The Finance Gem 💎 Week #32: The three things you need to do really well

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If you’re looking to win in business, do these 3 things really well: get finance right, scrutinize costs, and constantly analyze.

Read about each one below:

• Your Business Problems have Solutions

• 16 Powerful Cost Saving Strategies You Need to Know

• Costs aren't just numbers in your financial statements

• If you thought the CFO role is all about the numbers, think again

Most business problems fall into one of 3 main areas:

1️⃣ Profitability

2️⃣ Cash Flow

3️⃣ Growth

Use financial analysis techniques to identify and address them.

1️⃣ Profitability Issues

🎯 Gross Profit Margin Analysis: (Gross Profit / Revenue) x 100

🎯 Operating Profit Margin Analysis: (Operating Income / Revenue) x 100

🎯 Net Profit Margin Analysis: (Net Income / Revenue) x 100

2️⃣ Cash Flow Issues:

🎯 Segment cash flow by sources & uses into operations, investing, and financing

Analyze to identify trends, forecast future cash flows, and highlight potential liquidity problems

🎯 Measure the cash a generated after accounting for cash outflows needed to support operations and to maintain productive output (free cash flow)

🎯 Measure how long the business will be deprived of cash if it increases its investment in resources in order to expand customer sales (cash conversion cycle)

3️⃣ Growth Issues:

🎯Sustainability:

Revenue Growth Rate: Current period revenue / Prior period revenue - 1

🎯Risk:

Operating Leverage: % Change in Operating Income / % Change in Sales

Financial Leverage: Total Liabilities / Total Equity

🎯Debt Service Capacity:

Fixed Charge Coverage Ratio (FCCR): (EBIT or EBITDA less Cash Outflows) / Total Fixed Payment Obligations

🎯 Sooner or later, you will need to start making strategic decisions in your company.

🎯 Here's a list of 16 powerful strategies you can consider for your costs.

☑️ Just-In-Time Inventory System (JIT):

- Maintain minimal inventory
- Order as required
- Reduce holding costs
- Avoid overstocking

☑️ Vendor-Managed Inventory (VMI):

- Suppliers manage inventory
- Inventory off company balance sheet
- Needed for production

☑️ Consolidation of Suppliers:

- Reduce supplier numbers
- Streamline procurement
- Bulk-purchase discounts

☑️ Outsourcing Production:

- Don't own factories
- Outsource production

☑️ Offloading Fixed Assets & Leasing:

- Sell and lease back assets
- Convert fixed to variable costs
- Improve financial ratios

☑️ Operational Efficiency:

- Refine processes
- Use technology
- Lower operation costs

☑️ Switch to Variable Cost Models:

- Use contract employees
- Convert fixed to variable labor

☑️ Strategic Supplier Relationships:

- Strong supplier relationships
- Negotiate favorable terms
- Lock-in prices, priority access

☑️ Vertical Integration:

- Control supply chain
- Eliminate markup
- Cost savings

☑️ Adopting Technology and Automation:

- Automation solutions
- Reduce labor-intensive tasks
- Lower labor costs

☑️ Focus on Core Competencies:

- Spin off non-core segments
- Focus on primary competencies
- Reduce overhead costs

☑️ Shared Service Models:

- Centralize back-office
- Economies of scale
- Reduce redundancy

☑️ Energy Efficiency and Sustainability:

- Invest in energy efficiency
- Sustainable practices
- Long-term savings

☑️ Economies of Scale:

- Increase production volume
- Spread fixed costs
- Reduce cost per unit

☑️ Relocating Operations:

- Move operations
- Lower costs regions
- Tax incentives, favorable regulations

☑️ Product Simplification:

- Reduce product complexity
- Streamline operations
- Reduce diverse product costs

Yes, you can segment costs into Fixed & Variable.

Accrued & Deferred. Direct & Indirect. CAPEX & OPEX.

Yes, some live on your balance sheet and others actually don’t.

But costs are fundamentally about shaping competitive strategies.

About aligning with market dynamics, customer demand, and industry shifts.

The strategic management of your cost structure will determine your market position.

Because these are strategic factors influencing the profitability, health and viability of your business.


Here are 3 examples:

🎯 If your business has high fixed costs, it will benefit from a Differentiation strategy.

☑️ you’ve probably made considerable investments, perhaps in technology or research, enabling you to offer unique or superior products and command higher prices to offset those hefty fixed costs.


🎯 If your business has high variable costs, it will benefit from a Cost Leadership Strategy.

☑️ the direct link between costs and production means you can scale operations efficiently to hopefully become the industry's most cost-effective producer.


🎯 If your businesses has a balanced mix of variable and fixed costs, you’ll probably lean into Focused Differentiation or Focused Cost Leadership.

☑️ you’ll be able to serve niche markets effectively by leveraging both your fixed and variable cost advantages.


🎯 Remember:

These connections between cost structures and strategies may be just guidelines, but it’s paramount to understand:

☑️ If Business Strategy doesn’t proactively drive Costs

❌ Costs will inadvertently dictate the Business Strategy.

Yes, it’s about KPIs, spreadsheets, accounting, internal controls, and management reports.

But it’s also about influencing & guiding to align financial and business strategies.

About strong relationships with your team, stakeholders, and executives.

About strategic thinking, effective communication, and strong leadership.

Your first year as a CFO will determine your impact during your tenure.

Because your financial expertise is only half the battle.

🎯Here is a checklist with the most essential areas for CFOs to focus on, broken down in 30/60/90/180/365 days.

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𝟬-𝟯𝟬 𝗱𝗮𝘆𝘀: 𝗨𝗻𝗱𝗲𝗿𝘀𝘁𝗮𝗻𝗱

☑️ review the company's financial statements

☑️understand key revenue streams, and assess profitability trends

☑️engage with both internal and external stakeholders to gain insights on financial commitments, obligations and corporate governance.

☑️familiarize yourself with budgeting, forecasting, CAPEX plans, and the company's overall financial decision-making structure

𝟯𝟭-𝟵𝟬 𝗗𝗔𝗬𝗦: 𝗢𝗽𝘁𝗶𝗺𝗶𝘇𝗲

☑️develop a financial strategy aligned with company objectives and prioritize cash flow management.

☑️identify and address gaps in KPIs, systems, reporting, and risk management while fostering continuous learning within the finance team.

𝟵𝟭-𝟭𝟴𝟬 𝗗𝗔𝗬𝗦: 𝗗𝗿𝗶𝘃𝗲

☑️initiate and track the newly developed financial strategies, ensuring alignment with company objectives and regulatory compliance.

☑️monitor risks, refine budgeting, and prioritize resources while evaluating investment opportunities and implementing risk management solutions.

𝟭𝟴𝟭-𝟯𝟲𝟱 𝗗𝗔𝗬𝗦: 𝗘𝘃𝗼𝗹𝘃𝗲

☑️review the past six months' financial performance, reflecting on successes and challenges.

☑️refine objectives, plans, and strategies based on evaluations of capital, CAPEX, compensation, and alignment with sustainability goals.

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As always, if you have suggestions or feedback, simply reply to this email.

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Thanks so much for reading. See you next week.

Oana

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