Preventing Financial Surprises: Four Essential Steps for CEOs in Manufacturing

If you’ve ever asked, “How Can These Numbers Be Right?” you’re not alone. Seeing unexpected dips in margins or other financial surprises can be frustrating. But often, the issue isn’t faulty accounting—it’s operational inefficiencies.

Accountants don’t create the numbers; they report on what’s happening in your business. Poor execution leads to poor financial results. So, how can you stay ahead?

Here are four tips to avoid financial surprises at month-end:

Focus on Cash Flow

Many manufacturing CEOs focus solely on revenue and margins, overlooking cash flow. A 13-week cash flow forecast can be a game-changer. By comparing weekly actuals against your forecast, you’ll gain a clearer, more frequent view of incoming and outgoing cash. This practice reduces the likelihood of month-end financial surprises.

Track Key Performance Indicators (KPIs)

Operational KPIs provide insights beyond financial statements, helping you understand the drivers behind your results. Consider these critical metrics:

• Days Sales in Backlog (DSIB): Measures how long it would take to fulfill current orders. A healthy backlog provides stability.
• Inventory Turnover Ratio: Tracks how frequently inventory is sold and replaced. High turnover ensures cash isn’t tied up in unsold goods.
• Current Ratio: Indicates your ability to meet short-term obligations. A ratio above 1 is ideal.
• Employee Productivity Ratio: Reveals workforce efficiency by tracking revenue per employee. Aim for consistent month-to-month results.

Review Account Reconciliations

Regular account reconciliations ensure your financials accurately reflect business activity. If left unchecked, minor errors can snowball into major problems. If you’re unfamiliar with your balance sheet details, have your accountant walk you through the reconciliation process. It’s beneficial for you and your accountant to have a second pair of eyes on the numbers.

Take Control with Weekly 1-on-1s

Sales Team: Uncover True Sales Activity Levels

Sales and finance often operate with different mindsets—sales thrives on creativity, while finance is rooted in routine. To keep sales activity on track, ask your sales reps weekly:

• Who did you talk to?
• What did you discuss?
• What opportunities are you pursuing?

Hearing the same names and conversations repeatedly is a red flag. Challenge these patterns to ensure progress and prevent complacency.

Operations Team: Track Key Metrics Daily

The factory floor can be challenging to monitor, especially when managers are caught up in day-to-day problem-solving. To maintain clarity, ensure your operations leaders can always answer the following:

• How much was produced today?
• How many labor hours did it take?

Consistent labor hours with fluctuating production levels signal inefficiencies. If production falls short, you can anticipate unfavorable financials—avoiding unpleasant surprises at month-end.

The Bottom Line

Focusing on cash flow, tracking KPIs, reviewing reconciliations, and conducting regular 1-on-1s will help you gain better control over your business. Proactive monitoring helps you stay ahead of issues and ensures financial results never blindside you.

Stambaugh Ness has helped numerous manufacturers implement simple tips like those recommended above in their organizations. Reach out for a brief call to see how we can help you.