Manufacturers: When to Put Financial Practices In the Spotlight
Published on by Travis Knight in Manufacturing
With geopolitical uncertainty, supply chain snags, and economic volatility, manufacturers are at a crossroads. Maintaining the status quo in their financial practices could mean missing out on opportunities for growth and optimization – but how and when is it okay to implement big changes to financial systems without incurring serious exposure to risk?
In this post, we’ll look at when manufacturers ought to overhaul their financial practices, the role of technology in this shift, and how the need for robust data is crucial to drive this change.
Technology isn’t optional, it’s integral
One significant shift in this financial practice is the adoption of emerging technologies to drive insights and efficiencies. More specifically, the exploration of how artificial intelligence (AI) can be integrated into financial functions is gaining momentum. The appeal of AI lies in its ability to analyze financial trends, identify patterns, and utilize historical data to develop forward-looking strategies. Consequently, manufacturers are investigating how generative AI can help them improve their financial planning and decision-making processes.
Unsurprisingly, the effectiveness of AI in financial forecasting is heavily dependent on the quality and quantity of the underlying data. The best AI models are only as good as the data they are fed. Unfortunately, many manufacturers lack the necessary data to track their returns on investment (ROI), making it challenging to forecast future returns accurately. This shortfall often stems from insufficient analysis of acquired companies and a lack of clarity on the returns from these acquisitions.
For instance, manufacturers often absorb an acquired company into their operations but fail to continue further analysis post-acquisition. Consequently, they lack the data needed to verify whether they are achieving the expected ROI. This data is essential in determining if an acquisition is delivering value and, if not, understanding why.
Robust financial data is your lifeline
The volatility experienced in the past few years has made it critical for companies to project their costs not just for internal purposes, but also for the benefit of investors and stakeholders. As such, manufacturers are finding it increasingly important to provide accurate forecasts for the forthcoming fiscal year or even beyond. This trend is driven by the necessity to ensure transparency, stability, and confidence among the stakeholders.
Manufacturers need a detailed breakdown of their costs. A comprehensive understanding of costs, such as those related to back-office operations and other Selling, General, and Administrative (SG&A) expenses, is crucial. They should analyze key metrics like overall cost per headcount and compare these with competitors’ figures. And, it’s important to scrutinize both the returns on their acquisitions and their capital, including revenue derived from investments into the company, and their non-modeled costs on a per-headcount basis.
As manufacturers seek external investments or invest in technology and other growth drivers, they need efficient and effective financial processes that yield data capable of informing decisions. Manufacturers must demonstrate both their current performance and future projections to attract investment capital, a commodity in high demand in today’s business environment. There’s a growing expectation to demonstrate improved performance and efficiency, which further underscores the need for robust financial practices.
Driving continuous improvement
Focusing on financial practices is vital – accurate forecasting, adoption of AI for financial functions, and a data-driven approach are key to meeting stakeholder expectations and fostering growth. While it may require significant investment and effort, the rewards of overhauling financial practices are substantial and far-reaching. Manufacturers that embrace these changes stand a better chance of achieving long-term success, stability, and competitiveness.
If you’re a manufacturer considering changes to your financial processes, or just have some questions, the Barnes Dennig team of top manufacturing pros is here to help. Contact us for a free consultation.
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