Let Your Numbers Give You Better Insight

The in-depth financial analysis that leads to good decision-making isn’t easy, especially for component manufacturers (CMs), who encounter significant variability in the work that they do and the customers they serve. Chartered financial analyst and SBCA Past President Kendall Hoyd, currently the chief financial officer at Residential Design Services, believes analyzing financial data begins with asking the right questions. Looking at the numbers needs to give you insight, he stresses, not just raise more questions. “What you measure drives how you think,” he said. “How you think, drives how you manage your company.”

Reorganize Your Income Statement

Hoyd suggests CMs start by examining the values for operational variables that lead to financial results. For example, how many hours of work were needed per board foot produced? According to Hoyd, “making an income statement with answers can be more proactive, to allow for a more productive conversation leading to quicker and better reactions by management.”

Hoyd proposes turning financial accounting into management accounting to show CMs the effect of variability in the work. “Financial accounting statements are typically arranged in a way that makes them very difficult to use for management purposes. However, regrouping the costs helps us see the true effect of variability in the work,” said Hoyd.

Financial reporting combines balance sheets, profit and loss statements, financial notes and disclosures. It is the language that communicates information about the financial condition of a company. The procedures and the guidelines under which that language is written are generally accepted accounting principles (GAAP). GAAP practices typically mix variable and fixed costs. Hoyd contends CMs need to see the income statement reorganized to make a clear distinction between these costs.

To answer many of the questions that a typical GAAP income statement raises, reorganize your numbers to examine each cost in terms of dollars per board foot (BF) delivered and dollars per production hour (DPH). This organization shows which costs go up with production and how much revenue and margin are generated per production hour. Reorganizing the income statement gives you better plant-to-plant or period-to-period comparisons.

Improving the presentation of your income statement helps you make sense of the financial data you’re assembling. In a nutshell, improved financial statement means you can “look at your business and use the right combination of financial and operating data to make better pricing, and ultimately, better sales decisions,” says Hoyd.