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:
- Understanding the true profitability of products and customers. (Many get it wrong or just don’t understand it.)
- Accurate and comprehensive monthly financial reports that show management exactly how, why and where it made and lost money.
- 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:
Here is an example of steps I often take to help manufacturers with these three profitability improvement strategies. Some or all of them may be used, depending on the circumstances.
- 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.)
- Adjustment in accounting and reporting practices, as needed, to provide accurate and timely accrual-based books.
- 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.
- 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.
- Review and improvement of the company’s quoting and pricing model and incorporation of the new costing rates.
- Review, and development as needed, of product, line of business and customer margin reports.
- Review of other major factors, financial and operational, in determining product and customer profitability.
- 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:
- Review of labor tracking and reporting, and labor efficiency calculations and improvement efforts.
- Review material cost improvement efforts and processes including purchasing strategies, reporting, scrap, etc.
- On-going, monthly 2-4 hour visits (for companies without CFO’s) to:
- Review the financials, bookkeeper/controller work and ensure accuracy and proper controls.
- Update the financial database and reporting (if not done internally).
- Review financials, performance, pricing, strategy, new business opportunities and challenges with the owner.
- Provide a sounding board to the owner and management, as needed.
- 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.
- 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.
Contact Rick for more information: firstname.lastname@example.org, 608-576-3773