Four Strategies for Connecting Operations and Finance
Manufacturing operations departments and finance teams share the same goal of keeping the company running like a well-oiled machine. However, the perspective of a boots-on-the-ground engineer often differs significantly from that of an accountant studying profit and loss statements. How can you get everyone on the same page?
Mike Sibley, leader of the James Moore manufacturing team, shares why it’s important for operational data to be consistent with financial results. He also discusses tips on how to make this happen.
Create a culture of curiosity.
The first step to connecting your operations and finance departments is creating a work environment in which people are willing to ask questions. Operations and finance staff can be siloed. Bringing these teams together requires intentionality and a culture in which people feel comfortable being candid.
In meetings, focus on data and information, and recognize that operations and finance teams may view investments and timelines from differing perspectives. Some situations, such as discussing a discrepancy in a financial statement, can feel high stakes.
One way of diffusing tension is to regularly hold “failure celebrations.” These are meetings in which participants openly share their mistakes or errors in a relaxed atmosphere where the goal is to learn from the experience, rather than accuse or retaliate. Failure celebrations can spin what could have been an uncomfortable conversation into something positive, productive and transparent.
The goal is to focus on data and information and keep things from getting personal. Doing so can really advance your organization by having safe spaces for people to talk through problems. Just make sure you avoid making the failure celebration about pointing blame at other people.
Another strategy is what Mike calls the toddler method: Ask why six times. “By the sixth time, you’ve gotten down to that root cause of the problem, and rarely is it a single root cause,” he said. “Plus, you’re identifying multiple areas for improvement in the organization, whether it be on the finance side or the operational side.”
In companies, it can be a challenge to balance open and transparent communication with confidentiality. Aim to share enough information so that staff have the resources they need to ask the right questions and receive the best answers for the organization.
Value others’ expertise.
While differing perspectives can make communication challenging, they also contribute to an organization’s success. Valuing the diverse expertise everyone brings to the table can help companies stay resilient and innovative.
For example, an engineer may specialize in manufacturing setup and supply, while a financial expert knows how to find the best way to finance equipment. The difference in their perspectives can lead to productive conflict. They might not speak the same language, but it’s up to everyone to get in the same room and share those perspectives.
Keep in mind that the same dataset – and even the same terms – may mean different things to different people. Finance and accounting personnel may view operations data as financial statements or cashflow. People in the operations department, however, may be focused on raw materials supply, inventory management or how many units they are able to get contracted for.
Another example is inventory. From the manufacturing line perspective, inventory is viewed as an asset. From a financial perspective, however, it can end up being a liability. When all of that comes together in financial statements, you can get a different perspective than what you might have on the manufacturing floor.
Team financial reviews offer one way of giving everyone the same view. Instead of focusing on single data points, zoom out to get the bigger picture that your collective data can reveal.
Find a common language and methodology.
Operations and finance teams can also be divided by language barriers. In cross-team meetings, avoid jargon that could lead to misunderstandings and communicate at a level that everyone can understand. Using specific examples can help illustrate your points.
Make sure that operational staff has enough financial literacy to connect in conversations about various financial components. Similarly, accounting and finance professionals need education from the operational perspective to help them better understand the underpinnings of the finances of the operations. If you must use jargon, make sure you explain what you mean.
Communication is also key when dealing with varying financial timelines. Your company may pay vendors within 30 days but take 90 days to produce and ship a product. Coordinating between purchasing, operations and sales staff can ensure you have enough working capital to cover gaps in timelines.
Using consistent methodology for both finance and operations can also prevent errors in your data. When accounting and operational data don’t match, it can be time consuming to sort through inventory costs, labor costs, overhead pools and other factors to pinpoint the mistake.
Revisit your assumptions down the road.
Finance teams can find themselves playing the role of company historians – producing reports rather than being proactive and future oriented. Meanwhile, operations staff may think they know what’s going on but have a viewpoint not aligned with what financial statements reveal.
These differing perspectives can lead to decisions made based on faulty or outdated assumptions. Someone on the operational side might say, “Well, we liquidated all our inventory so we should have made tons of money, or we sold it all at a loss.” They don’t necessarily appreciate that over time, accounting personnel are revaluing that inventory at the lower of cost or net realizable value.
Make sure you routinely revisit your assumptions. Overhead allocation estimates might have been set years ago and could be in need of revision. The value of inventory can fluctuate significantly with inflation and deflation. Installing and integrating new equipment into your manufacturing chain may have cost more than anticipated or come with unexpected delays. Your equipment might also be lasting longer than you’ve accounted for, leading to a mismatch in financial and operational data on its depreciation.
Evaluating your assumptions after time has passed can help you validate your decisions or adjust the factors you consider in the future. Re-evaluating assumptions is also important than ever in the face of rising prices, labor shortages and supply chain issues.
“At the end of the day, owners want to make a net profit that makes sense, and not do all this to lose money or break even,” Mike said. “You want to ensure if you’re increasing your prices, you are doing so based on solid information.”
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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