Financial Management Improves Performance — August 2016

This post concerns financial management.

The CFO plays a critical role in utilizing the firm’s financial data to provide useful information for effective management of the firm. The financial analysis of data is utilized in several ways. It can be used to facilitate business financial planning; for borrowing decisions; and for investment decisions. It is also useful for the improvement of corporate performance. Our focus in this post is the latter.

Relating financial data points to one another is a tried and true means of assessing absolute and relative performance. In addition it provides a platform from which to improve operational processes. For the small businesses we serve, we favor benchmarking the business of larger successful firms in the same industry. Done properly, this activity will enable the company to improve and ultimately gain a competitive advantage against many of its rivals. It entails focus on how others have achieved better results.

Benchmarking is typically broken down into two major areas: operational and financial. It is accomplished by examining relationships between data points and comparing them to corresponding relationships at larger, successful firms. Once the comparison is made, management determines the necessary steps for the company to reach the benchmark.

Operational benchmarks relate to processes concerned with the operation of the business, i.e. creating value for customers through a product or service. This effort includes: creating products, selling, delivery, handling of cash, and payment of bills among other tasks. Key processes to measure include customer order fulfillment; product delivery time; speed of inventory replenishment, just-in-time metrics; processing of cash payments; and amount of time required to close books. Often this information, as it concerns competitors, can be found at trade associations.

Financial benchmarks relate to financial measures based on the accounts of the firm’s financial statements. Usually two or more of these accounts are utilized to calculate ratios or percentages. Theses measures indicate profitability, return on invested capital, efficiency, liquidity, and leverage. Publicly traded companies are required to publish the financial information necessary to determine these measurements for public consumption. The financial information can be obtained from SEC filings and the relevant ratios can be calculated. The CFO must be careful to read the related footnotes and management discussion and analysis sections, so that additional information may be gained. It is then up to the CFO to compare various financial ratios and understand the discrepancies by investigating the relevant operating data that drives the financial ratios.

For private competitors, the financial information can be found at trade associations or publications such as Dun & Bradstreet as well as several others.

The CFO must remember the goal is not to produce traditional comparative financial statements. Operating personnel do not focus on such information. Instead the CFO must focus on the weaknesses reflected in the financial benchmarking and ask operational personnel about the related processes and how they might be improved.

A helpful supplementary tool for helping the CFO dig deep into the financial analysis and pinpoint areas for improvement is known as DuPont analysis. Essentially, it is a framework that starts with small detailed measurements of profitability and efficiency that gradually builds to the final key measure — Return on Invested Capital. This ratio indicates how well the firm creates profitability for its owners. By examining the inputs at the initial level and building up to the final result, the CFO can identify areas that can be improved and then help operating and executive managers determine how improvements can be effectuated.

The CFO plays a critical role in utilizing the firm’s financial data to provide useful information for effective management of the firm. The financial analysis of data is utilized in several ways. It can be used to facilitate business financial planning; for borrowing decisions; and for investment decisions. It is also useful for the improvement of corporate performance, the focus of this post.

Capitol CFO Solutions serves clients in Washington, D.C., Maryland, and Virginia. Please contact us for a free consultation.