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CFO Tools

Every CFO has certain tools used to impact the business and hopefully improve the bottom line. These tools can be broken into broad sections - those that impact short-term profits and those that improve the organizations long-term prospects of success.  A few of the common tools to improve short-term profits (6 months or less) include:

• Breakeven Analysis - Answers the question of 'How many sales dollars do I need to breakeven?'. A short twist to this analysis is 'What is the maximum profits that I can hope to make with the current facilities?'.
• Economic Order Quantity (EOQ)- A mathematical approach to balancing the costs of placing an order for inventory against the cost of holding that inventory.  The result of applying the EOQ formula tells the purchasing department what is the most economical quantity to put on the Purchase Order.  The bottom line is sure to improve with this application.
• Returns Analysis - Most businesses selling physical products have returns from customers (service business just have noncollectable receivables) that are always a looser.  Very few returned products have the same value as when they originally went out.  If you are lucky there will only be some repackaging costs.  Since very few executives pay attention to the cause and cost of returns, a smart CFO can usually have a fast victory by making recommendations that improve the systems that cause the returns.

Short-term boosts are nice and everybody needs a few victories now and then.  Long-term improvements however, keep giving and giving and giving.  My approach to these improvements is to make it a system with the following steps:

1. Have all the managers and supervisors list all of the systems/functions that they supervise.  For example, the purchasing manager may supervise the P.O. issue system and the inventory master update system.
2. Take all of the systems and break them into three categories:
   • Core Systems - those that make your money.
   • Support Systems - Systems that support core and other systems.
   • Enterprise Systems - These are systems that are mandated by the government, such as tax return preparation, and systems that are related to the future, such as research and development of new products.
3. Develop a costing system to allocate all of the costs to the various systems using the concepts of Activity Based Costing.
4. Starting with the Core Systems, set up interdepartmental teams to study the findings of what the systems cost to operate and the value of the products produced.  These teams are tasked with making recommendations as to how to improve those systems.  This should be an ongoing process with a rotation system to bring new people into the various teams.Each major system needs a standing team to monitor its progress towards improvement.

Continuous improvements to how you do business is how Great Companies are built.  This must be a system that does not depend upon a few select individuals for its existence or accomplishments.  Otherwise, when they leave the improvements will slow to a halt.

11/15/00

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