Hi and welcome to Be The Flagship with our podcast host Jeff Parsons.
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Take it away Jeff.
Hello, hello.
I'm Jeff Parsons and welcome back to Be The Flagship where we focus on all things operations.
Today we're continuing our discussion with guest speaker Jeff Smith.
And in this episode, you don't want to miss it, in this episode we're focusing on how
to create a dynamic finance strategy that will drive operational excellence and support
achievement of business goals.
So can't wait to get started again Jeff.
Thanks again for being with us.
Glad to be back.
But before we do get into strategy Jeff, let's talk about the role of technological integration
and its impact on finance and operation.
So Jeff.
How can technology and tools enhance operational decision making?
Yeah.
So I've had the, I'm not sure whether to call it the pleasure or the misfortune, implementing
a whole bunch of business systems in my career.
Okay.
I've implemented Oracle, I've implemented Microsoft Dynamics, I've implemented some
lower tier ERPs.
One of the beauties of an enterprise resource planning system is that it integrates both
operations and finance, right?
It takes your inputs, your inventory, your transforming resources and helps you to plan
out what you need to do and when and feeds directly into the accounting system.
The downside is that when things go wrong, they go drastically wrong.
And so you'll hear in a lot of manufacturing operations that MRP stands for more wrong
parts.
Right.
And the reason for that is that if you have error in your flaws in the logic of your ERP,
it's going to drive signals that are incorrect.
And so technology has helped us in so many ways, but we still have to understand the
fundamentals behind it in order to generate the right results.
Yeah.
I've gone through systems implementations before and on the surface it sounds, oh, this,
you know, we stopped using this system, we start using the new system, but nothing is
that easy, right?
You know, and everyone ought to have at least one ERP implementation on their resume.
Just one, but everyone should have at least one.
It's a character builder.
Yeah.
So before we talk about finance and strategy, there are a couple of other things.
So can you share any examples or case studies where strong financial management significantly
improved operational outcomes?
We talk about a hundred of them, but...
I'll take one.
Yeah.
So sure, I walked into a company as a new director, I was coming into an MTC that was
previously filled by somebody who'd been with the company for a long time.
Okay.
So one of the things that I do when I come into a new position is that I spend a lot
of time with the balance sheet because the balance sheet will tell you a lot of stories.
Okay.
So I, you know, first I look at the account reconciliations, make sure that the account
reconciliations are done and that I understand them and that the detail behind them is true
and accurate and has reasonableness to it.
In this case, one of the things that I noticed was that there was no allowance for bad debt.
Okay.
So I went and asked them about it and they said, well, we don't have bad debt.
And I'm like, okay, well, that's an interesting take on it.
So I put that in my little risk register.
Right.
You know, there was other aspects to the balance sheet that were not making sense and that
needed to be cleaned up.
Okay.
So started digging into accounts receivable and I realized that there was stuff on the
accounts receivable that was years old, not just, you know, out 90 days, it was years
old.
Okay.
And so I'm like, well, you don't have bad debt because you don't write anything off.
So, one of the things that I did was I signed down and with the accounts receivable people
and we put together a plan and I said, we got to get rid of the noise, the stuff that's
truly not collectible.
We need to write it off.
We need to take that up to the senior leadership team and explain why we're writing it off.
And then of the old stocks that is, you know, doubtful, but we still need to work at, let's
work it.
Mm-hmm.
And let's take a very structured approach to it.
And so in a period of six months, I took our accounts receivable from, I think it was $60
million down to about $30 million.
Oh, wow.
Of which we collected about 20 million of it.
Oh, wow.
And we wrote off the other.
So that had very real impacts on our cashflow, right?
And it had very real impacts on the results of the business.
So and by taking and focusing the conversation, focusing the department, we were able to increase
our cashflow.
We were able to get our accounts receivable down to something that's manageable and explainable
and more accurately represent our financial statements, our income statement, our bad
debt.
So...
Great example.
I mean, that's $20 million.
That's truly a significant impact, right?
Yeah.
So, you know, let's get this out of the way before we talk about some of the higher level
finance functions.
So from your perspective, what's the difference between finance and accounting?
Okay.
So it depends on where you go.
I've worked in companies where there's a hard line between finance and accounting.
So accounting in those companies, accounting took care of the historical and the outward
facing aspects of reporting.
Okay.
Whereas finance was more focused on the managerial side of it, the forecasting and budgeting,
the management statements that are not necessarily generally accepted accounting principles.
They can be more flexible that way.
Okay.
Right.
Whereas the accounting is all within those guidelines of what they call gap.
Yeah.
Right.
So in other areas, in other companies I've worked in, there's a blurring of the lines
between finance and accounting.
And that's where I function best because they are not distinct.
One contributes to the other.
And so there is the reporting aspect that goes external, but there's the management
accounting aspect, the controls and the reporting and the cost accounting that all goes into
the results of the company.
And those two have to really reconcile.
Okay.
You can't have management reporting that is not related at all to the external reporting.
Right.
So they're really closely related, but one is more internally focused, one is externally
focused.
Got it.
Which is again, a nice segue to talk about strategy because based on your description
or differentiation between accounting and finance, I would see the role.
I know that accounting feeds into strategy, but I would say that the finance leader is
the person who's really holds the responsibility for working with senior leadership and the
rest of operations to develop strategy.
Correct.
So you'd have a great finance person who thinks very strategically, who's not the best accountant.
They understand the role of accounting and they know it's important, but they don't really
want to go down and do that level of work.
That is correct.
And you can see a lot of accountants who are really great accountants, but they don't really
think, they think very tactically.
They don't think very strategically.
So that leads us perfectly into the next topic, which is finance strategy.
But before we get there, let's take a quick break.
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Okay.
So we are back with Jeff Smith.
So Jeff, so I know that you've presented it before on this topic, Jeff, on finance strategy.
And I'm familiar that you delivered a presentation to a conference of professionals.
You know, it was called Strategy 101 and you've been kind enough to share that presentation
with me.
And I'd like to have you walk through some things for me if you don't mind.
You know, when I look at the first slide of the presentation you made, you know, it was
like 48% of all organizations fail to meet at least half of their strategic goals.
You know, that's a broad statement.
48% fail to meet at least half of their strategic goals.
Why do you think that's the case, Jeff?
Well, I think there's a couple of things.
The first one is, and let me lay out kind of a situation for you, is the annual strategic
plan usually starts in May, wraps up in June, right?
Or sorry, March and ends, wraps up in June.
So it's roughly a three-month period.
One quarter of your year is spent in focusing on preparing the strategic plan, right?
So your senior leadership team all gets together in a room and they talk about what's important,
where they want to go, all that sort of stuff, all high-level stuff.
And they get it together and they present it to the, either the shareholders or to the
parent company or to some other group, right?
And then they got to go back and tweak a few things and then do the final presentation.
The strategy is accepted and they go out for a beer.
They congratulate each other on a job well done.
But then the next day they've got to go back to their operation and they've got an operation
to run in the four disciplines of execution, they call this the whirlwind, right?
The whirlwind takes over your life, right?
So all those things that you said were important for the future take second priority to what's
in front of you right now.
So a study of senior leadership people that should be working on strategy spend less than
one day per month working on strategy.
Wow.
So one day of 20 is 5% of their time working on strategy.
Should be at least 30% of your time working on strategy, right?
Right.
So one of the things is that people are not focused on the strategic plan.
And so what happens is that after that celebratory beer, after the presentation, the strategy
strategic plan goes on to the bookshelf.
And then the next March they pull it off the bookshelf, they blow the dust off it.
What did we say last year, right?
Right.
The other thing is that the economists interviewed a whole bunch of executives.
They said that they struggle to bridge the gap between strategy formulation and day to
day operations.
So what am I doing today that supports the strategy that I said was so important to the
future of the business?
And they struggle to make that connection.
And I think that's where the real magic happens in my experience is that strategic planning
happens typically March to June.
And then in September you start your operational plan.
And the operational plan is what am I going to do next year, right?
But there's often a disconnect between those two planning processes.
One is a lot of what businesses do I want to, what markets do I want to compete in,
what products do I want to bring to market, all those sort of high level things.
Because the operational plan is how much is it going to cost me to make the things that
I, sales is saying they're going to sell, right?
And so bringing those two together, I think is where the magic really happens in achieving
strategic goals.
So what is, again, this sounds like an obvious question or answer, but what is a strategic
plan?
Well, really a strategic plan answers the questions of what business do I want to be
in?
And how do I want to compete in that business?
What products am I going to bring to market?
Well, it really answers the question of what problem am I trying to solve?
Every good business is solving somebody else's pain.
I need to get from point A to point B. I need to buy a car, right?
So an auto manufacturer is solving at its root the problem of transportation.
It's also including other things like when you add in all the creature comforts and the
status and all that sort of stuff, it's solving multiple issues, but at its core, it's solving
the transportation issue.
Gotcha.
Okay.
So what are the steps in creating a strategic plan?
I know there are several steps involved.
Walk us through those steps.
Really, it starts with making sure that you're aligned with your mission, your vision, and
your values.
Why am I in business?
What am I trying to solve?
What is the overall the big why?
Your vision is what do I want my business to look like?
How do I want people to perceive my business?
And then values is how do I want to operate?
What are my ethics?
What's my social responsibility?
How do I view the customer, my employees, my vendors, my stakeholders?
How do I interact with those?
Okay.
Mm-hmm.
So every strategic plan has to be consistent with what our mission is, what our vision
is, and what our values are.
And then we look internally.
We do a self-assessment, and we can use different tools like SWOT or GAP analysis or to look
at what our current state is and what our current results are so that we have a baseline
of where we want to go.
We then look to the competitive environment of what's going on around us.
Is our product unique or does everybody make one?
Who are my suppliers?
Who are my customers?
Are there people that can come into my business and take it over and eat my lunch?
Or is there substitutes that you can have that instead of buying my product, can buy
one that's kind of like it, right?
Right.
And so there's all these forces that are at play within the competitive environment.
So armed with the knowledge of the self-assessment in the competitive environment, where do I
want to go?
That's the planning phase.
What are the activities that I need to do today, tomorrow, next year, the year after
in order to get to where I want to be into the business that I want to compete in?
And so you've put together this plan and you put goals in place, milestones and KPIs and
other metrics, right?
Then there's the execution phase.
And that's the one that we just talked about where people fall off, the wheels fall off
the bus.
And that execution is just so important.
You set priorities, you set accountability, you communicate, right?
And then there's the optimization phase.
You should be reviewing your strategic goals on a regular basis.
You update your strategic plan every year.
I've worked in companies where the strategic plan from last year is completely different
than the strategic plan from this year.
Strategic plan should be an evolutionary sort of thing where you're reviewing what's working
well, what's not working well, has the environment changed?
What do I need to adjust to continue to move towards that strategic goal?
It shouldn't be throw out the old plan and build a whole new one, right?
Right, right.
Overlaying all of that is communication and behavior.
What is the words and the actions of the senior leadership team telling the operation, right?
Because we can have a plan and it can sit on the shelf and look all pretty, but unless
we're living it and speaking it, it's not gonna do anything.
Right.
Our people are not going to follow unless they know where they're going.
Right.
That's right.
So, yeah, it's more than, it's a process.
The planning is actually a process, not an activity or an event.
Correct.
Okay.
So, we mentioned tools for assessment, internal assessment, but Jeff, if you don't mind, let's
pick up here next week in our next episode in finance and operations and talk more about
tools for internal assessment and help you assess where you are compared to where you
want to be.
Let's take one more break and then I'll come back and we'll wrap up.
Thank you.
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Okay.
We're back.
So thanks again, Jeff, for your contribution today.
And don't forget, you can contact Jeff Smith at jeff.smith at dynamicstrategylc.com.
That's Jeff.
It's spelled G-E-O-F-F dot Smith at dynamicstrategylc.com.
Join us next week for the third episode in this series, Finance and Operations, with
our guest speaker, Jeff Smith.
Until then, be the flagship in your organization.
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