Best Practices That Help Manufacturers Be More Profitable
By Jeff Appleman and Allan Tepper
Are we leaving money on the table?
That’s the question one client, a few years back, asked themselves when they realized their booming frozen food business might be underpriced.
Despite the wide popularity and strong sales of their food products, one crucial aspect was overlooked: an accurate understanding of their production costs.
The complex network of costs, including ingredients, labor, machinery, packaging, energy and transportation, was largely unquantified.
Without an in-depth analysis of these production and supply chain expenses, how could they determine if their pricing strategy was indeed maximizing profits?
The resolution ultimately involved adopting an extensive “Record to Report” strategy. The process involves thoroughly tracing every financial step—from the first entry of transactions to crafting the final financial statements, all to secure precision, compliance and insightful economic analysis.
Think of the Record to Report (R2R) process as a key foundation of your financial house, essential for supporting business decisions and regulatory compliance. Here’s how manufacturing owners and C-suite leaders can best lay down their solid R2R framework, starting from the ground up.
Data: The Cornerstone of Record to Report
Just as a sturdy house requires a strong foundation, a robust Record to Report process begins with data.
Reliable and accessible data is critical to support Business as Usual (BAU) analytics and reporting. Leading data management practices and quality processes ensure that the data used in reporting is accurate and trustworthy.
But it’s important to remember that it’s not just about having data. It’s about having the correct data at the right time. For manufacturers, this means tracking everything from raw material intake to product shipment with impeccable accuracy.
Technology: Enhancing the Control Framework
Once your data is in order, technology is the framework that holds everything together. Technology provides operational efficiency and data transparency, which are crucial for making informed business decisions.
Providing SME (Subject Matter Expert) advice on data gathering, assessment methodologies and best practices further strengthens this layer. It allows for the effective use of technology in areas such as predictive maintenance, quality control and supply chain management, all of which contribute to the integrity of financial records.
Process: Operational Efficiency and Teamwork
With technology in place, the next layer focuses on the process. A robust set of operational procedures ensures efficient workflows and hand-offs, which is vital for manufacturing operations.
Processes should be standardized to drive cross-functional efficiencies, coordination and teamwork. This aspect can be likened to the internal structure of a house, where every beam and pillar serves a specific purpose and contributes to the overall integrity of the building.
Controls: Ensuring Accuracy and Accountability
Controls act as checkpoints or quality assurance steps that validate the accuracy of financial data. These measures are critical for preventing and detecting errors, ensuring that the financial statements are a true reflection of the company’s financial status.
To put in place effective controls, organizations must implement a series of checks and balances that scrutinize financial information for material inaccuracies. These controls not only prevent errors but also promote a culture of accountability where each team member understands their role in the financial reporting process.
Establishing a comprehensive governance framework with clear policies, procedures and training programs is key to reinforcing these controls and ensuring that all employees are aligned with the company’s financial integrity goals.
Documentation: Creating a Blueprint for Success
Documentation is analogous to a construction blueprint—it is the detailed plan that guides the financial reporting process.
It outlines the procedures, policies and guidelines that dictate the baseline operating model of the organization.
Just as a blueprint is essential for builders to understand their roles and responsibilities, documentation clarifies who is accountable for each part of the process. It ensures that all financial transactions are recorded in a consistent manner, facilitating clear communication and supporting regulatory compliance.
Documentation also includes defining roles and responsibilities within the financial structure, ensuring that everyone in the organization understands their part in the governance framework.
Governance & Organization: The Roof That Protects Everything
Governance and organization within a company are the overarching structures that ensure processes are executed correctly and effectively.
Senior leadership is instrumental in establishing a corporate culture that values and rewards good behavior, akin to the roof that shelters and protects a house from external elements. This cultural framework is essential in ensuring that all levels of the organization adhere to the principles of accurate reporting, efficiency and accountability.
By setting the right tone at the top, leaders can influence the entire organization to uphold company standards. This not only safeguards the integrity of financial reporting but also reinforces the organization’s commitment to excellence and compliance.
(Allan Tepper, is a partner at CFO Consulting Partners and co-manages the firm.)
(Jeff Appleman, CPA, is a director at CFO Consulting Partners. Appleman provides CFO services to small and midsized manufacturing clients.)