Editor's Message: The Path to Greater Economic Profitability
SBCA’s new Financial Management Concepts training is a great investment....
Most component manufacturing operations in the U.S. are small businesses. Consequently, many component manufacturers (CMs) don’t have the budget to hire financial analysts or financial management professionals. In order to provide value to members in this aspect of their business, SBCA is now offering its Financial Management Concepts training program at no cost.
The program was created by Kendall Hoyd, an SBCA past president who has had extensive experience both as a CM and as a financial analyst. In looking at a CM’s profit and loss (P&L) statement, Kendall says, “The microeconomics of the component manufacturing business are actually fairly complicated and non-intuitive. There is a lot that needs to be managed well.”
For instance, the training program explores the concept of opportunity costs, including the concept that every dollar has an opportunity to generate profit. Kendall addresses the important difference between being profitable and being economically profitable. He believes that in order to accurately determine the effect of the dollars you invest in your company’s operations, you need a good analytical framework. The program shares how to develop an industry-specific framework for your operation. “It’s not okay just to make money,” says Kendall. “You should be making more with your money operating a truss plant than doing something else with it that has a similar level of risk.”
Another important concept that the program focuses on is work complexity. “There are a lot of pricing models out there, and I would argue each has its own set of biases,” says Kendall. He argues that anything your pricing model overvalues you won’t get much of, and anything your model undervalues, you’re going to get a lot of. The bottom line is it’s imperative to price complexity correctly when bidding a job.
Kendall explains, “Any time you are working on one job, there’s a good chance you could have been doing a different job instead. If you don’t price complexity correctly, you could be spending more of your time doing jobs that don’t provide as much economic profit as you should be getting.” SBCA’s new training program walks you through the concept of complexity and provides sound guidance on how to approach it.
While it may seem like this training program is designed for company management and CFOs only, in fact, anyone who has anything to do with the company’s financial systems can benefit from working through the first few training modules. “We start out slow and cover a number of financial topics applicable to component manufacturing that are very accessible even to those who know little to nothing about finance,” says Kendall.
After the introduction, the main portion of the training program provides a number of tools and resources that are geared towards those who are engaged in the financials of a company. Finally, for those who are responsible for the financial management of their company, there are tools provided at the end of the program that even seasoned veterans should find helpful.
Again, the program is free to SBCA members, and so the only investment required is your time. If you consider that your company could improve its profitability by just one percent by adopting some of the tips and tools contained in the program, you come out ahead. “Even if you apply a very conservative hourly rate to the five hours it takes to get through the program, you should get a very healthy return on your investment,” says Kendall. That is the first step towards improving your economic profitability.
Sean D. Shields, Managing Editor