As companies grow, more and more people get involved with the operations of the business. Whether you have a manufacturing business or service business, this eventually grows beyond a one-man show. Sales people, engineers, and technical people often become the leaders responsible for driving your business and adding to the top line. Everyone understands what a new client means and what revenue is. So, does your management team understand the financials?
Does Your Management Team Understand the Financials?
The challenge is when a business grows, companies add people to operations, the management level, vice president positions, etc., but they do not have a solid understanding of the financial statements. We often see this in high growth businesses, where the focus is on sales as it should be, but only the CEO, Controller, or CFO understand the other parts of the financial statements.
Why Your Operations People Should Understand All The Financial Statements
I recently witnessed a business that had a steady run rate of sales and EBITDA at a very attractive rate. Then, the operation was handed over to an “expert” in the industry. This industry expert does know a lot about how to technically process something, but he has no clue about how a business really operates. In one month, he changed the focus of the production to one project. While, this one project was completed in record time, all other projects came to a standstill. Now, the business ran out of work in process and finished goods, and sales suffered the following month.
If the industry expert understood the balance sheet, inventory, A/R and A/P (in addition to sales, cost of sales, and cash flow), then the company would have avoided this poor performance in the following month. Anyone in charge of an operation or in a management position must understand how their activity affects the balance sheet, income statement, and cash flow. They are all tied together and all get affected with operational activities.
It All Turns Into Cash or Lack of Cash Eventually
My prediction is that in the following 4-6 weeks, that business mentioned above will find itself in a cash tight position. Remember, CASH IS KING! Everything you do will have an effect on cash one way or another. The lack of planning in a production environment causes work in process inventory to run out, sales to suffer in the following month, and ultimately, cash to get tight.
Educate Beyond the CEO, CFO, and Controller
I am a big believer that it is the company’s responsibility to educate the management team that has “P&L Responsibility”. I do not mean just the P&L. Everyone with responsibility for the bottom line, profit, and cash should have a general understanding of the impact to all three financial statements. Not everyone is an accountant, and they should not be. But it is our responsibility to educate those that have operations responsibility that affect the bottom line. I am a big proponent of workshops and educational courses for operations people. In a few days, you can give them enough knowledge to at least have them ask the right questions. But as CFOs, Controllers, and CEOs, we need to provide that education so that the people making operational decisions have a positive impact on the bottom line and cash.
From Operations to P&L Leader
We have specifically designed a 4-day workshop for this exact purpose. It is called “From Operations to P&L Leader”. We are not out to have operations people become accountants; however, our goal is to simply provide enough data and understanding of how operations and the financial statements are tied together. Furthermore, we show participants how their decisions in operations affect all three financial statements – the Income Statement, the Balance Sheet, and the Cash Flow Statement.
Educate, hold accountable, and have deliverables. This will lead to a successful organization!
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