Hi and welcome to Be The Flagship with our podcast host Jeff Parsons.
This is where we tackle the day-to-day talent management challenges you face.
And now over to our host.
Take it away, Jeff.
Hello and welcome to Be The Flagship.
I'm your host Jeff Parsons and today is episode two of our series Finance and Operations where
we discuss the role of finance in supporting the operational excellence and business success
for organizations and continuing our discussion today with our guest speaker Jeff Smith.
So Jeff, thank you for joining us again today and for continuing our discussion on the role
of finance and operations.
Glad to be back.
So Jeff, in last week's episode we talked about the importance of financial education
in organizations.
We talked about the role of finance and how finance adds value to organizations and contributes
to organizational excellence.
We talked about budgeting and forecasting and some of the critical things to keep in
mind there.
We had a discussion on cost management, on financial metrics, on capital allocation and
we left off there.
And so what I'd like to do is pick up our discussion this week and start with the role
of finance in risk mitigation.
Tell me about risk management.
You hear the term.
There may be some listeners or operational leaders out there who really don't know exactly
what risk management is.
So from your perspective as a finance guru, tell me about risk management.
What is it and what's the role of finance in identifying and mitigating operational risks?
Yeah.
So risk management again is on several different levels.
And so from a direct accounting perspective, we put controls in place to mitigate risk.
And so things like having a sign off on your expense report is a control process to mitigate
the risk of employees going and spending like drunken sailors.
And spending on the wrong things.
Having purchase orders in place is a control that mitigates the risk of buying too much
inventory at a price that's not good for the company or buying the wrong materials.
So you have controls in place to mitigate risk.
And one of our jobs as accounting people is to make sure that the controls make sense
to the risk that's involved.
And so biggest risk is in cash.
Every business needs to control their cash, make sure they reconcile their bank accounts
on a monthly basis.
Make sure that their cash is safe because that is the heart and soul of the organization,
right?
Right.
Whereas things like pens and paper and lower value items don't need as much control.
And so we have to make sure that the cost of the control is relative to the risk that's
involved, right?
So do I need to have a purchase order that's signed by multiple levels to order stationary
supplies or could I just put it on a purchasing card, right?
And so is the cost of the control relevant to the risk that's involved?
But there's other types of risk.
There's overall business risk that's covered by insurance.
One of the clients that I worked for, we had to assess a worm farm because-
Hey, wait a minute.
Wait a minute.
Worm farm.
Yes.
So it was a soil blender.
Okay.
One of the inputs is worm castings, which is worm poop.
But what would happen if their entire population of worms died, right?
Yeah, right.
They would have to change their operation until they could reestablish that population
of worms.
And so we assessed the insurance risk of that and we assessed how much insurance that we
needed to carry in the event that something catastrophic happened.
So how difficult is it to get worm insurance?
It's a form of business interruption insurance.
Yeah, right.
You know, something that we all carry in businesses.
So that's another form of risk.
And then the other form of risk that we talk about is from a project basis is identifying
a risk register.
And in many respects, budgeting and forecasting is a type of project, right?
So you look at the overall project, you say, okay, if everything goes perfect, this is
what's going to happen, right?
Right.
We all know that we work in an imperfect world and so things will happen.
And so you develop this list of, okay, what could go wrong with my operation?
And so then you identify, well, what can I do to mitigate those risks?
And so you have this risk register and this mitigation plan, right?
And I've seen that applied in businesses where you have several different business units
all reporting up into a parent company.
The parent company takes the aggregate total of all those budgets of the business units
that are reporting up into it and then it applies this risk register of not all my business
units are going to operate exactly as they've budgeted.
And so they put a contingency in place so that when they're reporting to the shareholders,
they're reporting something that's different than just the aggregate of all those business
units budgets.
Interesting.
I still, I can't get this picture out of my head of a guy in overalls farming worms.
I just, you know, I know.
It's really interesting because the beauty of what I do is that we've talked about people,
product and process.
So I've worked in heavy goods manufacturing, I work in high tech and I've worked in dirt.
And it's fascinating because you can learn so much about every business.
So that's right.
Again, yeah, I have similar experience in various industries and learning from those
industries so very interesting and a great example.
So Jeff, while I try to get worm farming out of my mind, let's take a quick break.
At Flagship Talent, we work with our clients to find and place the right talent.
What do we mean by the right talent?
We mean we find talent who will commit to your organizational goals and align with your
values and behavior expectations.
Talent who will perform to your expectations.
Talent who will stay and grow with your organization.
How are we different from our competitors?
We offer the lowest fee structure in the industry.
We offer the best talent guarantee in the industry.
We provide selection and interviewing support to our clients at no additional fee.
We want to save you money, deliver high quality talent, become an extension of your organization
and be your preferred provider of talent acquisition solutions.
To learn more, contact Jeff Parsons by email at jeff at FlagshipTalent.com or by phone
at 1-800-530-4189, extension 101.
All right.
We're back with Jeff Smith.
So in organizations that operate on a JIT or a just-in-time approach, I would imagine
risk management is really super important because if you have a supplier, they have
a piece of equipment go down and they can't deliver to you when you need to deliver it
to your customer, then you're going to shut that customer down.
And so you have to have a plan B, maybe a plan C to make sure that doesn't happen.
There's that trickle down effect of inventory is one of our biggest risks.
You have so much that can go wrong with it.
You can forget to order.
You can have a supplier that runs out of stock.
You can have things that are delayed in customs or you can have a quality issue, a bad batch
of product.
All those things can go wrong with your inventory.
And so it's not infrequent for companies to have safety stock, especially on their critical
pieces of inventory, because if they're missing a deadline, either the customer is going to
go somewhere else or something catastrophic is going to happen with the customer and you're
going to have to pay penalties.
Yeah.
One of the interesting things I learned earlier in my career in operations is that, and it
certainly surfaced in the education I was providing to supervisors and their bosses
and how cash moves through manufacturing organization is that there's a difference between generating
cash and generating revenue.
You can generate revenue, but again, going back to your processes and being efficient
you've talked about earlier in the discussion, if you're receivables, if you're not receiving
the cash, then you can have a cashflow problem.
So you could be a successful business, but if you have a cashflow problem, you can't
make your payroll and you can't pay your bills, you can't do those things and companies go
under because of cashflow issues.
Although it was a successful business as it relates to sales and that sort of thing, but
they had a cashflow problem.
Yeah.
Very, very true.
And one of the measures that I didn't mention before that I really love is what's called
the cash conversion cycle.
Basically what it is is if I take an investment of a dollar, how long is it going to take
me to get that dollar back?
If you think about your three major things, your accounts receivable, your inventory and
your accounts payable, right?
I buy inventory and on the day that I get it, I incur accounts payable, right?
If it takes me 30 days to take that inventory and turn it into a saleable product and then
I sell it and then it takes me 45 days to collect down it, I'm getting from day zero,
I'm getting 75 days to when I collect on my investment, right?
But I've got accounts payable and say I've negotiated 45 day payments on my accounts
receivable.
Right.
And now from the time that I actually paid my accounts payable to the time I collected
on my accounts receivable is 30 days.
Right.
And it makes a significant tremendous impact on the business.
It does.
And so if I'm in growth mode and I've got increasing sales, that means I have increasing
inventory and increasing accounts payable, that 30 day period is going to be a huge impact
on the business.
So managing your cash conversion cycle and understanding how much money I'm going to
need at my projected rates in order to fund that 30 days is really important.
Yeah.
Good discussion.
You spoke about lean, you referenced lean earlier in discussion, operational efficiency.
So in what ways can financial analysis contribute to improving operational efficiencies?
Yeah.
So we talked about controls before, we talked about risk management.
One of the biggest part of the balance sheet for a lot of manufacturing companies is their
inventory.
And so accounting can have a direct impact on the operational efficiency of a business
just by the way that they contribute to the controls of the inventory.
Okay.
In the past, accounting would shut down operations for the annual physical inventory.
Yeah.
A bunch of people would count all the inventory, they would input it into the business system.
And typically those things would be wrong.
They would introduce error into the inventory population.
Right.
So the key to good inventory management is knowing what you have and knowing where it
is.
So not only do you have to have it in stock, you have to be able to find it.
And so when you do the annual physical inventory, things get all messed up and you don't know
what shelf it's on and all that sort of stuff.
It might as well not even have the inventory.
Right?
So a good cycle counting system can help to prevent the annual physical inventory.
Gotcha.
If we can put in place a cycle counting process in which you're counting your A items 12 times
a year, your B items four times a year, your C items once a year, and you're just counting
a small percentage of the population every day, finding the error in the inventory, identifying
the root cause of it and correcting the root cause, you're now pushing your error out of
your inventory.
If you can demonstrate that your inventory is accurate through your cycle counting process,
you can get the auditors to buy off on eliminating that annual physical inventory.
Now you don't have the disruption of the operations.
Now you don't have the inaccuracy that the annual physical introduces into the system.
So now you can find your product every time and you're pushing the error out because you're
investigating and correcting the upstream processes that are introducing errors into
your inventory.
That's interesting.
I do remember the days of being on the inventory count proof.
Been there, done that.
War stories.
It wasn't a coveted role at the time.
So as I mentioned earlier, finance and accounting groups are support groups for operations.
They support the success of operations.
In order to do that most effectively, there has to be some degree, and you've referenced
it several times in our discussion, there really needs to be a certain level of partnering
and collaboration with the operational staff and team.
I can tell from your earlier discussion that you really value being a part of the operations
process and not just over in the corner doing bin counting and that sort of thing.
You like to be engaged in the process and learn the process and that sort of thing.
So how important is it really to collaborate?
And I know it sounds like an obvious answer to it between finance and operations department.
So how important is it in your experience and how effective has it been for you?
And then what are some best practices for fostering collaboration?
So A, it's absolutely fundamental to what I do.
Not everybody goes about accounting the way that I do it, but in my mind, I understand
financial results better if I can understand the upstream processes.
Okay.
I love to go out on the shop floor and I love to watch the process.
I love to be able to touch and feel and understand what's going on so that when I look at the
financial results, I can tell the story behind the financial statements.
So it helps me, but I also view operations as my customer.
So when I led accounting departments, I encouraged all of my staff, the accounts payable person,
the accounts receivable person, the cost accountants, the entire staff, I encouraged them to always
have a pair of steel toe shoes under their desk because I wanted them to go out on the
shop floor.
If they had a question about something, I wanted them to go out on the shop floor and
ask the question out on the shop floor because that would help them to understand what they're
doing.
Whether it's accounts payable where they're looking at a bunch of invoices and what's
this widget?
Right.
You're understanding what it is so that they can understand is $10 per unit a reasonable
price or should I be questioning this?
Or if it's the cost accountant and trying to understand why we have this variance, go
out and understand it.
And so by doing so and treating our operations people as if they're our customers, we're
providing a valuable service to them.
And then when we're looking at the senior leadership team, we're able to tell a good
story about what's actually happening in the operations and not just a bunch of numbers
on a page, but the things that contributed to those numbers.
Yeah.
You know, the trick is to create good relationships and a sense of collaboration, a sense of partnership
because sometimes it's easy to fall into a more adversarial relationship and HR has the
same challenge.
Sometimes in HR we forget that we're not the customer.
We have our customers, but we're not the customer.
And sometimes the other administrative areas sort of fall into that trap sometimes too.
You give me this and you give me that as opposed to I'm going to go out here and work with
them.
My job is to make your life a little easier, make better decisions and things.
Right?
Yeah.
Okay.
Let's take a final break and then we'll be back to wrap up our discussion with Jeff Smith.
At Flagship Talent, we work with our clients to find and place the right talent.
What do we mean by the right talent?
We mean we find talent who will commit to your organizational goals and align with your
values and behavior expectations.
Talent who will perform to your expectations.
Talent who will stay and grow with your organization.
How are we different from our competitors?
We offer the lowest fee structure in the industry.
We offer the best talent guarantee in the industry.
We provide selection and interviewing support to our clients at no additional fee.
We want to save you money, deliver high quality talent, become an extension of your organization
and be your preferred provider of talent acquisition solutions.
To learn more, contact Jeff Parsons by email at jeff at FlagshipTalent.com or by phone
at 1-800-530-4189, extension 101.
All right.
We're back.
And Jeff, thank you so much for your contribution.
We really appreciate what you're bringing to this series on finance and operations.
Thanks, Jeff.
And Jeff will be joining us again next week in episode three of this series on how finance
supports operational excellence, helps achieve business success.
So join us again next week with Jeff Smith.
I'm looking forward to it.
I am as well, Jeff.
But in the meantime, should any of our listeners want to contact Jeff, you can do so via email
at jeff.smith.com.
Jeff.smith.com.
Until next time, work hard to become the flagship.
Thank you.
Bye.
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