Finance in Operations
written by : William F Bryant If operational divisions in a business were an automobile, I tend to view finance as the gauges and warning lights. The gauges monitor velocity, RPMs, fuel and temperature but these gauges are side by side the warning lights that light up when something is amiss and outside the acceptable operating range in the numerous subsegments that allow the automobile to do what it was designed to do. Once a business is up and running (or getting ready to be up and running) the finance department will, similarly, monitor operations through a myriad of metrics and also send up warnings if something seems amiss and outside the acceptable ranges in all the subsegments that comprise the business. What’s more is that, much like premium aftermarket parts and automobile maintenance, the finance department works to optimize expenditures and capital to get the most out of every dollar put into the business and to keep it running at its highest potential.
At this point, if you are not familiar with many business operations, you may wonder exactly how this works. Simply put, the financial statements for the individual departments and the business as a whole are not kept just for tax purposes. In fact, companies would track financials even without any corporate taxes. Afterall, only through the use of a benchmark can one measure progress. Financials are kept on everything from your properties, plants and equipment to inventories in all their stages of completion, all labor, tools, maintenance, servicing, insurance, permits, shipping, capital or operating leases, lines of credit, debt or equity issuances, stock options and even company investments. Anything that has a receipt attached, going into or out of the company, is tracked. This information will allow you to assess how efficient your operations are, how often you have to order supplies, how much it may cost you to order too much or too little, the efficiency of your usage of capital and labor, the usage of derivatives as an insurance hedge to protect profits or rising raw material costs, and even assist in strategic planning for marketing, expansion of product lines or any other investments that will increase profits and margins for your business. Due to my background in mathematics and courses of applied econometrics and statistics, I tend to make use of regression theory, correlations or probability theory in both optimizations and predictions. If done correctly with data and proper significance testing, these tools can be very powerful in many scenarios. Such scenarios of predicting sales in certain environments and variables, returns on advertising dollars, inventory levels, labor scheduling and so many others. I really enjoy using these math techniques and even more so when I get the opportunity to use them to assist your business operations. |
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