Focusing on Improvement

July 3, 2025

Every couple of years, I teach a financial course for AICC, and I as I write this, I’m preparing for the next one. (By the time you read this, the course, hosted by Acme Corrugated Box, will have taken place on May 14, 2025.) I always take this course preparation as an opportunity to examine how the converter’s finance department can influence and improve the operation as a whole.

Most company owners and general managers come from the sales side of the business or, less frequently, the production side. Very few are financially oriented and have learned the financial side of the business while on the job. They are accustomed to getting “their numbers” in a certain format that they have learned to understand over the years and tend to be somewhat resistant to change. Although this is a great generalization, my 47 years of experience in public accounting tell me it’s true—at least 80% of the time.

The other side of this coin is that most accountants tend to be focused on traditional tasks and the conventional accounting process and are not looking to reinvent the wheel. Daily tasks that keep the company operating take precedence over new ideas. Without a mandate for change or improvement, accountants tend to go for precision and want to make sure their “books” are as correct as they can make them within the existing system.

Accounting departments often cover many of the other functions such as personnel, employee benefits, and payroll, especially in smaller businesses. Even if the accounting department wants to effectuate change, there is usually no mandate for it, and as we know, most people don’t embrace change—they fear it. What is a forward-thinking, progressive chief financial officer or controller to do?

Here is the action plan I intend to share in the financial course:

Give them fast, accurate beans.
Focus on materials and material margins.
Add key performance indicators (KPIs) and management goals into the reporting framework.
Reconcile and integrate cost accounting results and analysis into the monthly reporting.
Focus on profit and cost centers.
Integrate other company data collected outside of the accounting systems to create meaningful departmental reporting.
Let’s discuss these points in more depth.

Fast, Accurate Beans

For monthly reporting to have any real impact, it must be done as close to month’s end as possible. In my opinion, there is no reason it should take longer than three business days. This is crucial for the following reasons:

The further you go from the end of the period, the less impactful the information becomes.
To effectuate change, you need credibility. Fast, accurate data gives this to you, while taking weeks to put the numbers together has the opposite effect.
You need to close out the accounting period and move on. This gives you more time to be forward-looking rather than backward-looking.
- To accomplish this, you must be willing to make estimates and allow for a little less precision in the monthly close; 95% accuracy is good enough if getting that extra 5% takes two or three weeks.
- The other key to this is to put in good cutoff procedures and adhere to them strictly. Most companies that see wild fluctuations in their monthly profits have sales or purchase cutoff issues, and there is a doubling effect of bills entered in the wrong period; they will lower the profits in the current period and increase profits in the following period by the same amount.

Focus on Materials and Material Margins

Whether you are a corrugator selling truckloads of brown boxes or a digital display company selling relatively small quantities of multipart point-of-purchase displays, the largest expense on your income statement is likely to be materials. The monthly reporting must have a focus on material margins by major category of income. It should also include information about the overall volume by category, the cost of procurement, and the efficiency of usage. Ultimately, if these margins can be linked to the underlying machine hours, a powerful predictor of profitability can be created.

Adding KPIs

If your management team has identified what they believe to be KPIs that predict success for your company, you must add them to the statements. This will help management determine whether they have picked the correct priorities to track and will help management monetize and vet them. If your company has not formally settled on KPIs in conjunction with discussions with the management team, this is an opportunity to add some and test their validity. While one of the goals of reporting is to be as concise as possible, it is important to have those goals, and there is no better place to show them than the monthly financial statement.

Reconcile and Integrate Cost Accounting Results

The most important daily decisions that companies make have to do with pricing orders and accepting customers, yet the cost accounting system is almost always in a totally separate database from the accounting system. Making money in a manufacturing business is easy; just make sure that your contribution dollars are greater than your fixed costs. That is easier said than done, especially when your costing system is in a separate database, which may or may not reflect the reality of your actual costs. But if you can reconcile the two systems to within a tolerable difference, then you can see that the costing system is based in reality, and you can add some of its results to the financial reporting.

Creating Profit and Cost Centers

Most financial statements start with sales and end in net income, with basically four different expense categories in between: cost of goods sold, shipping, selling, and general and administrative expenses. There may be some additional details of factory overhead items and items of other income and expense. Most companies have readily definable departments, most of which have a manager. Wouldn’t it be better to break the expenses down by these departments? So instead of plant, selling, and general and administrative, you could have plant labor, shipping, maintenance, delivery, sales, customer service, design, accounting, and maybe others depending on how your company is configured. At least management would have a sense of what each department costs, and each manager could get their own report on their departmental expenses as the year goes on, without necessarily having to see the entire financial statement.

Profit centers can be a little tougher to design, but separating machine-centric work from labor-intensive work from brokerage activities is imperative for understanding the profitability of each. When you have all three of these types of efforts comingled, the results become difficult to decipher.

Integration of Other Company Data

Your company collects a lot of data outside of the accounting system: machine hours run (and not run), plant labor, shipping and delivery, design, customer service, maintenance, etc. One of the keys to profitability in any manufacturing environment is machine uptime, but where does that show up on your monthly financial statement? What about shipping efficiencies or miles driven? The number or orders processed by customer service or design? A tremendous amount of data could be adding powerful analytics to your statements.

I intend to have a good discussion with financial managers about these and other topics relevant to their jobs. My objective will be to inspire them to take on a more active role in helping their companies improve. They say nothing can be improved without measuring it, and I agree. But integrating the measurements within the financial reporting framework can be a powerful tool to help a company improve its profitability.