We Have Financial Reporting And 100% Visibility On The Frontline Profitability Drivers, Right?
Case Study: Connect The Transactions
When I do financial analysis for companies and find there is a disconnect between financial reporting and frontline visibility, what I find are divisions or sectors that are not profitable or, worse, are even running at a loss and costing the business money.
They’d be better off to close or fix these, but they can’t see them. This is because as you move up through the organisation and consolidate results, transactions from all areas get mixed together, the trackability and potential insights become lost, and the overall business result has been diminished. A certain business unit could be costing you money and you can’t see it.
Again, this occurs when the financial systems aren’t transparent enough all the way down through the organisation to the front line. The more complex the organisation, the bigger this problem can be.
As an example, we worked with an aeronautical company selling products into a specialised market with a wide area of distribution. They had a range of technical products, and, over time, they would upgrade those products to bring better ones to market. What they didn’t have, however, was a migration strategy to take the customers using the older products over to the new products. They just had more products.
To service more products, or sell more products, you need more inventory. This grew and grew over time to the point where they had so much inventory their cashflow started to be threatened. In fact, the whole sustainability of the organisation started to be threatened due to the amount of funds tied up in carry inventory, work-in-progress (WIP) and finished goods (FG) stock.
They couldn’t see it because, at any one time, they were only measuring a product. We’ve taken a product to market. Is it profitable? Yes, it is. They weren’t measuring the overall inventory as a cost of sales, a total cost of the business and monitoring how that inventory was growing from a base value and cash flow perspective.
When I did an analysis, I found that 50% of the inventory had a very low turnover rate simply because it was only the old customers who were using this inventory. New customers were getting the more recent product. Inventory sat in the shed instead of being free cash in the bank, and this brought a very high cost to the business.
Equally servicing a growing range of products has a steadily escalating costs cycle. I worked with this company to optimise their approach to market and also significantly change their inventory methodology. Within 12 months of doing this, the business had turned around to a profitable position. The organisation was now taking a more focused approach to market and managing the total cost and profit of delivering to that market.
Show Me The Money!
It is so stressful and frustrating as an executive when you don’t have your finances under control.
If your financial systems aren’t well-connected to the business, then people can’t explain to you what’s going on. If you’re a managing director or an executive general manager of some kind, and you’ve got a number of people reporting to you who are all responsible for profit and loss, and you keep getting surprises when you speak to your managers, or they struggle to be able to tell you what’s really going on, that is just plain scary. It’s frustrating for them, too.
The natural instinct becomes to blame the manager, only you know the manager is not an idiot. He can’t explain it because he can’t see the full picture either.
This creates a snowball effect. The more disconnected you are from the frontline, the more you keep getting surprises. If you keep getting surprises, it diminishes the trust of your stakeholders.
As you diminish the trust of your stakeholders, you require more information to try and keep your finger on what’s going on when really you should be leaving it to your managers. Like the small snowball rolling down the hill, getting bigger and bigger, all of this grows into complex reporting processes.
Finance is very much about profit, loss and cashflow, and not having a clear view of these items is where companies get caught out. This is because, at the end of the day, accounting is about predicting future costs by looking at current costs that have been applied or upcoming costs that will be applied in the future.