Associate FD increases business owners profit by 6%

Background

Case StudyWith the competition increasing and requirement for high volume, low cost product, the parent company took a decision to purchase a low-cost European manufacturing company to supplement the current European group’s activities. Having played a key role in the due diligence of the acquisition, I was now tasked with the integration of the new business into the existing group in order to provide relevant, accurate and trustworthy data and reports to form the basis of future strategic development and growth plans.

Challenge

The new company, being relatively small but with potential for quick growth, was owner managed and had minimal management reporting of note. The key measurement at the time was based only on cashflow which, while essential, did not supply the new owners with the key data and indicators needed to understand and develop the business in readiness for growth.

The key challenges for the integration was to develop a greater understanding of the subsidiary’s systems, processes and data, and to develop a standard suite of processes and reports to assist both the local management team and new owners in fully understanding the business. This was further complicated with the subsidiary’s existing reporting based upon local requirements only which differed substantially from the parent’s legal requirements.

A further obstacle was presented by a two-month timescale to produce the redesigned reports for the parent company.

Solutions

To meet the short timescales, I allocated the project between sub teams, each led by myself, enabling the group to quickly understand the current availability of business data and system capabilities and to develop revised processes, updated controls and a reporting system suitable for both the local management and the parent company. This allowed me to clearly explain, in detail, the parent company’s requirements and to ensure that all team members had a clear understanding of the objectives, their responsibilities, and a clear buy-in into the project requirements and deadlines.

Manufacturing – A team comprising of the local accountant, operations manager, and production manager was established to develop a revised product costing system. The team documented the current processes and developed updated procedures, analysing the available plant capacity, cost drivers and analysis, cost allocations, product life cycles, scrap reporting and labour requirements. From here, a new costing system was introduced leading to revised bills of materials producing more accurate and reliable product costs and ultimately leading to improved margins and overall profitability give the subsidiary a greater return on investment.

Sales – I worked closely with the sales team to understand and document the subsidiary’s markets, key customers, customer contract details inclusive of discounts and rebates, key products, and pricing strategies. Previous sales reporting was based upon customer sales value only. Following the review, new sales reports were introduced giving the owner, local management team and the new parent company, full visibility of the subsidiary’s true customer and product profitability.

Finance – I worked closely with the local accountant and external auditors to understand the subsidiary’s system capabilities and finance / general ledger reporting. Whilst maintaining local reporting requirements, a detailed update, conversion and redesign of the system set-up and general ledger reporting was undertaken to allow relevant data to be captured and utilised in improved financial reporting.

Benefits

  • A new suite of financial reports was introduced supporting both the local management team and parent company, giving a much clearer and accurate understanding of the business in readiness for its expansion.
  • A clearer understanding of the manufacturing capabilities with the introduction of capacity reporting, labour utilisation, variance analysis, and scrap reporting helping to identify issues and the creation of improvement plans.
  • Customer/product profitability reports, by key market, were introduced allowing a greater understanding of the business and identification of low margin, problematic, loss making products and customers.
  • A detailed financial income statement, by key market, was introduced assisting the local management and parent company in gaining a much-improved view of the business leading to certain aspects of the business being questioned and investigated.
  • Updated processes and controls were introduced into the business as a result of the teamwork performed in understanding, documenting and redesigning current processes.
  • Having the teams involved in the development of the new reporting structure led to a revitalised interest in the subsidiary’s financial performance, from both the owner and local management team, and a willingness to be both involved and play an active role in helping to improve the company’s results in readiness for growth.
  • The documentation of the current system and revised processes prepared the subsidiary for future integration into the parent company’s IT systems.

Financial impact

The introduction of the new reporting suite and involvement by the local management team enabled a reassessment of the business leading to the removal of loss making products, improved efficiencies in manufacturing, a restructure in certain elements of the business, and the introduction of a series of customer price increases, all of which led to an increase in company profitability of approximately 6%.

EFM Expert: Lee Oddie