I spoke with a CEO today, referred to me by a business associate, about providing CFO services to get their financial records current and their financial reporting up to what is needed to manage the business. It didn’t go as I had hoped.
The CEO’s company, in the business of refurbishing major pieces of equipment operated by large companies, gets their business when customers send them a project to complete, sometimes providing materials and sometimes leaving that up to the company’s procurement team. Adding parts and labor is always involved, and the company charges all those costs to job numbers associated with the project. Pretty good, huh?
Well, not quite. The company does not ever compare those costs with the price they charged for the project to see if they made money, lost money or broke even. The CEO believes any financial reporting beyond the monthly standard reports – balance sheet and income statement – is an unnecessary cost in an environment in which he is trying to keep costs to a minimum. (At the outset of COVID sales dropped and the company laid off, among others, their CFO and Controller.)
Let’s think about that for a moment.
If a company is trying to fix its bottom line, cutting costs is a good idea – usually the first one that comes to mind. But then increasing gross margins is another, more all-inclusive way, achieved by
- cutting job costs,
- increasing prices to customers, or
- better managing the production processes through measuring and reacting.
But if you don’t know how much you made or lost on Project A or Project B, you risk losing money on new business vs. making money, and not even knowing it. You can’t cut costs enough to escape that dilemma. That’s why we insist clients have management reports geared to their unique needs, rather than simply relying on the reports that come out of a prepackaged software product. Those standard reports are mostly designed for outsiders, not for running a profitable business. For that purpose the standard reports are only the starting point.
Whether a company sells its own products or does work to its customers’ specifications, that cost capture and management is essential to profitability. Standard management reports can include a wide variety of data analysis, depending on the nature of the business the company is in. But certain things MUST be measured to avoid trouble:
- The profit earned from each major product or project the company undertakes,
- The overall profitability of a relationship with each of the company’s major customers,
- The relationship between overhead costs and sales volume, a key part of gross margin analysis.
Whether your business is making airplanes or selling cotton candy, you’ve got to know the answer to each of those touch points, every month, every quarter, every year. And you need the accounting team to be able to produce that, ARTistically (Accurate, Relevant, Timely).
And that’s what the CEO I spoke with today doesn’t yet understand. I hope you do, though.
We are Your CFO for Rent.