monthly financial reports that show management exactly how, why and where it made and lost money.
  3. An effective Planning Process to drive profitability (using 1 and 2 above to provide the insight needed) and to identify, vet and drive well thought out growth strategies.

Many small and mid-market manufacturing company Owners and CEO’s don’t realize they are receiving inaccurate or incomplete financial, costing and margin information, leading to lost sales and profits. Most of their CPA’s, Controllers and CFO’s have never been properly trained on advanced manufacturing reporting, costing, and pricing strategies.

Process to implement advanced financial management strategies in manufacturing:

  1. Initial meeting to gather information on financial and operational performance and reporting and gain an understanding of current challenges, opportunities and goals. (No charge meeting.)
  2. Adjustment in accounting and reporting practices, as needed, to provide accurate and timely accrual-based books.
  3. Development of a financial management and reporting database with monthly reports that analyze all aspects of the company’s Financial Drivers, profitability and cash flow. The database contains monthly history, detailed expense analysis, KPI’s and financial trends. It is easily developed from data already in the accounting system.
  4. Development (or review and improvement) and implementation of an overhead – costing rate model to accurately allocate overhead to products. Includes expense analysis and review of dual and other multiple level rate models.
  5. Review and improvement of the company’s quoting and pricing model and incorporation of the new costing rates.
  6. Review, and development as needed, of product, line of business and customer margin reports.
  7. Review of other major factors, financial and operational, in determining product and customer profitability.
  8. Development of goals and plans to correct problem areas and enhance strong areas identified through the analyses.

Once these steps are implemented, we recommend the following for additional margin and profitability improvement:

  1. Review of labor tracking and reporting, and labor efficiency calculations and improvement efforts.
  2. Review material cost improvement efforts and processes including purchasing strategies, reporting, scrap, etc.
  3. On-going, monthly one-half day visits (for companies without CFO’s) to:
    1. Review the financials, bookkeeper/controller work and ensure accuracy and proper controls.
    2. Update the financial database and reporting (if not done internally).
    3. Review financials, performance, pricing, strategy, new business opportunities and challenges with the owner.
    4. Provide a sounding board to the owner and management, as needed.
  4. Creation of a 12-month Profit Plan to achieve profitability substantially above the current level. This can be done any time during the year. It is a fairly simple process and is integrated into the financial reporting database.
  5. Development, financial and operational vetting of aggressive growth strategies.

Steps 1-8 typically take a half-day, once per week, for two to five months, depending on the size and complexity of the company. Full days reduce implementation time. Management and accounting personnel time required is one to two hours per week. Month end management meetings are approximately two hours.

The Goal is to create substantial new profitability and company value which greatly exceeds the cost of implementing these new processes.  The Company will learn to use its financial reports and advanced financial management techniques to help improve the company and its value for the life of the company.  I work directly with Company Controllers, CFO’s, accounting staff and management to fully teach them these concepts.

For more information, contact Rick: rperrin@b2bcfo.com, 608-576-3773

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