strike a balance between growth and risk that keeps their companies profitable today while planning for a better future. Findings from Grant Thornton LLP’s Value-Adding Strategies
survey reveal that they do this by proactively focusing on five critical areas:
Improve operations and supply chain performances
Improving operations internally and across the supply chain
Investing appropriately in innovation
Leveraging secure information technology and data
Developing creative tax strategies
“Value-adding CFOs really are in-house return on investment (ROI) experts, and, as such, they are improvement-minded CFOs,” says Rob Tague, director in Grant Thornton’s Advisory Services Group. “They walk through operations, understand processes, and interact with all the different departments and levels of staff in their company and with suppliers. They build relationships that help them coordinate improvement throughout their organizations. They play a key role in helping their organizations do things better, faster and more efficiently.”
Manufacturers confront multiple issues and opportunities. But which ones deserve focused effort to drive improvement? Some issues, such as ongoing safety problems, command immediate action and require no study. Other issues, though, demand CFO attention to evaluate potential ROI (e.g., increased revenues, higher profits, faster growth) and risks (e.g., lost sales, compliance issues, warranties/recalls).
Savvy CFOs prioritize improvement projects while also identifying opportunities to divest of products, departments and facilities that no longer serve corporate objectives. This extends to the supply chain as well, where these CFOs insist on the same operational rigor from vendors, supported by procurement and purchasing teams.
“Taking proactive steps to mitigate risks — such as establishing supplier performance criteria, developing backup suppliers, or evaluating overall supplier costs (not just unit price) — requires a thorough understanding of the supply chain,” says Brian Larsh, director of Grant Thornton’s Business Advisory Services practice. “This begins with an analysis of the supply chain presented to a CFO in a way that gives them visibility into where action is needed.”
Invest in innovation
CFOs have good reason to lead innovation efforts: government credits, incentives and direct-funding programs can cover up to 20% of all innovation costs (wages, supplies, research by contractors, and payments to nonprofits and institutions). Yet only about half of U.S. manufacturers take advantage of federal R&D incentives
, and even fewer use state and local credits and incentives or direct funding.
Some executives don’t know the extent of funding available, and others are concerned about disputes with tax authorities (for small companies, defending the credit may cost more than the value of the credit).
Value-adding CFOs can lead the innovation charge with a four-step strategy:
Identify and review innovation activities eligible for funding (product development, process innovation, as well as new techniques, inventions, formulas and software)
Review funding options, including the combination of incentives and direct funding for the same innovation
Identify restrictions that can diminish the value of a credit, incentive or direct funding
Negotiate with multiple entities to get the best possible innovation funding
“The CFOs we work with are actively involved in researching credits and selecting a funding provider,” says Mark Andrus, partner of Grant Thornton’s Strategic Federal Tax Services practice. “They also look at a range of options to pursue credits, such as joint ventures with larger companies, and opportunities to combine funding sources, such as government programs. These CFOs identify activities that are eligible for funding, determine the types of funding arrangements to pursue and create a list of potential partners.”
Leverage secure information technology systems and data
Modern manufacturers rely on information technology to compete. But this reliance makes them vulnerable to security breaches, too — putting data and profits at risk.
“The reality is that security breaches happen,” says Kevin Morgan
, Business Advisory Services principal and co-leader of the national Cybersecurity practice at Grant Thornton. “At some point, it’s not a question of if
. It’s a matter of when
Less than one-third of manufacturing executives report
that their companies’ IT systems and data are “highly secure.” Top security concerns include external threats (50% of executives), employees using the Internet (50%), and employees’ remote access to corporate systems (46%).
The average organizational cost of a data breach is $3.5 million.1
That makes it imperative that CFOs guide corporate efforts to improve IT security by:
Enforcing data-access policies and authentication protocols that secure physical property (computers, servers, smart devices, etc.), data and information
Conducting background checks on system administrators, IT staff and third-party contractors, and ensuring that information access aligns with roles and responsibilities
Updating and cleansing data regularly to keep it reliable, available and secure
Upgrading and testing technologies regularly
A strategic, CFO-led approach to M&A can significantly improve growth and profitability.
The strong performance of manufacturing in 2015, combined with high multiples, rising debt limits and undeployed private equity capital, make the sector a target for M&A. Half of manufacturing executives say M&A is important to their company’s strategic vision
, and four out of five manufacturers completed an M&A deal in the past five years.
Buy-side CFOs look to:
Support corporate strategy
Expand market and customer reach
Increase operational capacity
Boost operational capability
Expand intellectual property
Sell-side CFOs find the time is ripe to:
Streamline cost structures by divesting noncore products or business units
Optimize return on assets with a partial or complete liquidation
Ensure ongoing operations by bringing in new capital and talent, especially if internal succession options are limited
, Grant Thornton’s managing director for Transaction Advisory Services, says that value-adding CFOs are actively exploring M&A: “They’re not waiting for an opportunity. They see that multiples and debt limits are high right now, so they are more deliberate in finding partners that fit their core strategies.”
Value-adding CFOs develop M&A plans that:
Update financial statements, customer and supplier contracts, and tax liability plans
Conduct thorough due diligence with each potential partner
Evaluate every deal within a context of potential tax and regulatory issues
Incorporate post-merger integration plans early in the M&A process, which helps to determine partner compatibility (e.g., processes, systems, talent, culture), accurately quantify post-merger synergies, and rapidly get integration underway when the deal closes
Yet despite best intentions, manufacturing executives report that half or more of M&A activity over the past five years has been unsuccessful.2
M&A failures occur for many reasons: incompatible partners, poor timing, and overly optimistic estimates of synergy. Even sound deals with strong partners can founder due to poor integration planning.
A well-crafted integration plan can eliminate mistakes that lead to failed deals, says Chris Schenkenberg
, a partner in Grant Thornton’s M&A Tax Services practice. “CFOs delegate that plan, allowing department leaders to own pieces of it, and then the CFO holds those people accountable for the integration’s success.”
Schenkenberg cites three best practices that drive effective integration:
Develop creative tax strategies
Communicate about the deal as soon as possible (before the deal closes,) in a consistent manner, regardless of the audience
Manage expectations of all parties affected by the deal — employees, stakeholders, customers, suppliers, etc.
Move quickly, and commit to a 100-day plan with clear milestones
Tax strategies at many manufacturing companies are the accumulation of reactions to changing tax requirements through the years — more than 5,000 federal tax code changes since 2001, and thousands more local, state, and international revisions.
“Companies need to examine their tax strategies and see what makes sense in today’s environment,” says Andrew Wilson, a Grant Thornton Tax Services partner and Manufacturing Tax practice leader. “Sometimes decisions were made based on rules that no longer apply, and sometimes there’s excessive complexity.”
Value-adding CFOs establish a tax strategy that benefits the company today and addresses the near-term horizon (one to three years out) by:
Leveraging favorable foreign tax regimes
Structuring M&A for tax advantages
Reducing tax burdens from supply-chain revisions
Finding tax credits for new employees
Funding R&D expenditures with national, state, local and international tax credits
Value-adding CFOs and operations executives work together to review corporate plans on an ongoing basis and understand their potential tax outcomes. This team also reviews corporate execution of tax strategies, evaluates effectiveness of tax strategies (anticipated benefits of improved cash flow, streamlined filings, etc.), and updates the strategy in light of future events (political, economic, etc.).
CFOs have always focused on “the numbers.” But in today’s competitive environment, fiscal know-how alone is insufficient; successful manufacturers need value-adding CFOs who:
Understand their companies’ operations and supply chains
Participate in strategic decisions that affect the entire organization (not just finance and accounting)
Offer innovative solutions that leverage assets, resources and talent for optimum cash flow now while establishing a path for sustainable growth tomorrow
Are you ready?