The CFO'S Perspective

The thought of needing to hire a CFO often doesn't come before there is some sign of trouble. Most companies try to operate using the “bank account formula” for as long as possible and then make a change only when the pain becomes too great. “Let me look at my bank account… if I have money, I must be OK!”

Fortunately, this no longer a black and white choice. The most successful businesses are built on a collaborative foundation, and a growing number of companies are embracing the concept of hiring a part-time CFO. Instead of being just a sunk operating cost, this move is now widely viewed as a smart business investment that is delivering positive returns.

As a CFO, one of the common reasons I am brought into a manufacturing organization is to solve the mystery of “Why our sales are growing, but profits low?”  Most of the companies I work with have rigorous quoting processes that they assume will protect them financially, but in the end their actual monthly profit margins often fall short of quoted (and anticipated) profit margins.

Before diving into an examination why profit margins lag behind sales growth projections it is important to take a look at accompanying financial reports. These are categories from a simplified manufacturing income statement:

In this article we will discuss materials, direct labor and manufacturing overhead as they relate to gross profit.

What senior manager hasn't looked into the future to plan the growth of their business? The forces that drive the market acceptance and commercial success of your organization are going to vary depending on the nature of your products and services.

Whether you're in a traditional industry or a new one, business moves faster than ever today. Every millisecond a new app is download from Apple's online store. Walgreens now offers a walk-in one-minute flu shot, and customers can drop off their Fed Ex packages in the process. Any organization that wants to ensure its future must first figure out how to measure its past performance and then leverage that information to inform current decisions that impact their ongoing success.

Most small to medium-sized companies are owned and run by business leaders who are highly skilled in some key aspect of their business - such as technology, sales, or manufacturing - but are less savvy in financial matters. Financial performance measures are essential because they indicate whether a company's strategy, implementation, and execution are contributing to bottom-line results.

Whether it is your company's number one goal or not, the notion of turning a profit is sure to be in your top five short and long-term objectives. The only way to know if you are achieving your financial goals is to regularly assess your business. Are things running smoothly? If not, where are the bottlenecks? What parts of the business are acting as growth catalysts? Many of these questions can be answered by reviewing regular financial reports.

Knowing which KPIs to track is the first step towards financial awareness, but the real goal is to use that awareness to monitor the health of your business and inform intelligent business decisions. Business owners and top-level executives must understand how to use KPIs to formulate a financial analysis that is accurate, actionable, and predictive.

These KPIs should be provided by finance and/or accounting personnel to help bridge the knowledge gap at all levels of an organization. Transparency among business groups regarding key metrics is one of the most commonly recognized ways to effectively monitor business health and meet short and long-term business objectives.  

What are 'Key Performance Indicators - KPI'

Key performance indicators (KPI) are a set of quantifiable measures a company uses to gauge its performance over time. KPIs provide a way to measure how well companies, business units, projects or individuals are performing relative to their strategic and operational goals. KPIs can also compare a company's finances and performance against other businesses within its industry.

KPIs can help to reduce the complex nature of organizational performance to a small, manageable number of key indicators which are crucial to decision making and ultimately, to improving performance.

There are many, many KPI’s for every kind of organization.  The following are illustrations of some of the more common and ubiquitous metrics.