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Timely Close of the Financial Records

Timely close of the financial records – this is a topic every company needs to address. Whether you are a publicly traded or private company, the issue of closing the books is ongoing. Publicly traded companies usually have well established processes in place to meet the deadlines imposed on by the regulators. However, closely held businesses often struggle with this process. We see many clients that tell us it takes them weeks, if not months, to close the books and produce financial statements. This blog will discuss why it is important to close you accounting records as soon as possible. In addition, we will provide some tips on improving your financial close.

Timely Close of the Financial RecordsImportance of the Timely Close of the Financial Records

Why is it so important to close your books timely and generate financial statements? The executive team of the company must run the business, and there is no other way to run your business than to have timely and reliable financial statements.

I have met business owners that own a company with over $100 mm in revenue and no financial statements. They literally used a check book and online banking to check cash balances, pay down outstanding balances, etc. When I asked the business owner how he knows what his margins are and how he can run his business, his response was he has a“gut feeling”. I get that, and in a sector with high margins and strong cash flow, I can see where an owner gets confident about the amount of cash he pulls from the business monthly and stuffing his pockets. But that “gut feeling” will not help you when the market or economy turns. And it will one day.

b

A gut feeling cannot be measured or tracked. Fortunately, you can track your key performance indicators (KPIs.) Click here to discover your KPIs.

In a well run company, the decision makers must know how the business is performing by looking at the historical data. Historical data includes last month’s financials and even the trailing 12 months. With that information, the decision maker will apply his management skills and look at forecasts, then make executive decisions of what to do. The sooner the decision maker has the financial data, the quicker he can make a decision.

How to Close Your Books Sooner

How can you close your books sooner and produce financial reports? A delay in closing the accounting records and producing financial statements is very common. And sometimes, there are various causes for this.  It may be any one or several of the following:

How quick can you close the books? What is the right number of days to close the books? Well, it depends on many things. Certainly more than 10 days after the last day of the month is too long for me.

I have always said that a well run company with the correct process and systems in place should be able to close the books any day of the month. Now with that said, the closer to the end of the month the more accurate the numbers will be because you limit the use of accruals to only a day or two. I would not suggest that it is okay to close your books too early. But your business should be able to start the close process a day or two before the last day of the month and have financial statements by the 5th day of the following month.

If you financial records are delayed by days or even months, then it will be more difficult to make any decision. Start tracking your KPIs as you close your books more timely with our KPI Discovery Cheatsheet.

Tips to Close Your Books Timely

Every company should be working toward timely close of the financial records. The following includes some tips to close your books timely:

  • Establish an accounting calendar close that includes deadlines for turning in information from operations and accounting, firm deadlines for certain activities
  • Hold people accountable in operations and accounting to meet the deadlines
  • Use accruals for revenue and expenses, no need to wait on actual invoices
  • Reliable accounting system
  • Hire the right people
  • Written process and procedures in the accounting department
  • Always include at least one day after the preparation of the financial statements for analysis

There is simply no excuse to delay the accounting close and generation of financial statements. Having the financial reports completed timely and analyzed before they are turned into the decision makers of the business will make your company a much better company.

When you close your financial records or books in a timely manner, you are able to make better decisions. In addition, monitoring your key performance indicators will help you to make better decisions. Need help discovering the KPIs you should be monitoring? Access our KPI Discovery Cheatsheet and start tracking your KPIs today!

Timely Close of the Financial Records
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Timely Close of the Financial Records

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5 Signs It’s Time to Restructure Your Company 

signs it's time to restructure your companyOver the course of my 28+ years of financial experience, I’ve had a number of restructuring transactions. What I have found is that many companies do not know when it’s time to restructure their company. Instead, they wait until it’s too late and it becomes a liquidation event.  Restructuring can mean different things, there are restructuring engagements that take place through the legal system such as bankruptcy, and there are out-of-court restructuring.  In this blog when I mention “restructuring,” I am referring to out-of-court restructuring. In this week’s blog, we’re looking at the 5 signs it’s time to restructure your company.

What is Restructuring?

Restructuring is when you change internal operations processes, positioning in the marketplace, restructure debt, modify your operations and work towards becoming a more profitable and cash flow positive business. There are several reasons why companies undergo restructuring.  Usually, they are feeling a financial pinch. Most business leaders actually wait to long to restructure their business. In 2014 with the fall in oil prices, I actually saw companies with direct impact wait to make any changes. Those that saw the writing on the wall and took aggressive action early on are the ones that survived. Whenever you see external or internal factors affecting your cash flow and financial performance, you need to take a hard look at them and do not wait to make changes.

Several of the signs its time to restructure are also destroyers of value. If you are crafting your exit strategy now, then download our Top 10 Destroyers of Value to make sure you don’t leave any money on the table.

Signs It’s Time to Restructure Your Company

Now, you know what restructuring is. The next question is… When? There are several signs it’s time to restructure your company, but we’re going to look at the top 5 indicators that things need to change.

signs it's time to restructure your company

1. Trends Are Not Looking Good

Hopefully you have dashboards in place and financial reports that allow you to track trends such as your trailing twelve months margins, ratios and a 13 week cash flow forecast in addition to an annual budget. If these tools are painting a picture that your business is not performing, then corrective action should take place sooner than later.  If after your corrective actions, the trends are still negative, then you may consider a broader restructuring of your business.

2. Over-Leveraged

For the past 10 years, the cost of money has been cheap. Banks, asset-based lenders, and investors are all looking to place money to work. With low interest rates and excess liquidity, companies have had access to cash in the form of debt. Debt is not all that bad if it is managed wisely and you do not exceed the amount of debt that your balance sheet can handle. The ease of acquiring debt has led to some companies having to much debt  – over-leveraged.

What is too much debt? Well it depends on your business and your balance sheet. Commercial banks have the most conservative ratios, but I would say that even some of those may lead to too much debt. If you have too much debt, then you may find yourself needing to restructure your company. If the debt is more than you can pay, then you will likely find yourself in a legal reorganization, such as court protection through a bankruptcy process.

An investor will not invest in a company that has too much debt. If you are seeking investment, financing, or want to sell, then learn about the Top 10 Destroyers of Value.

3. Changing Markets

I can think of two current markets that have changed or are changing today. If you are in these either of these markets, then you will need to consider restructuring your business. The first is the retail real estate market businesses that own malls or large shopping centers. Online sales have totally changed this market. Large department stores are disappearing as more and more retail customers are shopping online. Owners of malls in many areas are having to restructure their business and find alternate uses for the real estate. The second is the off-shore oil and gas industry. This sector has not recovered yet, and it is going to be a long haul. Boat companies, offshore suppliers, and service companies are having to come up with a new way to survive.

If you find yourself in a market that is either disappearing or dramatically shrinking, then you need to take drastic action and restructure your business. If it is a permanent change in the market, such as the market change of renting movies to Netflix, then you may find yourself in the same position as Blockbuster which just disappeared. Hopefully, the executives and your Board of Directors have a keen eye on the markets you are in and how technology is affecting them.

4. Environmental & Technology

The world has become smarter about taking care of our environment. Technology is helping us do this more and more efficiently. 20 years go, an electric car was more of a concept only and cost prohibitive from a manufacturing standpoint. Today, there are several cars in the market that are more affordable and manufacturers are bringing prices down every year and new models coming out.  The major automakers know this and are planning ahead.  For 100 years now, cars have run on on oil based products. If your business is tied to gasoline engines, hopefully you are looking to restructure your manufacturing or market. The environment can also bring major changes. Do not think of just taking care of the environment versus pollution, but bad weather can also force you to change. Sometimes, for the better. I was talking to a client recently in the mid west part of the country. They can not find contractors to fix roofs because they are all down in the Gulf Coast.  How about a new roofing business in the mid west? They continue to have the need.

signs it's time to restructure your company

5. Regulatory Environment

Government is getting bigger and bigger. Every year, there are more and more regulations changing how the business world operates. If you are in a market that has new regulations, then this may be something that will cause you to change how you operate. You may find yourself restructuring your business to either adapt to the new regulations. Or you may find your self restructuring your business to get away from the regulated environment.

Protect Your Company From Destroyers of Value

Restructuring your company protects your company from destroyers of value; however, you should always be looking at how to improve the value of your company. Locate other areas that are destroying the value of your company with our free Top 10 Destroyers of Value whitepaper.

signs it's time to restructure your company

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The Silo Effect

Silo Effect

We hear about the Silo effect in companies all the time. Silos are formed in the large public companies as well as in small private companies. These organizational Silos can impact the profit potential of an organization because each department or silo is kept separate from one another. In this blog, we’re looking at the Silo Effect and how it impacts your company.

Organizational Silos In Your Company

In business a Silo is a department, service unit, operating unit, business unit that does not have good communication with other units.  Thus leading to a dysfunctional organization.  The Silo operates only for its own benefit and not for the benefit of the entire enterprise. One Silo usually points to other silos when there are problems or issues. Silos have may have their own teams, but they are not part of a broader team – the company as a whole.

Get the financial leadership skills you need to be more effective in breaking down organizational silos. Click here to access our 7 Habits of Highly Effective CFOs and guide your team to a silo-free environment.

How Silos Are Created

Before you can break down the barriers (Silos) between departments, you need to know how Silos are created. I have found that like everything else, the tone starts at the top. If the top brass does not permit his company to have Silos, then you will not. Many CEOs may argue that it is easier said than done. I once operated a fairly good size company and they had two very distinct business units. One was a service company, and the other was a regulated utility. You could not have a more diverse culture in each business unit. As a result, each business unit had deeply entrenched Silos. Once the top brass held management and employees accountable, we saw silos starting to dissipate.

silo effect

Difficulty in Breaking Down Silos

When the CEO or owner allows for different areas in the company to develop Silos, it is very difficult to break those down. But it is doable. Two of the most common areas that are affected by Silos is the operations side of the business and the accounting side of the business. It is easy to allow these to develop. Operations people are the people dealing with customers and the outside world; they directly generate sales. They all understand how to make a widget or draw up complicated engineering plans. While the accountants tend to be “the back office”.  The accountants do not usually interact with the customers and remain in their own department.  Few accounting departments or accountants understand how to make the widget. I bet many have never left the office to understand the field operations or manufacturing facility.  So it is easy for the accountants to develop their own Silos.

So, who is right and who is wrong? They are both wrong. It is up to leadership to ensure that the operating side of the business understand why things are important in the back office. It is also very important for accountants to understand the complexity of any business.

It’s up to you as the financial or business leader to break those silos down. Access our 7 Habits of Highly Effective CFOs to learn about the financial leadership skills you need to do that.

From Operations To P&L Leader

This is precisely why we developed our new workshop From Operations to P&L Leader. I have seen it time and time again… A talented sales person or operations person who gets promoted, and someone hands him a P&L (Profit & Loss Statement). They expect that promoted person to manage the P&L. But has anyone trained the operations person and really explained what a P&L is? Or how to analyze it? Or better yet, has anyone educated the operations person on working capital, the balance sheet, and the cash flow statement? If someone is going to manage the P&L, then that person should probably understand more than just the P&L. Well, we do offer this 4-day workshop to operations leaders. Learn more about the workshop here.

silo effect

What about the accountant? I believe it is up to every CFO to educate the Controller and their accounting department on what the operation does. How do you make the widgets? What do those smart engineers do? What are the challenges and obstacles day to day? Why are the required raw materials constantly changing for that petrochemical plant? If an accountant does not understand what a reactor looks like, then the accountant is missing a big piece of the puzzle. Once the accountants understand the operations, things will work smoother.

The Silo Effect

 Let’s look into the Silo Effect. What is the effect of a Silo or Silos in your company? It increase the number of inefficiencies in your company. You risk duplicating the work, not communicating between departments, wasting time etc. There is a lack of communication between departments in your company. As a result, the company does not work as one. It will cost you in cash. Tension will eventually rise among the different departments. And rumors will begin to spread. There will be delays in the operation – impacting both throughput and/or progress and the bottom line.

Case Study On The Silo Effect

For example, a manufacturer had a somewhat complicated business. They had very talented people in the operating side of the business as well as very talented people in accounting. Their cost accounting is a mess after the implementation of a new system. The system was supposed to solve a lot of issues, but the margins made no sense at all. (Operations blamed accounting, accounting blamed operations). After many interviews and site visits, we concluded in our assessment that the technical cost accounting part of it was relatively not that complicated. What was the problem? The company created Silos.

Accounting never explained to the operations side of the business what accounting needed, and they were sticking to their old ways of doing things. Accounting and operations needed to “talk” to each other and understand what the other needed. The lack of communication led to garbage in and garbage out of the system. They thought they were communicating because they would sit down monthly and have a meeting. But just because they were sitting in front of each other, it did not mean they were “talking” to each other. The meetings included a bunch of finger pointing. Furthermore, both sides not willing to change or listen to the other.

These silos contributed to bad data and unreliable financial statements. It also resulted in issues with lenders and investors. I wish I could say that our firm provided this incredible technical solution for cost accounting. What we did provide was identifying the silos, the lack of communication, and the lack of processes. Then we took corrective action with the ownership and broke down the silos.

Breaking The Silos

By breaking the silos, forcing departments to communicate and having both sides take ownership of the processes established, they can now enjoy reliable financial statements and less pressure from lenders/investors. How do you identify if your company is feeling the silo effect? You need to look from the 40,000 foot level. This is just 1 of the 7 Habits of Highly Effective CFOs. To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

Silo Effect

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Why Use a 13-Week Cash Flow Report as a Management Tool?

Why use a 13-Week Cash Flow Report as a management tool? Cash is king! This applies to any and all companies. No matter the size or industry, cash and cash flow are critical to any operation. Yes, some companies have access to lines of credit and other forms of financing, but that is debt that must be repaid at some point.

So if cash is so important, then why do not all companies use a rolling 13-week cash flow forecast?  We have had many clients over the years. And some, but not all, use a 13-week cash flow report as a management tool that is updated every week. Once the process is started, it is actually a fairly easy tool to keep updated.

Cash is critical to a company’s success. Click here to access our 25 Ways to Improve Cash Flow whitepaper and start improving cash flow today.

Establish a 13-Week Cash Flow Report

The first thing we do with every client is to make sure they establish a 13-week cash flow forecast if they do not already have one. And usually, the first thing we are told by someone at the client office is “our business is special, forecasting when we collect cash is almost impossible to predict”. I hear this way to often and you know, we have never failed at implementing a 13 week cash flow forecast.

13-Week Cash Flow Report as a Management ToolThe Purpose of the 13-Week Cash Flow Report as a Management Tool

The 13-week cash flow report is not meant to me an exact measure of what cash balance will be at the end of every week. On the contrary, it is a forecast. That means the actual results will be different from your forecast, especially in the later weeks. But what the cash flow forecast does tell you is your trend for ending cash balances. It actually does give you an estimate of what your cash balances will be. It is true that weeks 1,2 and 3 forecast are more accurate than weeks 11, 12 and 13.  But it does not take away that it provides some visibility as to where cash will end up.

The 13-week cash flow forecast is useful to a company that is financial distress and to a company that is flush with cash. That is because a company that is in financial distress must be able to determine what costs they need to cut in order to achieve a cash neutral position. A company that is cash rich, needs to know how flush they will be with cash to project things like capital expenditures or shareholder distributions. Either way, the company must have an idea of where they will be over the next 13 weeks. Why 13 weeks? Because that captures an entire 3 months, one full quarter. Being able to have an idea of where you want from a cash position in the next 3 months allows time for planning and decision making.

Do you need help putting together your 13-week cash flow report? Access our template and how to use it (and so much more) in our SCFO Lab. Learn more about the SCFO Lab here.

Cash Collections

It is interesting how many times we have implemented a 13 week cash flow forecast, then we look into why the cash actually collected is way off in weeks 1,2 and 3. Then we dig and find out that the actual cash collection process is poor or non-existent.

Case Study

I was part of a Chapter 11 bankruptcy process a couple years ago. The first thing we did was implement a 13 week cash flow forecast. This is something any CRO would do. When asked about cash collections, the CEO told me that the sales team (7 people) handle collections with their respective client relationships. When we were way off on week 1 and 2, I asked the sales people why we are off?  What are they doing to follow up on late accounts receivable (A/R)?  The response from everyone on the sales team was that they do not handle calling to collect invoices and outstanding A/R.  They stated that the accountant makes those calls and follows up with old A/R.  When I asked the accountant, she said the sales guys collect old A/R.

No one was following up with collections of old A/R. I initiated a daily phone call with all the sales people and assigned clients to call on and follow up on old A/R. We started with daily calls. And we saw some progress, then we went to every other day, then weekly calls. Over then next 5 weeks the company collected $2.7 of $3.2 million dollars in old AR.

So How Do You Start Using a 13-Week Cash Flow Report?

Week 1,2,3….13

Create a template that has a direct method cash flow statement.

Cash In –         Cash from accounts receivable

Then list cash from work not invoiced yet (this would be in the outer weeks)

Cash Out–       Major lines of operating expenses

Payroll

Other

On a weekly basis, pull A/R and A/P from your accounting system. Then link the individual items to the line items in the cash flow forecast. Don’t forget payroll totals.

Include a section below operations for CAPEX activities and another section for Financing Activities.

End cash balance by week

Cumulative cash balances by week

Have one person in your accounting department responsible for updating the 13-week cash flow forecast weekly. Make sure you have a dedicated person/people follow up on collections.  Compare the forecast for each week to the actual cash collections and cash payments – note variances. Then adjust how you forecast.

It is that simple! This tool will by you piece of mind and allow you to have insight on your cash trends. You need to know this no matter the size of your company or your industry. Do not get frustrated; your first 3-4 weeks are a learning process. Your forecast WILL be off. Make adjustments and understand your variances. Before you know it, you will have a good feel for what your cash trends are. If you are strapped for cash now, click here to access our 25 Ways to Improve Cash Flow whitepaper. Make a big impact on your company today with this simple checklist.

13-Week Cash Flow Report as a Management Tool
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What It Takes To Be A Successful Leader

What It Takes To Be A Successful LeaderNo matter the engagement, having leadership involved in our work is vital. Over the years, some very talented people have defined leadership. Great authors and business coaches have also defined leadership. I did a quick Google search on the definition of “leadership” and here is what I found:

the action of leading a group of people or an organization
“different styles of leadership”
Synonyms: guidance, direction, control, management, superintendence, supervision; organization, government
“firm leadership”

the state or position of being a leader
“the leadership of the party”
Synonyms: directorship, governorship, governance, administration, captaincy, control, ascendancy, supremacy, rule, command, power, dominion, influence
“the leadership of the Coalition”

Talented Leadership is critical for a company to succeed, because without it, there is chaos, mismanagement, and no direction. I have also read some good books that discuss or mention leadership. One of my favorites is “Good to Great” by Jim Collins.

Now, I have my own life experiences that have helped me define my version of leadership. I can share with you what has worked and what has not worked in the last 28 years of my career. I can also tell you about the different leaders I have dealt with in many organizations – both huge publicly traded multi-national companies and small private companies. What is interesting is that the leadership roles that worked in huge companies and small companies share the same characteristics.  This has helped me define what it takes to be a successful leader.

Failed Leadership

What is clear is that there are things that do not work and destroy leadership. Leading out of fear surely does not work. In addition, leading with threats does not work. A leader that does not communicate is sure to fail. I have seen my share of failed leadership and leaders that were failures. It is amazing how these individuals made it to the top of these organizations. They usually operated by:

  • Threatening those below
  • Operating with a big stick
  • Greed: Looking out only for personal gain
  • Horrible communicators
  • Did not trust many, or anyone at all
  • Short term thinkers
  • Created silos in the organization
  • Had favorites that they worked with
  • Felt empowered by the title they carried

The above characteristics simply do not work.  The failed leaders that I have dealt with have many of the above characteristics or behaviors.

Want to add value to your company as the financial leader? Click here to access our 7 Habits of Highly Effective CFOs.

What A True Leader Wants 

A true leader wants to know that he has a strong team behind him. A leader wants to know that there is no doubt that those that follow him will follow him over a cliff. In addition, a leader wants his team to trust their judgment, but at the same time, his team has enough confidence to respectfully challenge an idea or concept if they truly believe it is flawed. A leader also wants his team to have excellent communication both up and down the chain of command. A leader also must have a right hand person. This is someone who is talented and can step in just in case something happens to the leader. A leader wants to be successful because that is his nature, but he also knows he cannot do it alone.

What It Takes To Be A Successful Leader

Over my lifetime, I have seen several successful leaders in the business world.  Here are a couple examples that stand out.

Example 1

Paul was the owner of a large equipment distributor here in Texas. I met this business owner because we used some of his construction equipment. I got to meet several people that worked for him. The business owner and CEO grew his company from a small $2 million company to a business that was well over $100 million in revenue. He went from less than 10 employee to close to 200. His employees loved him, and he had a well run business that was very successful. I watched him, and I made a mental note of what made this leader different from other executives I encountered.

Paul’s Leadership Characteristics

These are some of Paul’s characteristics as a leader:

  • Compassionate: He had a big heart, but he knew exactly when someone was trying to take advantage of that
  • Accountable: He held his employees accountable
  • He hired very talented people, paid above market and delegated
  • He had his employees help him set the goals and got them to buy in to them
  • Caring: Different from compassionate… He truly cared about his employees, from the receptionist to the CFO and COO
  • Disciplined: Early riser, stuck to his business plan, had good social habits, never broke rules
  • Excellent communicator
  • Zero tolerance for unethical behavior
  • Humble: Although he was personally worth millions, he never forgot where he came from and he treated everyone with equal respect.
  • His goal was not to fill his own pocket with cash, but to share with others and allow the team as a whole to benefit from success
  • He knew what he did not know; this led his to have the right strategic advisors and executives; he trusted his executives
  • He never uses the words, “my” and “me;” instead, he uses “us” and “our”
  • Transparent: If it is good news or bad news, then you will hear it… No hidden agendas

Example 2

Hugo was a leader from early in his career.  After working for a travel company in his early years, his entrepreneurship led him to start his business on his own. He started in travel, then expanded and ultimately had a very successful construction company. In the later years of his life, you would never know that Hugo was worth millions. He was humble, but he knew how to build teams.  He led by example, and was often found literally getting his hands dirty in a construction business.  Hugo loved success, and he enjoyed a nice lifestyle. But he too never forgot his roots.

Hugo’s Leadership Characteristics

He had the following leadership characteristics:

  • Humility
  • Discipline: He was as straight as an arrow and all those around him were also
  • Compassionate: He literally spent much of his wealth helping needy children
  • He was an incredible communicator
  • Zero tolerance for unethical behavior
  • Accountability: He made sure his employees knew where they stood at the end of every month
  • He never uses the words, “my” and “me”… He frequently uses the words “us” and “ours”

You will note several characteristics that the two aforementioned leaders had in common.

Example 3

Now, it is my turn. I am leading a consulting firm with talented people. I know I cannot grow this firm alone, and I need great people to do it. But I also know nothing is done with short-term thinking. The work we do for our clients are always keeping in mind the best interest of the client and the long term relationship. If there is ever any doubt about billable hours, then the client is not getting those hours billed. I must never forget where I came from and where I was just a few years ago. In our firm, we are all very transparent. We speak our mind, but we have professional respect to each other. Communication is the key-stone in our firm. We are treated equally no matter what the title. Our success will be shared with all employees; this is not my firm, it is our firm.

My Definition of Leadership

So how do I define leadership? It is the action of leading a team of individuals that you relay on, that you trust and respect. The team you lead believes in you because you have always been ethical in business and socially. It is a team that you have open communication with and that you never feel you are above. The team you lead believes in you so much they will follow you off of a ledge. That is leadership. If you want to learn how to be a more effective financial leader, click here to access the free 7 Habits of Highly Effective CFOs whitepaper.

what it takes to be a successful leader

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Mistakes Manufacturing Companies Make

Mistakes Manufacturing Companies Make

Job costing, cost accounting, manufacturing costs, what does all of this mean? Oftentimes, job costing, cost accounting, and manufacturing costs are used interchangeably. As a manufacturer, it does not matter what you call it. But it is critical that as a manufacturer, you capture all of your conversion costs. Simply put, you are taking raw material and converting it to a finished good that is ready for sale. You need to capture 100% of those cost of converting the raw material. Most small companies start with the most basic bookkeeping, and that’s okay. But there are two huge mistakes manufacturing companies make that you need to avoid.

 

Eventually, you need to have proper accounting transactions and systems to capture all of those manufacturing costs to have accurate margins. Accurate financial statements and margins will allow you to correctly price your product and will allow you to make adjustments to your business. This is helpful when you have a change in prices of materials or labor, or if your volume throughput changes for whatever reason.

Mistakes Manufacturing Companies Make

In my career, I have seen two recurring mistakes manufacturing companies make that are related to accounting process, procedures and systems.

First, a company may not want to spend the time and money to improve their cost accounting and systems. As a result, this company will struggle forever. The managers of that business will not have accurate financial reports, and they will likely feel the pain when markets turn or are in a high growth situation. Remember, cash gets tight when in either a growth or decline pattern, especially if it’s not managed well.

Second, a company wants to improve the manufacturing cost accounting, but they overdo it. They want a report that tracks every penny and part, and they install a massive expensive system. Many times, they install the wrong system for their company because it was marketed as the best accounting system. This happens when companies do not spend the money to go through a system selection process. They all end up spending much more than the cost of the professional system selection and bust their budget.

Best Practices for Manufacturing Companies

As a manufacturing company, please consider the following as a best practices for your leadership to abide by.

Analysis Paralysis

You DO have to capture 100% of your costs to take raw material and manufacture a finished good. However, this does not mean you need a separate dashboard or KPI for every cost item. If it is not material and the outcome of the cost is not going to change your mind or cause you to make a business decision, then you may reconsider trying to measure it. Remember, everything you want to measure has a cost itself of measuring it. Not capturing 100% of the costs can be devastating to your company.  Remember the quote from Benjamin Franklin, “A small leak will sink a great ship.

Many business owners and financial leaders want to measure everything. But you should limit your key  performance indicators to those that will lead to business decisions! Click here to access our KPI Discovery Cheatsheet to identify those indicators that really drive value.

Margins

When you manufacture a product, you have your obvious direct materials and direct labor – measuring Cost of Goods Sold. This is absolutely crucial in a manufacturing company. But there are other costs that you need to measure. I am referring to your indirect expenses, especially your sales, general and administrative expenses. You also want to measure your gross margin and/or contribution margin and your Earnings, Before, Interest, Tax, Depreciation and Amortization (EBITDA). Consider the implementation of analyzing trends based on a trailing twelve months (“TTM”). This will help you spot trends in your business and financially lead your company. Do not forget your balance sheet. Everything ultimately affects cash and working capital.  Without cash and working capital, you will create a financial disaster. Do have KPIs for your balance sheet items that you want to measure.

Systems

Systems are an important part of having a productive and efficient accounting department. It seems that every year there is a new operating system that comes in to the market, and it seems that the developers of these systems want to expand into every market – beyond manufacturing and accounting. With all of these choices and with all of the talented sales people, you need to understand what the choices are for your business. It is worth spending the money to go through a system selection process.

Timing

Timing is everything in manufacturing. Consider the following timing of:

  • Throughput
  • Delivery of the finished good
  • When you modify your standard costs
  • How quickly you close you books and generate financial records that are accurate and serve as a tool to help you run your business
  • Collections so you have cash to place that next order of raw material

Employee Turnover

I recently quoted in a past blog that employee turnover in the U.S. has an average cost of $65,000 per year per employee lost. The number in a manufacturing environment is actually higher because there are often specialty skills that need to be acquired in manufacturing. So keeping a close watch on employee turnover is crucial in a manufacturing company.

Inventory

For whatever reason, inventory seems to be the “Achilles Heal” in many manufacturing companies. Companies either do not properly manage inventory, they have bad practices, or it just seems that it is never right. Once you establish a good process and reconcile inventory, it should be more of a maintenance routine if your people know that they are doing.  Consider the following for inventory:

Be Realistic about inventory

Be realistic about what is obsolete inventory and good inventory. I know that companies, especially public companies hate to write off inventory.  But you are just kicking the can down the road by not dealing with it now.

Clean Up

Get rid of the junkyard! So many companies I have seen have a junkyard behind the manufacturing facility.  It has been there for years and all it does is accumulate rats, snakes and rust.  Liquidate it and get a scrap dealer to take it off of your hands. You can use that cash for door prizes at the next company party!

Stay Focused

Stick to your business and stay focused. Especially in closely held companies, some business owners waste money on the craziest things. I have saw hundreds of old mopeds (remember, these are bicycles with a weed eater motor) in the back of a large industrial manufacturer. The owner got a “great deal” on them, so he purchased them to resell. The problem is that the initial transaction happened 7 years ago. I also saw a massive specialty machine that cuts steel in the back of a pipe manufacturer because the owner thought he could open a new line of business cutting huge pieces of steel. This machine was two stories tall and weighed thousands of tons. Still to this day, I have no idea how they ever moved it. In addition, the owner never got the new line of business started because there is not a building big enough on his property. The machine has not run in 10 years.

Physical Count

Establish strict physical counts quarterly or at least annually. Have the right team of people conduct the physical count.

Adjustments

Make adjustments to your inventory, and get it over with. Write it up or down in your accounting records.

Segregate Inventory

Segregate your inventory. There is something beautiful about walking into a manufacturing facility and seeing exactly where the raw material, work in process, and finished goods are. Keep obsolete inventory in a separate area that is clearly marked off. Tag and count everything!

Hire a Good Cost Accountant

Cost accounting is a specialty area within the accounting profession. Unfortunately, not every accountant or controller knows cost accounting. Yes, hopefully most accredited accounting programs at universities cover cost accounting, but that does not mean the person you are hiring is a cost accountant. Someone with good manufacturing experience and understands cost accounting is worth his weight in gold. This person will add value to your bottom line.

In the meantime, start measuring and tracking your KPIs. Download our free KPI Discovery Cheatsheet and start tracking your KPIs today!

Mistakes Manufacturing Companies Make
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How HR Impacts Your Business

HR Impacts Your Business

Not too long ago, the Human Resource (“HR”) function was a clerical position that focused on helping the management team set appointments to interview prospect employees looking for work. Or they kept track of hours worked for a company. But those days are gone. HR impacts your business in ways that it once had no influence over. In fact, the HR role has evolved to include advancements in management, technology, and legal issues.

How HR Impacts Your Business

After having served as CEO and CFO for a couple different companies, I learned first hand that those two executive roles are really about managing people. Sure, we have our budgets, board meetings, bankers and analysts to deal with day-in and day-out. But what took up a significant part of my time in different companies was managing people.

Part of a wingman’s responsibility is to know what impacts your business. The CEO needs to know how every area, like HR, impacts your business. Click here to learn how to be the trusted advisor your CEO needs with our How to be a Wingman guide.

Science of Managing People

There are two sciences involved in managing people:

Psychology = the science of mind and behavior; the mental or behavioral characteristics of an individual or group

Sociology = the science of society, social institutions, and social relationships; specifically: the systematic study of the development, structure, interaction, and collective behavior of organized groups of human beings

We are clearly dealing with people in our management roles. As if that was not complicated enough, then add the legal system to that. This includes complex laws like the Affordable Health Care Act (“Obama Care”). Also consider things like American Disability Act (“ADA”), HIPPA, U.S. DOL,  Medicare, EEOC… And if you have a 401K or a pension plan, then you are regulated by a host of other laws and regulations.

Get the feeling yet? This is not a simple environment that can be administered by just an admin. The science of managing people requires a HR professional.

Today’s HR Function

Today, the HR function is a significant area of your business that needs a professional looking over it whether you outsource the HR function or if you are big enough to hire someone in house. Do not minimize this role in your business. HR professionals today have a variety of certifications and credentials and a good understanding of labor laws.

HR Impacts Your BusinessHow the HR Professional Works With Management 

Whether you are a small company of 20 employees or of 2,000 employees, your HR professional should be close to the executive team. In a typical company, this position may report to the CFO or even the CEO.  Executives: keep your HR professional close to you. Have at least a weekly standing meeting to discuss HR issues with that person. Have your HR partner develop and keep dashboards with key information that you want to see relate to your labor force. With the complexity of the HR regulations and labor laws, we need a cooler prevailing head to be at our side as management.

The larger your organization is and the more employees you have, this is ever more important. In addition, larger organization have more moving parts, and that includes HR. As an executive, having your pulse on the moral and culture of your organization is critical.

Have a pulse on the company and advise your CEO in their strategy and decision making. Click here to learn how to be the trusted advisor your CEO needs with our How to be a Wingman guide.

Managing Employee Turnover

In good times, we are building, hiring, growing, and asking more of your employees. You need to have your employees following you as the leader. In bad times, there is uncertainty, You are letting people go. You may also be asking more of  your employees. But you need to find the balance between not promising to much and asking employees to deliver. That is where a solid HR person will be worth their weight in gold. If you are a stable company that isn’t growing or shrinking, then you want to keep a stable workforce.

I recently saw a statistic that the cost in the U.S. of employee turnover is on average $65,000 per employee. Think about the loss of an employee and what it involves… Disrupted departments, time and cost of recruiting/training, learning curve for the new person. It really adds up. I have seen clients with high turnover, and they are simply bleeding cash. What is odd, is that I can’t believe that there are executives that simply live with the high turnover and do not address the issue.

Growing companies really need to keep HR at the top of the list. To be a successful growing company, you need to offer competitive benefits, develop policies, employee files and have a steady pipeline of additional resources when needed. There needs to be a lot of training so that employees follow company policies and labor laws. Believe it or not, State and Federal labor laws change frequently. As a result, your operations people must stay trained up to know what to do or not to do.

Quick Case Study

I was in a situation with close to 1,500 employees. The company entered into a financially distressed situation. We had to lay off half of the workforce while keeping the moral up for those staying behind. We restructured the operations of the business and shut down a whole division. Without a strong HR team, I am not sure we could have pulled it off. A reduction in force of that size involves special notices to cities, counties, and states. It involves severance benefits, angry people, sad people, and transitions of workload.

You can’t afford not to have an HR professional at your side, especially during drastic workforce changes.

The cost of violating the laws, regulations, or getting involved in a lawsuit around HR matters can be devastating to a company.  Not only is there a financial cost, but there is a branding and reputation cost as well. I once saw a large multinational company cancel a contract with a smaller supplier of supplies because the smaller supplier had pretty serious HR violations and was involved in litigation. The benefit of having the right HR partner at your side will far outweigh the cost. Your HR professional or financial leadership should be the wingman to the CFO. It’s time to step up into this trusted advisor role! Access our How to be a Wingman guide here.

HR Impacts Your Business

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HR Impacts Your Business

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