When manufacturers should focus on finance


Most manufacturers are hesitant to invest in their financial processes unless there’s a specific need. Sometimes, there is.


“It might not be worthwhile to have qualitative best practices in all manufacturing finance functions, because the capital investment to get there might not provide an adequate return,” said Grant Thornton CFO Advisory Managing Director Ronald Gothelf. “But you want to make sure that your investment is appropriate to what you need.”


So, what do you need? In the latest Grant Thornton CFO survey, 85% of leaders said that their financial close processes were at least “fairly mature and sufficient” — yet, 95% said they were seeking improvements. Only 5% said no improvements are needed.



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When improvements are needed


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.

Headshot of Mike Hennessey

“If you have a requirement to get your financials to your debt holders in a certain number of days, you may be able to reduce the interest rate associated with your debt if you close faster and get your lenders that data sooner.”

Mike Hennessey

Grant Thornton CFO Advisory Principal


“We’ve seen a number of clients that have specifically made investments to improve a close process,” Gothelf said. “A lot of private companies don't significantly focus on improving their close, yet when they take on some equity ownership, debt or other investments, they realize how important it is to show the market you have a high-quality close done in a reasonable duration.”


“If you have a requirement to get your financials to your debt holders in a certain number of days, you may be able to reduce the interest rate associated with your debt if you close faster and get your lenders that data sooner,” said Grant Thornton Principal and National Finance Modernization Leader Mike Hennessey. “That has a real, tangible ROI because you will have less interest rate expense if you accelerate your close.”


As manufacturers seek capital to fund growth in a competitive market, the speed and accuracy of the financial process can come under scrutiny. “If all of your peers are at a 7-day close and you're at a 10-day close, that creates a little bit of a question as to whether the organization is being managed effectively,” Gothelf said.


In the competition for capital, it’s important to understand how your organization’s financial processes compare.


Benchmark performance


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.

Headshot of Kelly Schindler

“I see some CFOs who don't really trust their own data. That can be because it takes so long to close, because there's a lot of cleanup, or because something else needs to be improved.”

Kelly Schindler

Grant Thornton Manufacturing Industry Incoming National Leader


Decision makers need to connect process performance to business performance, and they need to have faith in that connection. “I see some CFOs who don't really trust their own data,” Schindler said. “That can be because it takes so long to close, because there's a lot of cleanup, or because something else needs to be improved.” Many manufacturers need to reconsider the financial metrics they track as leading indicators. “Companies need to identify their key metrics. A lot of companies talk about how many metrics they have, but they need to focus on which ones really matter to them — and what they mean, besides just doing the math.”


The Financial Planning and Analysis (FP&A) function can help identify the key metrics for the particular organization, from an overall performance perspective as well as from an individual functional process performance perspective. Then, FP&A can help ensure there are mechanisms to capture the data necessary to accurately measure and report on the results. By benchmarking across performance metrics, staffing metrics, cost metrics and other indicators, you can identify the source of current or potential issues for your organization.




The assessment


When organizations need to improve the speed, quality, or types of metrics from their financial processes, they can start with a functional assessment. This assessment can include qualitative best practices to improve functions (like treasury or FP&A), along with quantitative benchmarks of process performance. Then, it can help provide a bridge that connects how the efficiency and effectiveness of key functions help to drive the overall business performance.

Headshot of Ronald Gothelf

“Too many manufacturing companies measure all of their variances at a whole, and measure their profitability as a whole, without thinking about the decomposition of the components like distribution, transportation, sales, delivery .”

Ronald Gothelf

Grant Thornton CFO Advisory Managing Director


“Look at the important measures that are really telling you overall throughput, and make sure that the numbers are accurate, not creating incremental variances,” Gothelf said. “Even though we look at a manufacturing company as a whole, to truly understand value, we have to measure things from a business segment perspective. Too many manufacturing companies measure all of their variances as a whole, and measure their profitability as a whole, without thinking about the decomposition of the components like distribution, transportation, sales and delivery. They just put everything into the plant and manufacturing, and that doesn't provide an accurate understanding of costs.” The generalized costs also keep you from understanding the cost of serving different markets or customers that might not use all of the components of the business.


“For example, you might have very high-volume customers that are direct customers of a plant, and you might have retail customers that go through a distribution or retail network,” Gothelf said. “The costs to serve those two different customer groups are significantly different. Making sure that any variances are allocated appropriately to the customer groups of those different business segments is critical to understanding the valuation of a company, how that company might be valued externally in the market, what investors it can attract, and the cost of those investments.”


Both internal decision makers and outside investors will also need to understand the financial value of any emerging service revenue. “Many manufacturing companies have evolved to also become service companies, providing services to their customers,” Schindler said. “Those costs aren’t factored into the widget cost, they’re sitting on the side. Therefore, that service element isn’t getting rolled into the costing models because the models are old and service was not considered in cost evaluation.”


Your finance function must provide a clear and comprehensive understanding of your costs today, so that you can accurately plan for the future.


Project the future


“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.



Mike Hennessey

Mike Hennessey is a Principal in the CFO Advisory practice of Grant Thornton located in Charlotte, NC.

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