Without products to sell a manufacturer cannot exist. But without products that sell profitably, it will not stay in business. This is where product development and finance intersect.
Strong financial leadership will ensure that the products being developed are right for the market, priced correctly, and attracting key customers. In an ideal scenario, it looks something like this:
- Finance will provide the data required to make product decisions
- Product development will use that information to shape product features and functionality
- Finance will close the loop by analyzing company performance across the current product mix
This process should be cyclical, with a steady flow of communication between both groups to ensure that the company is constantly evaluating profitability to make strategic revenue decisions. As the head of finance, the CFO should spearhead these efforts.
An article for StrategicCFO360 discussing today’s critical CFO role in product development explains,
“CFOs are essential in every stage of strategic product management—from developing sound capital budgeting processes that fuel growth in a fiscally disciplined manner, to identifying the company’s Profit Peak customers and profiling their purchases, to enabling their product management counterparts to curate their customer/product matrix, to providing best practice product mix opportunities to every sales rep for each customer. In this way, astute, proactive CFOs can shape and fuel a strategic product management process that propels their companies to a leading position in today’s turbulent ever-changing business world.”
Let’s take a closer look at how an experienced manufacturing CFO can aid the product development process.
Bridging the Financial Gap
Product managers use numbers every day to shape the work they do, but they may not be the same numbers that accounting and finance are focused on when analyzing business performance. While product managers are accustomed to looking at the numbers related to their product development efforts, they are typically less well versed in broader financial metrics and concepts. This is one area where finance can bridge the gap.
A CFO will understand which product-related metrics are most important to track and analyze. While these can vary from one manufacturer to the next, they will typically include things like production costs, inventory turns, customer rejects, lead time to the customer, OOE (Overall Operations Effectiveness), OEE (Overall Equipment Effectiveness), and capacity utilization. When finance can clearly communicate which metrics they are tracking and why, both teams can be on the same page when it comes to KPIs (Key Performance Indicators) to better align organizational performance. The result is a greater likelihood of achieving revenue goals.
Positioning the Product
Manufacturing CFOs will also play a role in product pricing and positioning. Relying on your CFO in this area is especially critical because one of the primary goals when creating new products is not to offer more features, it is to generate more profit. This fact can easily get lost when product managers are the only people involved in the discussions around new product development. At any manufacturing organization finance must have a seat at the table with more technical personnel for the company to succeed.
In their article on how CFOs play a part in product management Byrnes and Wass offer keen perspective in this area when they say,
“Once a CFO puts an appropriate capital budgeting process in place, the next step is to develop products that meet—or lead—the evolving needs of the target defensible high-profit customers. (After all, if you meet a customer’s needs you are a good supplier—but if you create products that meet critical customer needs that the customer did not even see yet, you are a strategic partner.)”
As part of their assessment Byrnes and Wass outline the following types of customers:
- Profit Peaks – These are the smallest group of customers, but they generate the largest revenues.
- Profit Drains – This group of customers does not generate any revenue at all. In fact, they erode a portion of the revenue generated by their Profit Peak counterparts.
- Profit Deserts – These customers are the largest group. They generate a small amount of revenue, but they require significant business resources to retain.
CFOs not only oversee the analysis of data to determine which customers are the most profitable but also advise on which products Profit Peaks typically buy to help make strategic product development decisions. In an ideal situation, manufacturers would have the robust data needed to identify these different customer types and their purchase patterns in real-time. With that information, they could offload Profit Draining customers to other companies or phase out the products that they are more likely to purchase, in favor of developing more products adjacent to the items that Profit Peak customers are buying.
Entering New Markets
In some instances, the product positioning that manufacturing CFOs are going to be assisting with is less about deciding which products to sell and more about deciding where to sell them. When existing products are going to be launched in new markets, CFOs can also advise on which products would be the best candidates for repositioning in a new market based on the product lifecycle. In an article from the Association of International Certified Professional Accountants on how a CFO manages products during a downturn discusses this in saying,
“Emerging economies [are] potential destinations for products that have already entered the saturation and decline stages of the product cycle at home. This not only gives the products a fresh lease on life, but also has the potential to create a much better return on investment. The major cost associated with such a move will be marketing; the hard graft of R&D is already done.”
These kinds of product decisions are where strong financial leadership becomes especially important for manufacturers because finance teams will have the data needed to support or refute new market expansions.
Advising on The Product Roadmap
The product roadmap is not simply the product development team’s territory. Finance should also be included in this crucial area. Roadmap milestones should be monitored and measured using consistent metrics that are in keeping with other product offerings to ensure that the business is on track for achieving its revenue goals.
Furthermore, a manufacturing CFO should confirm that the product fits the market as well as the company’s business model. The CFO should also expect that there is a business case for each product or product line that includes a clear explanation of how outcomes will be measured. In this way, the CFO acts as a de facto guardrail to keep the product journey ahead on course.
In discussing the relationship between product managers and CFOs, Product Development Instructor Jon Gatrell summarizes in saying, “Give the CFO an opportunity to contribute, participate in the day-to-day workings of your product as a business, and you may just get a business partner who can help you and your product be more successful in the marketplace.”
When you need strong financial leadership, we can help! Our team of fractional CFOs has extensive experience assisting manufacturers on a part-time or interim basis. When you are evaluating your product mix or preparing to launch a new product, ensure you have the right financial leadership in place to help you make smart business decisions. Contact us today to learn more!