The Problem: The company experience fast track sales growth each year with limited costing system to provide management critical information to plan margin and tax liability. The company financial system lacks and only limited to bookkeeping with no integration to sales and cost that provide understanding the impact of product turns and inventory management. The company has an established operation structure with barebone experienced personnel to handle day to day without any experience in developing any operation and financial baseline for measurement of performance. The impact is the pressure on working capital due to inventory control and vendor payment requirement and incurring undue tax liability with incorrect landed product costing.
Analysis of Alternatives:
- Continue as is in struggling day to day in dealing with the financial uncertainty of margin and cash flow pressure on resources management for control growth.
- Seek various option to either hire experienced financial and/or operation management to implement
system integration and/or engage with contractors to develop internal process review and create procedures
and burden the current personnel to execute as added to the existing stretched responsibilities. - Engage with outsource consulting partners to provide hands-on with financial costing understanding and
management acumen to deep dive in identifying the missing connection of distribution costing to develop a standard/average to provide consistent accuracy. With the understanding of the cost components, the company can plan margin and inventory turn to project accurately the cash flow and tax liability to preserve necessary operational cash for growth.
Recommended Solution: Hire outsourced financial CFO with supporting team to seek various options to temporarily analyze the financial with the impact of inaccurate costing to plan for tax and cash flow and simultaneously documenting the process & system to migrate to an ERP that will provide solid management exception reporting.
Implementation: To provide stability to the operation with the evaluation of costing process to establish a macro analysis of financial structure that will provide management control over inventory value and normalize margin that will involve the 3 key functions of their business: Sales, Operation, and Finance. Our approach is to focus on Process, System, and People to triangulate the synergy in delivering incremental progress.
- Solidify and expand financial management reporting and analysis to provide distribution cost components detailing product cost, freight, duty, and misc. costs to identify the critical core driver of inconsistent margin by sales channel and products. Additionally, we incorporate the budgeting process incrementally to better management understanding the variances and/or deviation that put pressure on resource allocation and adjustment to adapt to the competition.
- Establish and standardize the monthly closing process with timeline to consistently evaluate information with the analysis on the detail inventory tracking and margin impact that drive profitability and eventually tax planning. With the completion of the process design, the company is able to engage in ERP search into a integrated system like NetSuite, MS 365, and Sage.
- Develop cash flow planning to manage inventory purchases to identify and control over cash reserve to
strategically expand operation, system, and upgrade personnel. - Seek with various conventional and ABL lenders for working capital in getting line of credit or short-term loans to support sales growth and investment in system and eventually acquire commercial building.
Results: Our deliberate and focus approach to Process, System, and People built confidence in management to understand the importance of structure and performance management to anticipate, adjust and adapt the growth plan accordingly. Within 6 months of our engagement with our various partners network, the company was able to increase LOC 3x larger than previously at a competitive rate. The company was able to determine inventory over-valuation due to improper and manual calculation of costing that created higher NI and eventually tax liability.
The company is on the path of implementing a integrated ERP system in the next 6 months with a better understanding of costs and operation process. The additional cash flow infusion allows management the flexibility and the leverage to negotiate with vendors for terms and strategically invest in marketing of brand & OEM to diversify sales revenue and improve margin.
With the emphasis of Process, System, and People, the company recognize the importance of structure and planning to develop clear Process and then strengthen it by incorporating the System to deliver consistent results that allow People to perform effectively and efficiently throughout the company in delivering a profitable result with margin of 30%-40% and NI of 10%-20%.