Every Manufacturing Company is required to deliver good results every Quarter. Without this, the Bankers will not have confidence in the Company’s performance. In today’s Economic situation as everyone would have experienced, the Bankers are very careful in lending money. While Big Scams may happen, the Ordinary company is struggling to get their Discounting Limits expanded when there is genuinely a Turnover increase! The Ordinary Banking employee seem to have become very cautious! The Pressure is not only from the Bankers, the Investors also are watching the Companies much more carefully. No one wants to put their money in a Company that may not be looking strong.
Companies need to manage their Operations very closely to ensure they get maximum out of the Resources that they are investing.
While this is the situation of rising expectation and rising Caution on the part of Bankers, Investors regarding money and Investment, the Companies do not seem to be still managing their Profits closely.
There is always a big gap between the Seriousness with which the Board looks at the P&L Statement and how the rest of the Company looks at the Quarterly / Monthly P&L Statements. Many Companies may not be still having the Monthly P&L. Even in Companies where the Monthly P&L is prepared, Employees in these companies may not have any idea about the Profit of the Company or how the Financial situation of the Company is. Traditionally a good proportion of Indian Companies do not share the P&L with employees.
This gap between the Board of Directors and the rest of the Company is not good in following ways:
- Employees, including Senior Employees simply do not know the Financial situation of the Company.
- Operations Head may not know the effect of the Operational inefficiency on the P&L.
- Sales team may not know the effect of their Receivables Collection on the Working Capital.
- Engineering Team may not know the effect of their Capital Investments on the Debt situation of the Company and how it is affecting the Profit.
- Due to this ignorance, the Operational team may want more investment, not putting in efforts to improve the efficiency fast enough.
- While the Board of Directors are worried about the Financial situation of the Company, there is no guarantee that the actions are happening on the ground to address this situation.
- Actually, the Operational team may be pulling in the opposite direction. An Operations Head may be arguing for higher investment, he may not be focusing on the reduction of Raw Material Cost as he may see some other priority.
- A Sales head may be arguing for giving higher Credit days to the Customers.
- A Purchase head may not see the need to go for serious Cost reduction as he is busy in implementing an ERP or busy with some other priority.
This can turn the situation in to a quite serious one as the Company is in trouble. But not able to respond with agility! This is where the Companies will start going deeper into inefficiency and Losses.
Let us look at a few Best Practices with which a Company can set a System for Agile Financial Performance Management in the Company.
01. Educate the Team starting with Senior Team: My experience is that even Senior People at Functional Head level too may not be knowing how to read a P&L, Balance Sheet. They may not know how to link the Activities that they are involved into the P&L. A Sales Head may not be able to link the delay in getting Price increase from Customers (Post Raw material Price increases) to the Profit of the Company.
The Education should not be just on the General Concepts of Finance, P&L and Balance Sheet.
Every Company should identify the Critical Activities that are driving the Cost In the Company and highlight it to the Team.
Eg. A New Product Process may be ending up in higher Raw Material Cost for the New Products. This may be okay for the initial period when the volumes are low. But in many Companies, this higher price for low volumes will continue even when the Prices go up. This process may be flagged.
02. Create Focus on the Critical Processes: Every Company needs to create focus on a few major Processes in the Company that are important in determining the Profit of the Company. Some examples are as follows:
a. Sales and Production: I have seen many Companies who simply keep losing a lot of opportunities in terms of boosting their Top line. The Production team should always be at least 20% ahead of the Sales team in terms of Capacity to produce (Not just Production capacity, the ability of the Production team to hit higher Production after tackling all their Losses). If they are not ahead of the Sales team, then the Company would be losing Growth opportunities. I know quite a few companies who are losing the Top line as they are living with some problems for a long time.
b. Cost of Poor Quality: Production / Quality Teams do not realise that the Cost of Poor Quality straight away hit the P&L. The Customers returns may be high, the Export Customers may be debiting Penal charges for bad Quality, the Dispatches may be going by Premium freight as the Lot was rejected. The focus on these costs has to be sharp.
c. Premium Freight: Many Companies incur a lot of wastage in this area. If the Production is not efficient, then the Company may be spending a lot on Premium freight for dispatches. If the Sales forecasting Is not okay, the Company may spend a lot on Premium freight for getting Raw material and Parts into the Company.
d. Manpower Cost and Productivity: The recruitment of Staff has come under a lot of focus and the Indian Companies have definitely reduced the recruitment in the past few years. But still the recruitment of Blue-collar Workforce is happening without good control in many Companies. There are huge opportunities in improving Blue Collar and White-collar Productivity in Indian Manufacturing Companies. We are sitting on huge opportunity in this area.
e. Investment: The Operations teams and Engineering Teams still do not have full understanding of how the investment that they recommend is affecting the Company’s financial situation. We are again sitting on huge opportunities in improving Capital Investment Productivity.
f. Receivables: Indian Customers generally do not pay unless rigorous follow up is there from the Supplier. Of course, there are a few companies that may have good discipline in taking care of the Suppliers. But they are few. A company needs to have rigorous Receivables follow up system.
These are few areas. Companies may have more focus areas relevant to them.
03. Plant Wise/ Division wise Profitability: The Plant / Division Heads have to be made responsible for P&L. Some Companies already have it while many do not have it. The Plant Head and his team have to be held responsible for the P&L. The Plant should have a System of holding different HODs responsible for the P&L Line items.
The Annual Budgeting Process is an important one. The Teams should be involved in Planning the Expenses of the Plant. Each HOD should be clear about what expenses he is responsible for. When he does the Budgeting for the Expense, he will understand how the Expense is building up. A Good Annual Budgeting Process will ensure that the HODs and their teams understand the Expense very well.
Managing these Expenses should become a KPI for the relevant HODs.
04. Setting up a good Budgetary Control System: A Good Budgetary control system should be set up in the Company that will help the Employees to exercise the tools to control the Expenses. A Production head should have a Control for Raw Material and Parts issue at Quantity level on a daily basis. This will ensure a practical control on the Consumption. He should know how much quantity of Consumables he is consuming and what quantity is okay. A Good Budgetary Control System will take a few years to develop. But it has to start. Company has to create focus on this. The Finance team has to play a big role in making this happen.
05. Regular Reviews: Regular P&L Reviews have to take place with the teams. The Finance team should initiate them and the Leaders have to conduct them. The HODs should be asked to present the data and a Corrective Action and Preventive Action if the expense goes out of Budget. These regular reviews create a focus on the Budgetary Control.
06. Cost reduction: An Active Cost Reduction exercise should be happening in the Company and any Cost overruns have to be compensated by the Cost reduction Projects. A good Cost reduction system should be there in the Company.
This way the P&L focus can be taken deep into the Organization.
One concern that some people may have is that if there is too much of P&L focus in the Manufacturing Plants, the Plant teams may not focus on the Customer Service and they may become too money oriented.
We are doing Business with Customers to make money. To make money the Customers have to be definitely kept happy. But if we are not able to make money from the Business, then there is something seriously wrong with our approach. We have to make our Businesses profitable while making the Customers happy.
How good and deep is the system to manage Profits in your Company?