Managing Cashflows

Effective cash flow management is essential to a company's success and sustainability in the modern business environment. According to recent industry reports, inadequate cash flow management is the reason behind 82% of business failures. The case study at hand revolves around a manufacturing company facing significant challenges in managing its cash flows, primarily due to issues related to inventory valuation, non-moving inventory, and delayed customer payments.

CFO Bridge, with its team of one CFO partner and a chartered accountant, was brought on board to address these challenges and implement strategic solutions to improve the company's cash flow management and profitability. The goal was to improve the company's financial situation, spur corporate expansion, and lay a solid platform for sustained prosperity. This case study explores the particular difficulties that the company encountered, the strategic course that CFO Bridge took, and the actual effects that the solutions put in place had on the organization's overall operations and financial results.

Manufacturing Client's Scenario - Challenges Faced 

Exceptional Sales Growth but Cashflow Challenges

Despite experiencing exceptional sales growth and recently establishing its second plant, the manufacturing client constantly grappled with cash flow challenges. This dichotomy between sales growth and cash flow issues highlighted a potential disconnect in the company's financial management.

Inability to Identify Specific Issues

Despite their efforts, the internal finance team of the client needed help pinpoint the reasons behind the persistent cash flow challenges. This lack of clarity hindered the company's ability to take corrective actions and raised concerns about its growth trajectory's sustainability.

Operational Expansion without Financial Clarity

The recent establishment of the second plant indicated the company's ambition and readiness to scale its operations. However, the underlying cash flow challenges posed a significant risk to the company's expansion plans. Without a clear understanding of its financial health, the company risked overextending itself, potentially leading to operational and financial setbacks.

Mandate to CFO Bridge

Recognizing the gravity of the situation and the need for expert intervention, the company engaged CFO Bridge. The mandate was clear:

• Thoroughly analyze the company's financial situation.
• Identify the root causes of the cash flow challenges.
• Provide actionable insights for corrective action.

Expectations from CFO Bridge

Given CFO Bridge's expertise in financial management and strategic interventions, the manufacturing client expected a comprehensive assessment of its financial operations. This included a deep dive into its sales processes, inventory management, operational costs, and customer payment terms. The goal was to gain a holistic understanding of the company's financial ecosystem and identify areas of improvement.

How CFO Bridge Helped their Client Overcome the  Financial Challenges?

Upon being engaged by the manufacturing client, the two-member CFO Bridge team, consisting of a CFO Partner and a Chartered Accountant, conducted a comprehensive analysis of the company's financial operations. The team's initial observations revealed several key challenges that were contributing to the client's cash flow issues:

Inventory Valuation Challenge

The team identified inventory valuation as a significant challenge, rendering the Profit and loss statement unreliable. While implementing an ERP system was considered, the team opted for a more immediate and quick-hit practical solution. They designed an Excel sheet specifically tailored to capture the inventory and its valuation accurately, thereby addressing the issue of unreliable financial reporting.

Non-Moving Inventory

A substantial component of non-moving inventory was observed in the Balance Sheet. This was attributed to two primary factors:

• Excess ordering of project materials not included in project costing led to unnecessary inventory accumulation.
• Lack of periodic physical inventory verification results in orders being placed for items already in stock.

Project-Wise Profitability

The team found that while project-wise profitability was based on standards, no reports measured the variance between standard and actual costs. Upon capturing the actual costs, it was revealed that there was an excess consumption of 4% in every project, indicating inefficiencies in project execution.

To address these challenges, CFO Bridge implemented the following solutions:

Excel Sheet for Inventory Valuation

The CFO Bridge team designed a customized Excel sheet to capture the inventory and its valuation accurately, ensuring the reliability of the profit and loss statement.

Addressing Non-Moving Inventory

The team took corrective actions to address the issue of non-moving inventory by:

• Implement a system to ensure project materials are accurately included in project costing.
• Introducing periodic physical verification of inventory to prevent unnecessary orders.

Variance Reports for Project Profitability

The team introduced reports measuring the variance between standard and actual costs for each project. This allowed for a clear identification of areas where excess consumption occurred, thereby facilitating corrective actions to improve project profitability.

Empowering Financial Excellence: How CFO Bridge Paved the Way to Profitable Success?

Shift in Focus to Profitability and Free Cash Flows

• The client has shifted strategically from merely achieving sales growth to prioritizing profitability and free cash flows as critical business metrics.
• This shift is evident in the company's improved profits, which have increased by Rs 5 crores.
• Importantly, these profits are being strategically reinvested into the business for growth, departing from the previous approach of relying on high-cost, unsecured loans for expansion.

Introduction of a Comprehensive Pricing Template

• The client has implemented a robust pricing template encompassing all relevant financial aspects, including variable costs, fixed costs, wastages, and the cost of credit.
• The template is designed to ensure that the minimum profitability required for each project is clearly defined.
• Orders not meeting the minimum profitability threshold are rejected, ensuring that the company focuses on securing profitable orders that contribute positively to its bottom line.

Repayment of High-Cost Unsecured Loans

• In a significant financial milestone, the client has successfully repaid the high-cost unsecured loans that previously burdened its financial health.
• This repayment is a testament to the company's improved financial performance and commitment to achieving long-term financial stability.

Conclusion 

CFO Bridge's strategic interventions proved to be a catalyst for the manufacturing company's financial turnaround. By addressing the root causes of the cash flow challenges, the company achieved remarkable improvements in profitability, cash flow management, and overall business growth. The repayment of high-cost unsecured loans and the shift in focus from sales growth to profitability and free cash flows are a testament to the effectiveness of CFO Bridge's solutions. 

If you are looking to take control of your company's financial health and drive sustainable business growth, contact CFO Bridge today and let their team of experts guide you toward financial excellence.