How IoT Will Increase Profits

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“How Closer Collaboration between Operations and Finance can make a big difference to the bottom line.”

With the coming of IoT, it’s possible to connect devices directly to a chart of accounts that could measure real-time cost, which together with finance can compute close to real-time productivity and impact on pricing, market mix as well as EBITDA.

The collaboration of the Director of Operations and Director of Accounting and Finance can really impact the bottom line- if they can work in concert.

When dealing with companies that produce relatively high volumes of sales, a slight change in costs can have an immediate impact on EBITDA. For example, look at the sample below of a  four year “horizontal Comparison” of a company’s P &L. The percentages show the relative variations with respect to Revenue. Keep in mind that a 10% difference in expense controls equals a $ 1 million difference. Of course, there are reasons for the variation in expenses but what matters is how management can adjust for those changes. Waiting for a quarterly review can be way too expensive to the bottom line.

 

Ideally, if a company can closely hold the relative expense percentages, the potential EBITDA would be sales less the sum of the lowest expense line items. In the case above, that would provide for an “optimal EBITDA” of 15%. One could say that not operating to the optimum potential EBITDA is a real opportunity cost. So, does it make sense to aggressively manage cost controls as much as possible?

Companies normally look at monthly financial statements and focus on the dollar numbers instead of focusing on the percentage changes in expense categories with respect to revenue. Indeed, EBITDA is the “mother measurement” of how well a company is doing over a period of time, but EBITDA is directly impacted by what is happening to expense controls. Proactive companies watch those expense controls closely. However, to optimize EBITDA requires more timely indicators of key expense control changes. If at the end of each day, operations can provide finance with such things as actual materials cost, labor hours and units of production, finance can quickly determine what is really happening with the cost of production, which translates directly into profitability, pricing and a much finer grained forecast of real cash flow, which enables management to develop more precise strategies as to pricing, market mix and labor productivity. With the coming of IoT, it is possible to connect devices directly to a chart of account that could measure output which together with finance can compute real-time productivity and EBITDA.

Break-Even

One key operational and financial measurement is break even. This allows the company to know when it has past into profitability for any period. This financial number can be translated into operational metrics. For example, finance can compute a daily break even for a number of units that must be produced to make a profit for a day, week, month or year. Most companies use sales as a break-even measurement, but it can also be demonstrated on certain operational outputs. Indeed, using break-even as an incentive is a powerful tool as workers can recognize an objective number to shoot for.

Companies that are growing rapidly or companies that need to improve productivity can use timelier operational-financial analysis to help make proactive decisions on such things as CAPEX or hiring new staff rather than wait for a monthly, quarterly or even semi-annual financial review.

Information is power when it comes to strategy as well as tactics. Being able to have a closer information link between operations and finance can make a big difference in this era of agility and extreme competition.

Ask the Experts

On June 27th, MetaExperts Remote Center of Excellence will present another of its FREE webinars that will focus on the important link between operations and finance. If you haven’t dropped in to view one of the RCoE webinars, you will be pleasantly surprised at the level of knowledge and experience from a roundtable of experts that would normally cost thousands of dollars an hour just for their consulting input. And by the way, participants can ask questions of the group during the 45-minute webinar. So, if you want to help optimize profits and improve your reach for excellence, follow the link to register for the FREE WEBINAR.

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