Being a professional supervisor or manager means knowing more about how others operate so you can be more effective. Have you ever had a great idea that could provide your company with a significant benefit? Maybe you wanted to institute mobile technology over a large facility to save your maintenance crews from the wasted time and aggravation of returning to the shop between assigned tasks. You made conservative estimates on the benefits and even added some percentage to the cost side of the equation to ensure the cost-benefit numbers are defensible.[pullquote]
After submitting your proposal and demonstrating the appropriate level of patience and maybe applying some tactful pestering, you finally got your answer. The corporate finance guy said “no.”
What went wrong? Why did this obviously great idea not make the grade?
Often, it’s not the specific project you’re supporting that’s good or bad. It’s more likely that, just like any other function within the organization, there are insufficient resources needed to investigate and select projects for funding.
As a matter of professional development, I suggest you learn to speak the language of the corporate finance folks. Learn and be conversant in the things that make businesses successful. How much do you really know about the underlying business processes that provide your paycheck? Do you currently know your company’s:
- Sales during the past year
- Cash flow trends; increasing, decreasing or flat
- Sales volume; increasing, decreasing or flat over a week, a month, a quarter and over multiple years
- Profit margin; increasing, decreasing or flat over various time periods
- Return on assets? Return on investments? Return on equity?
- Inventory velocity and asset velocity
Cash flows into the corporate coffers through sales and, perhaps, through investments or asset sales. Cash flows out of those same coffers in the form of salaries, taxes, interest on investments, overhead costs and payments to vendors. Cash generation is the difference between cash flows into and out of the business. That number can be positive or negative.
Companies with cash flow problems might shy away from projects that require up-front expenditures without some immediate offsetting cost reductions. Cash flow is what keeps an organization in business. Does the company generate enough cash? What are the sources of cash for the business? How is it being consumed?
Inadequate cash flow kills businesses. If your company isn’t generating cash, is it because your strategy is to invest in growing the business, because sales are down or because you’re carrying too much inventory? Consider your company’s return on assets (ROA), return on investments (ROI) and return on equity (ROE). Calculating any of these metrics requires the margin being earned on each unit sold. To calculate ROA, you also need to know the dollar amount of sales and the dollar valuation of assets the company owns. Now, multiply the unit profit margin by the sales and divide by the value of assets.
Calculate the return on investments by multiplying unit profit margin by sales and divide by total investments. Likewise you can calculate ROE by multiplying unit profit margin by sales and divide by total shareholder’s equity. If your gross margin goes down 5%, you should ask yourself if it cost more to produce the product. Perhaps competition is forcing you to reduce prices while costs remain constant. Maybe the unit profit margin is changing because you’re selling more lower-margin products and fewer high-margin products.
The function of a maintenance manager or reliability engineer is to reduce operating costs and improve system reliability. These improvements lead to lower costs and increased margins. Improved system reliability increases margins, increases sales and generates cash, which reduces the need for interest-consuming investments.
You can anticipate what corporate finance decision makers will be looking for if you understand what’s going on in terms of cash flow, unit profit margins and the velocity of assets, investments and equity. Knowing what the bean counters are looking for allows you to incorporate the numbers and draft better proposals. Better proposals increase your credibility and that increases the number of projects you get approved.
Tom Moriarty, P.E., CMRP, is president of Alidade MER Inc. Contact him at [email protected] and (321) 773-3356.