The CFO'S Perspective

Key Performance Indicators (KPIs) help measure the performance and effectiveness of different areas within a company. KPIs are very specific to each industry and company. The best KPIs will depend on the company's specific goals and objectives. In a manufacturing context.

Here are some widely used KPIs:

Managing consistent working capital provides the resources needed to achieve organizational objectives and execute on the company’s strategic vision. In this way, working capital ensures business continuity for manufacturers and acts as a determiner of success. When cash is managed properly, a manufacturer will not only have the resources needed to keep operations running on schedule but also generate the long-term capital needed for major expenses like equipment replacement and facilities upgrades.

However, in a manufacturing setting, working capital is typically harder to manage than other industries. Manufacturing has a number of oddities that complicate their working capital formula and make management more challenging. Furthermore, inventory risks, high operating costs, reliance on manual processes, and frequent payment delays can all put strain on their working capital. The result is a perfect storm of cash flow management difficulties for manufacturers.

In a keynote speech at the 2018 Manufacturing Finance Summit, Dr. Peter Colman, a global pricing strategy expert, explained that price is the strongest profit driver for manufacturers. The data he cited showed that a 5% increase in price results in a 33% increase in operating income, whereas a 5% increase in volume only results in a 20% increase in operating income.

The message here is clear: selling smarter is better than selling more.

And while many things have changed for manufacturers in the years since, this wisdom has not. Pricing remains critical for manufacturers as a leading revenue driver.

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:

1. Finance will provide the data required to make product decisions
2. Product development will use that information to shape product features and functionality
3. 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.

According to CFO Dive, next year US employers are planning the highest pay raises in 15 years. Overwhelmingly, the executives surveyed cited a tight labor market as their main driver, with 73% indicating that they would be increasing wages to attract and retain their labor force. However, with national wages expected to rise by an average of 4.1%, these pay raises still would not offset the recent drop in real earnings due to rising inflation.

While the national average for wage increases is expected to be around 4% next year, manufacturing is one vertical where pay increases have historically lagged behind the rest of the market’s growth due to stringent control over wages by management and pushback against rising wage trends. So, how much will manufacturers increase wages next year?

Manufacturing CFOs are a unique breed. These financial leaders must not only encompass the typical traits of highly successful CFOs but also thrive in a quickly changing environment. The fast-paced, innovation-centric nature of manufacturing requires a distinct skillset from its leadership. As a result, even CFOs that thrive in other industries can find the role at a manufacturer more challenging because manufacturing has its own financial nuances and requires a commitment to continuous learning.

So, how do you find a CFO that will succeed in the role? Look for the following characteristics:

With US inflation rates rising rapidly small and large manufacturers alike are being affected by inflationary pressures in much the same way, although small manufacturers will undoubtedly feel the sting of rising inflation more deeply than their larger counterparts. These pressures are being further exacerbated by:

• The speculation around a possible recession hitting between now and Q4 of 2023
• All-time record low small business expectations being reported
• The lowest consumer economic expectations being reported since 1980

Knowing that a recession may be coming does not tell us when, why, or how it may occur. However, paired with dropping small business and consumer confidence, a looming recession is only going to worsen the effects of rising inflation rates on US manufacturers.

Should we pursue foreign manufacturing operations?

The last two years have shown the fragility of foreign supply chains. What were once relatively stable supply chains are now fraught with problems ranging from logistics/shipping delays, government lockdowns, material shortages, labor shortages, and changing political environments leading to increased duties and tariffs.

How do we proceed from here?

To alleviate some global supply chain problems, do we onshore our foreign manufacturing operations back to the United States?

Or are we still interested in foreign markets with low labor costs?