Want to Improve Cash Flow? Improve Your Operations Analysis
Managing operational efficiency is key to the effective overall financial management of a company, and particularly to maximizing cash flow from operations. As the CFO is the financial manager of a company, he/she must have a comprehensive knowledge of and a role in all facets of the business, particularly operations.
Managing operational efficiency is key to the effective overall financial management of a company, and particularly to maximizing cash flow from operations.
- Is operational capacity sufficient to meet demand?
- Are operations structured so that inventory is properly managed?
- Are the costs of operations controlled effectively?
- How many operating cycles does the company have and how long are they? These cycles maybe shortened by maximizing inventory turns and shortening production time and billing periods.
- What are the KPIs of operations and can they be improved, expanded or condensed?
- Are we utilizing all efficiencies available to us? These include balance sheet efficiencies, process efficiencies, acquisition and spending efficiencies.
By analyzing the answers to these and other questions, the CFO can create an actionable plan to address operational issues and implement management tools to indicate when and where changes are needed in operations.
As Ken Fruscella of FocusCFO states, “the CFO must work with the CEO and management team to develop a plan to implement operational strategies and develop metrics to ensure that the long-term strategy is on track, or to determine if corrective actions need to be taken.” In other words, the CFOmust always have an “ear to the ground” and be aware of changes in operations that will requiredevelopment of new measurements.
The CFO will also project operational capacity needs as the company grows and determine how capacity can be expanded. With greater size and complexity, operations become more difficult to manage. Management reporting tools are essential to effectively make decisions and to drive performance and strategy. Reporting will focus on company and industry specific operating metrics. The CFO will do the following:
- Develop manageable metrics that focus on profitability by product line.
- Determine what metrics drive revenue, gross margin, and working capital.
- Report key operating metrics as frequently as needed – from daily to monthly
While the CFO is not involved in the day to day management of operations, he or she drives operational analysis, planning and strategy. This requires a very specific skill set that only a CFO can bring to a company.