that show up on the profit and loss
(P&L) statement but don’t actually
create value. Conversely, they can
highlight cash improvements, like
reducing working capital, that add
real value but don’t affect the P&L.
One cautionary note: identifying
initiatives that create the most
value doesn’t mean differentiating
their valuations down to the last
dollar. Transformations need to be
fast-paced, with a bias for getting
things done, because the time lost
to overanalysis often represents
lost value to the business.
Ensuring Benefits Fall
to the Bottom Line
All too often, turnaround initiatives
that could create great value never
get to a company’s bottom line.
Sometimes, the problem is just poor
execution. At one mining company,
for example, an initiative owner
successfully negotiated lower rates
on rental equipment with a new
vendor, but then neglected to return
the incumbent vendor’s equipment.
Fortunately, the finance function
discovered the duplicate rentals in
its detailed reporting of monthly cost
performance, and the company was
able to quickly return the equipment
before accruing further costs.
But often the problem is a lack of
visibility into what’s expected and
too little coordination between units
or functions. As a result, the savings
accrued in one part of the business
are offset by expenses in another.
At one manufacturing company, for
example, procurement managers
successfully negotiated savings on a
contractor’s hourly rate. But since the
overall plant budget wasn’t adjusted,
the plant manager ended up just
using more hours on discretionary
projects, and the overall contractor
cost did not decrease. Managers at
another manufacturing company
managed to reduce production costs
but neglected to update the margin
targets for the sales department.
As a result, some sales managers
lowered their minimum price to
maintain their margin—effectively
giving away the savings in the form
of sales incentives and lower prices.
Finance specialists can help by
reviewing how a company reports
progress and ensuring that objectives
are clear throughout the organization.
This can include, for example,
ensuring that transformation
priorities are translated into formal
budget commitments. It also
includes translating traditional
P&L accounts, such as cost of
goods sold and overheads, into the
underlying measures that affect
their value, such as volume, foreign
exchange rates, head count, and
productivity. That offers managers
a much clearer understanding
of how value is created.
Creating insightful management
reporting for companies with
integrated value chains can be
especially challenging. Since
performance across such businesses
isn’t readily apparent from their
consolidated accounting statements,
it’s all the more difficult to understand
whether a transformation is effective.
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Greg L’Herault – Denver – 303-715-1775
Ralph Kourtjian – Detroit – 248-358-6636
Pete Lowney – Madison – 608-232-5987
Mike Colloton – Milwaukee – 262-792-7180
Jay Peterson – Minneapolis – 952-943-3977
Matt Lenzini – St. Louis – 314-854-1377
Chris McKernan – Seattle – 206-499-0520
Chuck Batson – Madison – 608-232-5980
President & CEO, First Business Capital Corp.
First Business Capital Corp.
We help highly leveraged companies overcome financial obstacles through innovative
asset-based lending and factoring solutions. Helping small- and mid-market companies in
transition with a focus on credit requirements less than $10,000,000. Call us today to learn more.
Bill Blenderman – Delaware – 302-354-2578
Gay Denny – St. Louis – 314-412-3091
Gail Heldke – Chicago – 847-493-8305
Division Manager, First Business Factors
ABOUT FIRST BUSINESS
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