By André Chaves, partner at FALCONI
Traditionally the view of the financial results of an organization was limited to the accounting department and a small portion of senior management. Mid-level managers, support areas and operational teams exclusively controlled the results of technical indicators (e.g. amount of input/units produced) of their respective areas.
This segregation, although natural, does not guarantee the survival of the organization in the long run. A more contemporary and more efficient way to achieve results is to spread the use of economic and financial view at all levels.
Knowledge in finance, which measures the actual organization’s sources of wealth should be spread across all hierarchical levels. We must be able to see the flow of money within the operation.
Whatever area you work, answer the following questions:
Knowing in detail how resources enter the company and how they leave is the first step to prioritize efforts to improve the results in those places where there is a greater chance of return.
Although it seems to be a trivial exercise, the use of economic and financial focus on the day-to-day operation management presents a great deal of challenges.
The main one is the lack of knowledge from managers and operational staff in relation to financial aspects causing the focus of process improvement to be defined and exclusively oriented to technical indicators.
A good example is a company whose activity demanded a high energy consumption and, therefore, had worked extensively for several years to reduce its specific fuel consumption (Kwh/unit produced). While significant gains have been achieved initially, the company reached a plateau which could only be surpassed with heavy investment in new equipment. At this point, the operating managers said that nothing else could be done. However, when we add to the problem analysis the price of the input and its variation, we were able to identify that there was a huge opportunity by adapting the production schedule for times when the price of the Kwh was lower. That is, without the need for investment or improvement of the technical indicator it was possible to obtain a significant cost reduction.
To tackle this problem, it is necessary that the company promotes, through its organizational structure, the unfolding of its goals based on an economic and financial analysis of operating indicators, assessing and prioritizing the improvement focuses according to their impact on the end result (e.g. EBITDA).
As Professor Vicente Falconi says “those who do not measure cannot manage”.
This development should reach the level of the operation to ensure that all efforts made there are connected to profit through a direct relationship of cause and effect. Everyone involved, from the manager to the operators, should be engaged and trained to understand how and why these targets were established and what its impact on the bottom line is so they can work in a coordinated and complementary manner to achieve the necessary goals for the company’s survival.
Then, action plans must be developed and implemented in a systematic routine of follow-ups, always reported in technical and financial values, established for the deviations from the plan to be identified and prioritized for correction.
Many Brazilian companies have recognized and adopted with great success this working method, known as Management by Guidelines* based on the PDCA (Plan, Do, Check, Act) cycle.
When the entire organization incorporates this quantitative economic and financial vision to its daily routine, efforts begin to focus on improving those activities that have the greatest impact on value creation, it decreases waste and incentive programs linked to profit become more effective. These combined factors have a major impact on the long-term balance of companies.
Published on Feb. 17, 2017, on LinkedIn Pulse.