By: Rik Katz (Portfolio CFO)
I’ve spent a significant part of my career around manufacturing businesses.
One thing manufacturing teaches you very quickly is that finance doesn’t happen in the finance department.
The financial statements may tell you what happened. But to understand why it happened, you often have to leave your office.
You need to understand the factory floor, the supply chain, the customer, the equipment and sometimes even the physics of the product you’re selling.
That has shaped the way I’ve approached the CFO role throughout my career.
Purchase Price Isn’t Total Cost
Take sourcing.
Suppose you can buy a component overseas for $0.92 and domestically for $1.07.
The obvious answer appears to be that the overseas supplier is cheaper.
But that’s not enough information to make the decision.
What does it cost to ship?
Are there duties?
What’s the lead time?
How much additional inventory do we have to carry because of that lead time?
How much cash will be tied up in that inventory?
What’s the cost of storing and insuring it?
Do we have the warehouse space to store it?
What happens if there’s a disruption?
The CFO needs to help the organization understand the economics of the entire decision—not simply the number printed on the purchase order.
Inventory Isn’t Free
The same principle applies when commodity prices are increasing.
I’ve been in situations where we knew a supplier price increase was coming and bought additional inventory before it took effect.
That can make perfect sense.
But there’s a limit.
Inventory has a carrying cost. There’s financing, insurance, warehouse space and handling. There’s also risk.
Buying something today for $100 because you believe it will cost $108 next month doesn’t automatically mean you’ve saved $8.
The question is what it costs the business to own that inventory until it is actually consumed.
Working capital is part of invested capital.
It needs to earn a return just like every other dollar invested in the business.
Risk Management Isn’t Speculation
I’ve also dealt with commodities and foreign currencies where hedging was available.
The important lesson I’ve taken from that experience is that the CFO’s job isn’t to become a trader.
A hedge shouldn’t be judged primarily by whether the market subsequently moved up or down.
The better question is whether you were able to lock in economics that worked for the business.
Years ago, we purchased custom manufacturing equipment from Germany. The commitment was in euros while our business operated in dollars.
We chose to hedge a substantial portion of that exposure.
The currency subsequently moved against us, so the hedge worked very well financially.
But that’s almost beside the point.
The objective wasn’t to make money predicting currencies. It was to protect the economics of an investment we’d already decided made sense. An increase in price due to exchange rates would have hurt.
That’s how I think about risk management.
Sometimes the Right Growth Strategy Is Selling
One of the more interesting decisions I’ve been involved with concerned a business that had been part of a manufacturing company almost from its beginning.
It wasn’t necessarily a bad business.
But the product was bulky and light. We were effectively paying to transport a lot of air.
That made freight a major factor and limited the geographic radius in which we could compete economically.
We could have spent years trying to solve that problem.
Instead, we eventually sold the business to a larger competitor that operated in the same markets.
It was worth more to them than it was to us.
They benefited from the acquisition, and we gained the ability to focus our resources elsewhere.
That’s an important M&A lesson.
Companies naturally spend a lot of time asking what they should acquire.
They should occasionally turn the question around.
Look at every significant business line as though it were an acquisition candidate and ask:
If we didn’t already own this, would we buy it today?
If the answer is no, the next question should be why you continue owning it.
History and sentiment are not capital-allocation strategies.
Understand What Actually Drives Margin
When a manufacturer’s margins are under pressure, finance can identify the problem fairly quickly.
Fixing it is another matter.
I’ve worked in environments where raw-material costs increased while customers resisted price increases.
There are only so many places for that pressure to go.
One response is to simply accept a lower margin.
Another is to understand the manufacturing process well enough to change the underlying economics.
Can we reduce waste?
Can we shorten production time?
Can we automate a specific process?
Can better equipment increase throughput?
Can we redesign something?
Those aren’t traditional accounting questions.
But they’re absolutely CFO questions because they determine the company’s returns.
In one business, we designed and installed specialized equipment that improved efficiency and reduced the amount of labor required as volumes increased.
The financial improvement happened on the factory floor before it ever appeared on the income statement.
Be Hands-On Without Micromanaging
Early in my career, I worked for a large South African textile organization.
One of the most important lessons I took from that experience was remarkably simple:
Be hands-on. Know what’s going on. But don’t micromanage.
I still think that’s particularly important for a CFO.
You don’t have to operate the machine.
You don’t have to negotiate every purchase order.
You don’t have to make every sales call.
But you should understand how those activities translate into cash flow, margin, risk, and return on capital.
The CFO’s job isn’t simply to report the numbers.
It’s to understand the business well enough to help management make better decisions before those decisions become numbers.
That’s particularly true in manufacturing.
Sometimes the answer is buying a machine.
Sometimes it’s buying inventory.
Sometimes it’s hedging a risk.
Sometimes it’s developing a product a customer has asked for.
And sometimes it’s selling a business you’ve owned for decades.
The spreadsheet matters.
But the real job is understanding what’s behind it.
About Imperial Advisory
Imperial Advisory provides fractional and interim CFO support to growing, changing, or financially challenged businesses.
At its core, Imperial helps owners understand what is really happening financially, make better decisions, and build a stronger finance function.
About the Author
Rik Katz is an Imperial Advisory Portfolio CFO with extensive experience in financial leadership and general management within the manufacturing and distribution sectors. Known as a trusted advisor, he is recognized for his work in strategic planning, operations management, mergers and acquisitions, banking relationships, and international trade.