Helping non-financial partners make stronger business cases
Non-financial managers bring much-needed operations focus into workplaces. Yet, because these managers typically lack strong financial acumen, it’s sometimes difficult for them to make strong business cases when they haven’t clearly identified the financial benefits. To name just a few areas of impact, they must consider the value and cost of capex spending, downtime, hiring, retention, and general policies when communicating their positions. They require insight into operating data and how related decisions impact financial projections.
This isn’t natural for most non-financial managers, and as such, FP&A can play a pivotal role in helping educate non-financial managers and facilitating a better understanding of financial implications. Interestingly enough, in recently years, we’ve found more companies seeking financial training for their non-financial managers and leaders. On the FP&A side, we’ve seen more companies venturing into rotational programs that allow them to align with operating segments of the business.
When I spend time with non-financial managers who seek to communicate more effectively in financial terms, I encourage them to start with the basic financial statements: the profit & loss, balance sheet, and statement of cash flows. Inherently, nearly every activity within a business has one or more financial implications. While it takes effort, if we can reverse engineer our decisions into activities, into journal entries, and ultimately financial statements, we can better convey the financial implications of our decisions.
Here’s an example of this approach. It should be no surprise that as companies seek to be good places of employment, they explore ways to entice and retain top talent. This means offering compensation and other meaningful benefits that are attractive to the workforce. Many perquisites now being offered by companies come with a hefty price-tag, yet allow the company to maintain its competitiveness in the market. One such a perquisite would be paid-time-off for new mothers and fathers. In the United States, unlike many developed countries, there is no law that mandates paid leave. When we do witness paid leave, it is mandated by company policy, not federal law. Because other companies offer these benefits, human resources at one particular company may deem such benefits essential in attracting talent.
When human resources advocates its position: a) we need paid maternity and paternity leave to attract talent, and b) it’s the right thing to do because it aligns with our mission of treating our employees with care, it leaves its arguments exposed if not presenting them from a financial perspective. In other words, making its case without sharing the financial benefit and cost, makes the case difficult to support. FP&A is in a perfect resource to aid in this endeavor.
Let’s make this discussion simple: Commitment to paid maternity/paternity leave is an investment in people. This investment translates into better and more engaged talent. Greater engagement means a more productive, positive, caring, efficient, and utilized workforce. While these advantages seem soft and non-financial, the cumulative benefit likely translates over to increased revenue, greater cost efficiency, and less waste in salaries and benefits. If FP&A can help determine how greater engagement, productivity, positivity, care, efficiency, and utilization translate into improvement within these three financial line-items, the case for paid maternity/paternity leave becomes that much stronger. Seem too intangible? It’s not.
Let’s provide another example. It’s common in manufacturing environments for operations managers to grow frustrated with inefficiency. Imagine for a moment that we as an FP&A partner are working with the head of operations and warehousing for a uniform company. The company designs, manufactures, and distributes custom-made uniforms for industrial companies around the United States. The head of operations and warehousing has a hunch that manually-programmed stitching and embroidery are costing the company time and causing waste. If the manager were to petition leadership to procure a fully-computerized, automated stitching and embroidery machine without any financial justification, leadership would have to act based upon the manager’s hunch. Instead, by requesting the partnership and insight of FP&A, the manager can formulate a variance analysis, demonstrating what waste and time exist within the current manual setup and system versus how it would exist using a fully-computerized and automated stitching and embroidery machine.
If FP&A were to analyze the results and determine that operations could save 240 hours per quarter or 960 hours per year, that would translate into $36,480 dollars in direct labor savings. Further, because of the direct automation, one laborer at $38,000 salary could be switched out in exchange for one designer at $58,000. Finally, by switching to direct automation, extra capacity of 85,000 uniforms could be created. While the direct cost savings would amount to only $16,480 (-$38,000 - $36,480 + 58,000), the capacity expansion would be significant, thus allowing the company to expand capacity with no incremental costs beyond the cost of the new equipment. If operations can present this analysis and explain how the cost of the machine would return benefits over the coming years, it makes for a far more provocative and convincing argument than one without financial considerations.
In summary, it is the responsibility of FP&A to provide insights into operations, that ultimately do have financial implications. Similarly, operations should seek out the counsel of FP&A as nearly every operating decision within a business has financial implications. What many organizational leaders do not realize is that this is as much a cultural dynamic as it is a functional one. The encouragement of cross-departmental business partnership needs to come from the top and trickle down. When there is support and investment from leadership, operating groups and FP&A learn that financial collaboration is a core value of the business.