When manufacturers should focus on finance

For manufacturers, improvements in the finance function  can lead to cost savings, better funding and better planning. “There’s a lot of investment right now in terms of improving budgeting, planning, forecasting capabilities, as well as treasury and cash management capabilities,” said Grant Thornton CFO Advisory Managing Director Ronald Gothelf.

The pandemic forced many companies to handle back-office processes remotely. “Before that, most companies felt they would never be able to close their books with a remote workforce,” Gothelf said. “Since then, we’ve seen a great interest in improving the close — from the perspective that the remote workforce pointed out deficiencies, and also now from a capital-raising perspective.”

More manufacturers are looking to raise capital as they see new potential for growth. “As companies are preparing to grow, they’re realizing that higher-quality and quicker financial processes can give investors greater confidence in the financial results. That can make it easier for companies to attract capital,” Gothelf said.

You might not win an investor with your financial processes, but you could lose one.

The outside perspective

To help your organization compete for capital, make sure your financial close is a reasonable duration. “One way to identify that reasonable duration is to look at benchmarks of the industry, and then put together a plan,” Gothelf said. “A lot of clients ask us to: first, look at their current close process; second, identify improvement opportunities; third, identify a target duration for the close; and then develop a roadmap to deploy the improvement opportunities and achieve that target duration.”

Gothelf said that these efforts frequently include training on what constitutes a quality close from an outside perspective, and the elements of quality reconciliations as part of that close process. Once your team understands these elements from an outside perspective, you can benchmark your goals against other organizations and ensure that your results are perceived as accurate, of high quality and within a reasonable duration.

It's important to note that a fast close process isn’t impressive if it’s followed by too many out-of-period adjustments. “The benchmarking is something to strive for, but if you continue to have out-of-period adjustments, then something like cutting your close in half probably introduces undue risk that auditors would not like,” Gothelf said. “The market, as well as investors, tend to look at benchmarks across companies in an industry. Understanding the measures that are used to value the performance of the company is critical, especially for companies with outside investors, as well as to continuously improve the finance function specifically.”

The internal perspective

Finance function improvements can also yield important internal metrics and insight. “Manufacturing facilities are dashboard heaven,” Hennessey said. “We need to know the score. We need to know downtime. We need to know waste. We need to know cutover time. We need to know overtime required. We need to know equipment efficiency and any of the other metrics we want to use. Those are leading indicators, because they're going to turn into the balance sheet, and the P&L, and they're going to drive profitability.” However, finance functions don’t always succeed at accurately connecting those leading indicators to the reporting that decision makers need.

“Companies need to project costs for themselves, but the need for those projections is also now greater for their investors and stakeholders because the past few years have been so volatile,” Schindler said. “The ability to provide more accurate projections for the upcoming year or years is an important function.”

That’s part of why many manufacturers are turning to technology. “Companies are examining how they should apply artificial intelligence into the finance function,” Gothelf said. “They’re looking at generative AI’s capability to analyze financials and trends, identify patterns and extrapolate from the past results into forward-looking strategies.”

But AI analysis starts with data. Even the best solutions cannot project the future without the right details about the past. Many manufacturers don’t have the right data to track the returns on their investments — so, they can’t project those returns in the future. “Manufacturing has a lot of acquisitions,” Schindler said. “Often, they absorb an acquired company into their operations, but then they walk away from any further analysis of that acquired company. You need to know if you're still getting the return on that acquisition investment that you had planned when you did the diligence, and so you need to have the data to see that.” If an acquisition isn’t paying off, you need to know why. Manufacturers also need a clear itemization of their costs. “From a data analytics standpoint, you need to understand your back office and other SG&A costs,” Schindler said. “What is your overall cost per headcount and how does that compare to your competitors? You need to look at both your return on your acquisitions and your return on your capital. For instance, what revenue are you getting from what you've invested into the company, including headcount, and what are your non-modeled costs on a headcount basis?”

As manufacturers look for outside investments or their own investments in technology or other growth drivers, they need efficient and effective financial processes that yield decision-driving data. They need to show today’s results and tomorrow’s projections. “In the current climate, where there's so much desire for investment capital, there’s also a desire to show improved performance and improved efficiency,” Gothelf said.

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