This post has been written from the perspective of a senior manager as that is the my most recent experience, although it applies throughout all areas of a manufacturing business. It can stand alone but can be read as an abstract work that will lead into other uses of the management toolbox, as posted elsewhere on this blog
If there is one key person instrumental in your success/failure (or road to mediocrity) in business then it is most likely to be your go to finance person. Not necessarily THE most senior finance person but someone in that department who has a keen, intuitive mind and a willingness to question the business operational output at every opportunity.
The starting point
A note of advice: Financial information and data – know what is important
Be mindful of what data and information you are asking for because, in most cases, someone else has to find, retrieve and interpret that data – they may have more important tasks to perform. Saying that, information and data that assists in planning the business is absolutely vital but keep it simple; unless you’re a forensic accountant, or performing due diligence of some type, then unnecessarily detailed numbers will obfuscate the process and waste everyone’s time, you won’t look clever, you’ll get the reputation of being an arse. Ask yourself if the time spent collecting the data will ultimately have a benefit to those that will be analysing it; YES is the only acceptable answer.
If you have been brought into a business to “turn it around”, it is often due to the fact that the incumbent (or recently departed) manager did not understand the business finances sufficiently (or at all). I have worked in businesses that pay scant regard to a detailed P&L, I think the most astonishing was a privately owned business where the monthly P&L “data” went something like this:
Sales – € x,000,000
Production costs – € x,000,000
Other – € x,000,000
Profit – €
Yes, Direct, Indirect, Sales, General Admin, transport costs; just about everything needed to understand the business was conveniently wrapped up into two, opaque, cost centres. It’s fair to say that I had difficulty in understanding how the business could improve without having any financial information to work with but I got there, eventually, yet what took over a year could have been done in half the time.
What struck me about this arrangement is that the owner followed a methodology that I refer to in other posts and that is key indicators (also Key Performance Indicators. KPI). He looked at the daily sales and then, at the end of the month, how much cash he had generated to pay his staff and pay off his creditors, he followed his own, KPI and it worked for him. For me this is hand to mouth cash management and creates too much stress, it’s best to leave this to people who have a desire for ulcers and migraines. Some detail is essential to manage your business or area.
When starting with a new post, take sufficient time to understand the financial mechanics of what you are responsible for. All of us that have, or will have, managerial responsibility will be beholden to a higher level of accountability, so one aspect of this is taken care of; our objectives. Supervisors, department managers, operational heads, administrative managers, General Managers and those further up the organisational chart all have objectives that have a financial element.
KPIs differ in business. If Working Capital is the main driver then understand stock levels, finished goods and how well your accounts receivable (AR) team performs. If Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) sits above all else then understand your break-even point and where your costs or product mix will impact your month. If Sales revenue is the primary factor, your operations will need to ensure that capacity and throughput are being driven to the maximum. The message here is; understand what is required and focus on it.
Back to your new chum(s) in finance; you will gain their respect once you begin to understand the inner workings of their end of month efforts. If you can work with them to find a method of daily or weekly financial forecasting then all the better for you, as this will allow you and your team to focus on “real time” operational performance.
Understanding the monthly P&L
This can be a daunting task, especially if this is a new assignment for you. I would suggest that you establish a brief period of grace before being expected to have a detailed understanding of what is going on, financially speaking. Anything more than that and either the P&L is as vague my earlier example, or you haven’t spent enough time making new friends in finance.
For this post, I’m going to assume that you have little influence on the sales numbers. In operational terms you “own” everything below the sales line, whether that be groups of departments or individual sections, so familiarise yourself with your specific Cost Centre (a Cost Centre will be the title of a department, such as “Logistics” or “Printing” and then there will be sub headings for various costs within that Cost Centre, such as “labour” or “repairs and maintenance”). Of course, if you’re the GM or site manager, you need to understand the key financial drivers that most impact your business/site from day to day and month to month, it pays immeasurably to have a team reporting to you that understand, in detail, what their specific drivers are.
I would advise you to peruse the year to date (YTD) numbers in your areas and then the previous year (PY) to gain an understanding of pattern or anomaly, if there is a spike in one particular month, or quarter, is this repeatable or is it due to unforeseen circumstances? Remember, this is where you can make a difference, you have direct control over your area and what/how resources are used, so focus your efforts and the efforts of your team to analyse what makes your business tick.
Working with legacy numbers
Having established a working relationship and understanding with the finance team, the process begins in earnest. You will probably be inheriting a budget previously created by someone else so familiarise yourself with what has gone, what is expected to come and how that compares against the actual budget and forecast. Focus on the financial KPIs that have/have had the greatest impact upon the business; month on month and YTD, use this time productively in preparation for your first budget process.
Once you have understood the current numbers, now is the time to involve your management team; allow them to gain a full understanding of the current budget and precipitate that down to department heads and shift leaders, the direct owners of each, individual part of the budget for the coming financial year.
There is an oft quoted adage in business; “fail to plan, plan to fail” and this is more true of financial planning than with most other disciplines within a business. Get it wrong here and you will experience purgatory every month end with expiation seemingly out of reach! That’s how important this process is, so the more people who have an input and have ownership, the more accurate and therefore easier your business will be to manage.
I wrote earlier of the break-even number; by tightly managing costs, expenses and output via financial planning this becomes controllable and advantageous to you. For example, does the Sales department need a competitive advantage (generally translated as “price” in salespeople terms) for a new job or product launch? The mix of work (high value/high volume/lower or higher production throughput) can change upon the break-even point, yet only by understanding the financial impact of your mix will you know if the request is achievable.
Also, as an incidental and added benefit, this will result in a positive impact in your relationship with the sales team. If they are aware of your detailed understanding of the financials of the business, then it is less likely that they will approach with fanciful sales requests and even if they do, you can have (relative) confidence that they have negotiated with the client beforehand!
Once you’ve traversed the path through your first financial year, then it is time for your own budgeting process. When this time comes it should be a familiar process to your teams, in fact, they should be so prepared that their input will merely be adding projected detail to the budget. There are many schools of thought when it comes to the budgeting process but I prefer inclusion (inclusion must not be separated from consultation, they are bedfellows; don’t think that inviting someone and not listening to them will work, it doesn’t), from sales revenue to department costs and output assumptions, this is the essential starting point for a successful budgeting process.
If everyone who has an impact is included then every member of that team will, by the mechanics of teamwork, take responsibility and take ownership and accountability. Accountability is another key word here, it’s not a case of “making” everyone accountable, they must want to be accountable for their numbers, otherwise apathy and ultimately failure, will result (see consultation above).
In one business I had responsibility over, I took everyone that had any direct influence over financial numbers off site for a one and a half day budgeting workshop. At the end of that financial year the business had not only achieved the budgeted financial numbers but had exceeded them, due primarily, in my opinion, to the awareness and understanding of the team members. Inclusion and attention to the detail in the process will result in success.
There is another, vitally important, benefit of this process and that is education. Few of the individuals involved in my example had ever had exposure or experienced financial planning or budgeting of any kind prior to this, it had a huge motivational boost and a further, important link in the building of the team.
Obviously, this needn’t take almost 2 days, the investment in the process needs to be directly proportional and appropriate to the amount of time available, in my example the business had an annual sales revenue of around €70,000,000, I felt that 2 days was appropriate and the end of year bore that out.
Once the budget is agreed and set in place, the next phase begins, a phase just as important as the first; review. All businesses should have month end reviews but often I’ve found that these are merely exercises in comparing numbers, possibly making notes and reviewing the “what happened”.
A high functioning business will know most of the answers beforehand (refer back to the comment on how one’s selected finance person provides regular data throughout the month), if the department heads have been monitoring the costs and expenses throughout the month, including variable costs such as temporary labour and outwork/out costs, then you are able to focus on the anomalies and unforeseen budgetary items. You can make accountable provisions for the ensuing month(s), heading off any major deviation from EBITDA or whatever is your primary KPI.
The lessons from the chapter
Finance; the department, the people and the numbers held therein can be the bedrock to a business. While finance for non-finance people can seem daunting and unfathomable, if one really aspires to be a manager with any sort of influence over financial numbers (everyone, basically) then it cannot be avoided. Early in my career, as a operations manager in control of a sizeable budget and workforce, I assumed, very wrongly, that I could leave the finance to the finance department and merely turn up for the monthly P&L solo and both understand and answer why/how the month had gone as it did. A sense of self-incompetence sharpens one’s motivation for learning, very quickly. Regardless of your position in the business, take the time and effort to get close to the finance department and the goldmine of information they hold for you in Operations.
One last point; Senior Execs absolutely adore a manager, regardless of seniority, who “understands the numbers”, so your new found friends in finance will be an absolute asset.
This article was previously published at http://www.moodgroup.co.uk/blog
© Andy Collinsson February 2020