Are you a new manufacturing CFO? Have not been exposed to manufacturing accounting or operations yet? It’s very important to understand the nuances of this industry to be successful in your role. Most manufacturing companies start looking for a senior finance operations leader once they grow to $20-50 mil in revenue. Before that, they might outsource financial operations or manage with smaller accounting systems such as QuickBooks. Most likely with the help of an external CPA firm. The owners or principals of the firm primarily manage the operations.
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Once the company hits the $20 million mark, it’s very hard to sustain. The way the company may have been operating. So they hire a financial operations leader like yourself. Someone who could streamline the operations and control the financial position of the company.
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the difference between a controller and a manufacturing CFO role
Before we start digging into the CFO role itself, it will be beneficial to understand the difference between a controller and a CFO role. How they differ, and how they both will be collaborating. Here is a snippet from the article published by one of the top recruiting agencies:
As you may have noted, the CFO and Controller roles are interchangeable in smaller companies. For the sake of simplicity and the purpose of this article, we are talking about manufacturing companies that may be hiring a controller or a manufacturing CFO for the first time. And as far as the scope of this article is concerned, we will be using them interchangeably as well.
Before we start, let’s start with some triggers why a controller or manufacturing CFO is typically hired. Unless you are replacing a seasoned executive, in most cases you are hired to streamline the operations and CONTROL (no pun intended). Here is the same article again that talks about these events:
As the article suggests, expanding operations that could include adding additional plants is among the reason why a controller or manufacturing CFO might be hired. The first time.
Now have you been a manufacturing CFO before? Your job could be easier as you would understand how manufacturing companies operate. And the metrics you should be tracking to ensure control. However, coming from a completely different industry, for instance, distribution or construction? You can expect a steep learning curve as manufacturing financial operations are fairly different.
Understanding of business model of a manufacturing company is critical
The very first question you need to be asking if the company operates in the process industry or discrete. The process and discrete are both fairly different in operations, compliance, and reporting. The best way to understand how discrete differs from the process? By looking at a sample of manufacturing businesses and their products. Here are some examples for you:
Examples of discrete manufacturers
This is an example of a discrete manufacturer from the New York area that produces surgical instruments for the dental healthcare industry.
This is another example of a discrete manufacturer from the New York area. That produces fluid sealing and pipeline solutions for several industries. Including Chemical Processing, Primary Metals, Pulp and Paper, and Pharmaceutical
Examples of process manufacturers
This is an example of a process manufacturer from the New York area that is a pharmaceutical manufacturer of prescription tablets and capsule formulations.
This is another example of a process manufacturer from the New York area that manufacturers packaged food for pets.
Able to spot the difference between discrete and process through these examples? The key distinction is in their manufacturing process. And how they manufacture these products. Process manufacturing utilizes formulation to produce their goods whereas discrete uses BOM (bill of the material). The formulation could look like a mathematical formula (M3=2*M2+M1). And may have interdependencies between the quantities or proportions of each material. In the case of discrete, the BOMs could have several layers due to sub-components. But typically the quantity of a material is not dependent upon the other material.
For the sake of simplicity, most Food and Beverage, Chemicals, and pharmaceutical companies fall under the process industry. The other companies that are slightly more hardware-centric or assembly-oriented for example, Industrial Machinery. Or Electrical and Electronics Manufacturing, Automotive, Windows, and Doors. As well as Medical Devices would be examples of discrete manufacturing. If you are still not sure, here is what Google suggests in their first search result:
Once you know the high-level difference between whether your company falls into the process or discrete, you then need to understand how they order these products. How they plan, or how they replenish inventory. As well as how they produce, and how they sell.
This will help you understand how many of your processes are make-to-order (you produce after you receive an order ). Or make-to-stock (you make enough to store in inventory as per demand), engineered-to-order (may have heavy engineering involved and are very long-term), or project-centric manufacturing (the whole manufacturing process would be a project as opposed to a process ).
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After manufacturing processes, next comes the inventory
Once you have analyzed each process in detail, then you need to find out how organized your inventory is. As well as if there is any formal process for your raw materials, WIP (work in process), and finished goods. Never had a controller or a CFO in your company? There is a very good chance that you may not have formal processes for inventory or BOM (bill of material or manufacturing).
Identifying your inventory, categorizing them, and mapping the value chain is important as that’s how you will be able to perform product costing for each manufactured item, which is not only important to know how much it costs to produce but will also help with pricing and discounting.
Once you have mapped your inventory, the next task would be to identify all your resources including machines or tools. As well as mapping them to each operation. Since manufacturing has a lot more moving parts and expensive machines, mapping these operations helps you with costing, as well as scheduling and predicting demand for labor so your production could run at an optimum level.
Finance and accounting are a bit different too
Assuming that you have a deep background in finance and accounting so I don’t plan to cover those topics in detail here. The only difference between accounting for manufacturing and other organizations would be the chart of accounts. Because they are fairly detailed in manufacturing organizations, primarily to accommodate product costing. Each BOM, as it moves through the production process, could update several charts of accounts as the labor and materials get reported on the production order.
Other accounting topics? If you don’t have payment terms, payment methods, pricing and discounting procedures, and approval processes documented and centralized, most likely you might have to sift through past paper-based invoices and orders to identify and centralize this information.
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Don’t forget customers, vendors, employees, and payroll processes
Already documented and gathered major details of your business? The next task would be to analyze different customer and vendor groups. As well as cleanse the data if there are any duplicates or obsolete records. You might also need to map end-to-end sales and purchase processes. Finally, you need to understand how they generate timesheets, expenses, and payroll. This will provide a comprehensive view of the organization.
This might feel overwhelming. But once you understand the business, that’s when your job starts. As noted in the beginning, your role is to streamline operations and automate processes so the company could scale. The more manual and ad-hoc processes you might have, the more bottlenecks and duplication of efforts you would have with your operations, making them inefficient and expensive. Your goal should be to automate and standardize as much as possible.
An integrated system could Help
While documenting these processes would help in identifying inefficiencies, if you don’t have a fully connected system in place that integrates all of your processes, it will be hard to implement your recommendations and process suggestions, making your job harder to streamline your operations.
This is why you should incorporate the implementation of a fully integrated system as part of your efforts. In fact, in some cases, they may ask you during your interview if you have implemented an ERP in the past. Or if the implementation of an ERP could be the driving factor for this position. Typically when a company feels that they need to streamline its operations for the next phase of growth, it means that they are ready for an ERP implementation. An ERP implementation goes through several phases preparation and documentation. The abovementioned steps are pre-cursor to an ERP implementation.
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