Making Money Through Production

February 7th, 2012

For most of my career, I worked in manufacturing. Being able to see people and machines transform raw materials into a shiny finished product makes me smile. Today, I was reminded of something that did, however, make me cringe.

In CFO.com, I was reading an article about how the “Big Three” used to over-produce cars to take advantage of absorption costing. By doing this, the companies recorded certain fixed costs on the balance sheet (because they could spread the costs over the number of units produced and put those costs in inventory). If they didn’t make products, fixed costs would hit the P&L. They would have to report all that cost against no revenue. Now, you can see why they did it, but was there something they were neglecting?

There were down-stream costs. The costs associated with excess and obsolete inventory. Warehousing and storage costs. Service costs to make updates to finished goods sitting in inventory. Cash tied up that couldn’t be used for investment. Stale products that couldn’t keep up with the competition.

Yes, we want to be profitable. However, making accounting moves that hide operating results on the balance sheet isn’t the answer. Slow moving, excess, or obsolete inventory is even worse. I have 3 words of wisdom for you. Inventory is evil!

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Where are the Leaders?

February 3rd, 2012

As the economies of the world change and become more diversified, it’s imperative that businesses have the proper leadership in place to handle the opportunities and threats that arise. For those companies looking to achieve their strategic goals of top and bottom line growth, new market expansion, and cost management the appropriate talent is essential.

These businesses are identifying the need to focus on three specific areas of talent management. They include:
1. Developing leaders & succession planning
2. Recruiting hard to find skill sets
3. Improving employee satisfaction
The list can be expanded, but these three are often identified as the core needs.

How do you get this leadership? Sure, you can recruit it. It’s not always easy, but it is doable. Make sure you look inside your building, too. With approaches that include performance management, high potential assessment, and high potential employee deployment, the leadership shortage might be less of a problem than you think.

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It’s Risky Out There

January 31st, 2012

Recently, I was reading an article published by Deloitte. The subject was risk, and CFOs were being asked for insight. Specifically, Deloitte wanted to know about the Boards’ focus on risk. CFOs were questioned, and the results were tabulated. Here’s how it looks:
1. Strategic Risk – 66% of all boards were focused here
2. Compliance Risk – 48%
3. Financial Risk – 47%
4. Reputation Risk – 41%
5. Operational Risk – 40%

With Boards focusing on strategy more than ever, it’s important for the CFO and his / her teams to be ready to develop, execute and be accountable for the results of the company’s strategy. Being nimble and business savvy is more important than crunching numbers and preparing reports.

Your finance team must be able to state why things are happening at your company and in the marketplace. You need to assess the likelihood that the current state will continue. Is the current state sustainable, and If things are going poorly, what can be changed?

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Paper or Plastic

January 26th, 2012

Do you remember back to the days when you went to the grocery store, shopped, moved to the checkout line, and the person bagging your groceries would ask “paper or plastic?” What happens today? You either bring your own bags, or you get plastic. You are no longer given a choice.

For many of us, the same thing exists in today’s world of invoicing, except paper rules! We need to stamp the invoice, get a signature on it, do a 3 way match, match the invoice against a check run, and then file the invoice. Eventually, the invoice is moved off-site to an invoice warehouse. A monument to our inability to let go of the past.

We can do better. If you want to devote some resources to reducing your costs and becoming more efficient, why wait? Some companies have gone with more automation, and reaped the benefits.

How do these numbers sound to you? They represent the number of days to process a single invoice, the cost per invoice to process, and the increase in capturing the early payment discount.
Best in class:                       3.8 days, $3.09 per, 4.1%
Industry average:                9.7 days, $15.61 per, 1.3%
Bottom:                            20.1 days, $38.77 per,  .5%

The change doesn’t happen overnight, nor does it happen easily. However, have you ever asked yourself this question? “Why am I paying for storage or consuming valuable space to hold onto thousands of old invoices?” Put the money towards automation.

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Growing Economies

January 24th, 2012

Many businesses are looking for the next big opportunity. To get there, they search for growth economies. In today’s environment, acronyms are often a big help. For some businesses, these are the hot areas. You have “MINT” = Mexico, Indonesia, Nigeria and Turkey, and CIVETS – Columbia, Indonesia, Vietnam, Egypt, Turkey, and South Africa. “MINT” and “CIVETS” aspire to be the next BRIC – Brazil, Russia, India and China.

The acronyms are the easy part, but predicting growth rates is harder. To do that, economists often look at the following to help them develop models:
Human Capital – education & population growth potential
Income Per Capita
Sound Taxation System
Stable Social & Political Environments

Some will expect to see “open markets, “resource rich,” and cheap labor as key drivers for growth. Let’s pick on cheap labor and resources. If labor isn’t efficient and productive, it won’t drive success. Resources are great, but if there isn’t infrastructure or a way to get them to the right spot, it doesn’t matter.

There are many factors that go into picking the next hot spot. The opportunities are there, but doing your homework is a prerequisite.

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Working Capital Can Give You a Lift

January 20th, 2012

When business conditions get tough, executives want to focus on actions that provide quick and hard returns to pump up cash flow. He or she often goes to the terrible trio:
1. Employee Layoffs
2. Job Eliminations
3. Organizational Structure Changes
How many articles have you read that talk about one of these three options as the course of action taken by a business? Yes, there are times when it’s needed, however, let’s take a look at something else.

What would it be worth to you to know that you it takes you 75 days from procurement to production, but it only takes your competition 35 days? What about understanding the layers in your DSO? Sure, it’s easy to state your DSO is 53 days, but it’s more beneficial to know what drives that measure. Is it geography, a market segment, or operational issues? On top of DSO and A/P, what do you really know about your inventory? Get your arms around these issues, and you don’t have to worry as much about the terrible trio.

We are just scratching the surface here, but there is so much you can do. Make sure you choose the right measures, construct the right incentives and break it down into pieces. Study the findings and adjust processes as needed. People and process are always the answer. The terrible trio might give you short term yields, but it won’t last for long.

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Term Limits for Audit Firms?

January 17th, 2012

This weekend, I read a good article about the ability or inability of companies and auditors to remain independent. Some parties from each side argued that there was no way auditor independence could be breached. Others took the approach that it would be too costly to change auditors, as the time it takes a new audit firm to get up to speed would be cost prohibitive.

In an era of business that has seen more irregularities, confusion and financial mismanagement, it may be time to think about “engagement limits” for auditors. One could argue that it behooves the auditor to become a “pillar” of the financial integrity for the firm it audits. After all, if I audit you for years, and then find out there have been irregularities that I overlooked or didn’t recognize, what does it say about my abilities? What does it say about the integrity of the company’s financial statements?

Think of “engagement limits” in the same regard as term limits for government officials. Sometimes, our elected officials behave as if their primary goal is retaining their championship belts. In other words, getting re-elected is the goal of being in office. Are auditors looking at it the same way? Is their goal to hold onto the client, or is it to provide a truly independent opinion of the company’s financial results?

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What Exactly is Value Added?

January 13th, 2012

We hear this term all the time. Presidents and CEOs tell their teams that the key to success is to provide more value added products and services. What it boils down to is adding a little more effort or information that your customer finds valuable. If you were selling a car, it might be free oil changes for the first several years of ownership. Customers appreciate that kind of service.

If you are a Financial Analyst, how do you add value in your job? It’s great that you can make complex graphs, amazing spreadsheets, and impressive PowerPoint presentations. That’s what we expect you to do.

Add value by telling us “why” things are happening. Bring a business perspective to the game. If you can tell us why the average selling price is dropping, and make recommendations to change it, that’s adding value. You might just move to the head of the class, too!

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How Do You Create?

January 9th, 2012

When you need to come up with great ideas to improve processes, get teams moving, or introduce new products or services, what do you do?

Sometimes, a manager calls a group together, and says “we need to find a solution to this by Friday.” What happens? He or she pulls 10 or 12 people into a conference room, the person leading the group runs to the whiteboard marker in hand, and now all you hear is the sound of silence.

These meetings drive me crazy, and I am sure they do the same for you. Without exception, innovation should be part of your job. However, when you feel that need to bring the group together, follow a few simple rules:
1. Get the most diverse group possible
2. Define the problem
3. Facilitate – brainstorm – no judging – set deadlines
4. Experiment and learn
5. Get the results you want

You can write books on this subject, but a few simple steps and reminders will keep you headed in the right direction. When you follow them, people won’t be nervous when they hear “it’s time to go to the conference room.” You will hear ideas, not crickets…

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Stop, Take a Deep Breath

January 5th, 2012

Over the past year or so, have you heard any of these comments?
- I don’t know what happened to the $1.2 billion.
- I’m taking my talents to South Beach.
- My teammates aren’t on my level.
- Corporations are people, my friend.

These tasty nuggets come from an ex-governor, an NBA all-star, a soccer icon, and someone running for President of the United States. What do they have in common? They were people who were in the spotlight, and the comments were the result of emotions getting the best of them in pressure situations.

All of us have said and will say things we regret. This is irrefutable, but how can we respond better than these folks did?  Anticipate the questions that will be coming. Practice the responses. Stop, take a breath, and then deliver your message. No one is perfect, but you don’t want to make the evening news, either!

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