The Value-Enhancement Pyramid
Welcome to the inaugural installment of this new column in FORGE. It will be dedicated to the financial issues facing manufacturing businesses, providing guidance on financial matters to those who may not have a dedicated CFO on staff and providing additional financial insight to those who do. This column will be provided by Focus CFO.
Who is Focus CFO?
Focus CFO is a group of former financial and operational executives, most with over 30 years of experience as a CFO or COO, who have finished their “regular careers.” We are now engaged in “encore careers” sharing our experience and skills to help business owners of primarily small- and medium-sized businesses.
Currently, there are about 100 of us with a wide range of experience. We want to serve as a business owner’s Sherpa as they climb the mountain of their businesses’ journey to maximize their health, growth and value.
The Value-Enhancement Pyramid
To start with, we will address topics of interest plus share thoughts and insights about topics that align with the value-enhancement pyramid shown here. The pyramid is a graphic depiction of how we, at Focus CFO, view the business owner’s journey to maximizing the health, growth and value of his/her business.
The Foundation is the bedrock of any organization. Your business needs to be functioning well foundationally in order to effectively move up the pyramid. This is your internal accounting and administration. Timely and accurate financial reporting and monthly closings are the source of data that become information for decision-making. Insurance, risk management and employee benefits, along with solid HR policies and contracts, are all important areas and must function at a high level.
Working on the Health of a business becomes the focus once your Foundation is sufficiently solid. Cash flow, finance and operations are key. In order to profitably grow, one needs to understand operating cost and profit margin. Tribal knowledge and years of experience are invaluable, but managing your profitable growth by “I feel” or “I think” can be problematic. The business owner needs to know which products and customers are profitable and why! Some business owners struggle with Growth because they’ve set their sights on growing sales (rather than the business) before their business has its foundation and health stages prepared for growth. With strong foundational business systems and excellent information for decision-making, the business is positioned to properly and intentionally grow profitably. Well-defined business goals and a longer-term strategic plan can bring clarity and alignment of resources.
Ultimately, growing the Value of a business is a primary objective. For public companies, this is done for shareholders. For privately held companies, an inevitable business transition drives one to maximize the value of a business. A healthy, growing business with a strong management team and great business systems will have higher value than one without.
What will we write about?
In pursuit of the pyramid business model, you can expect to find these types of topics addressed in future columns:
- Effective processes of budgeting and forecasting
- Banking relationships
- Key performance indicators and metrics
- Inventory management
- Cash-flow management
However, we want you to have a say in what we cover here. What are the issues that cause you headaches? What parts of your financial management cause you the most pain? Which aspect of managing the financial side of your business could be most valuable to you if performed better?