Is your business's cash flow not meeting its full potential? Operational inefficiencies are often the culprit, silently eroding your profitability. This is true regardless of the size of a venture, but for small and medium-sized businesses, managing operational efficiency becomes particularly important as every dollar in or out of the business counts.
How big of an impact can operational inefficiencies have on a business? Research firm IDC has found that inefficiency costs companies anywhere from 20-30% of their revenue each year. Think about that for a moment: What could your business do with an extra 20-30% of revenue?
For small to midsize businesses, those savings can be a game-changer. The question is, how do you identify these inefficiencies and eliminate the associated costs from your bottom line?
For many businesses, the answer lies in operational analysis.
What is Operational Analysis?
Operational analysis is the how of cash flow management: It looks across your business to identify opportunities to better balance the inflow and outflow of cash to support the overall financial health of your business. It can help identify areas where costs can be reduced or processes can be streamlined. It can pinpoint areas where sales can be increased, leading to more revenue opportunities for your business. And it can provide valuable data for financial planning and forecasting, helping businesses anticipate future cash flow needs and make informed decisions.
In short, operational analysis is key to cash flow management, just as effective cash flow management is vital to the long-term success and sustainability of your business. Consider this article your primer on how operational analysis works and how you can implement it within your company.
What Does Operational Analysis Entail?
Operational analysis involves an in-depth exploration of the current processes driving business operations and an investigation into how efficiently those processes are functioning. Reviewing areas such as inventory management, production and billing cycles, expense control, and accounts payable and receivable, are common ways to identify areas for improvement.
Throughout this process, key investigatory questions may arise, such as:
- Is operational capacity sufficient to meet demand?
- Are operations structured so that inventory is properly managed?
- Are the costs of operations controlled effectively?
- How many operating cycles does the company have, and how long are they?
- What are the KPIs of operations and can they be improved, expanded, or condensed?
- Are we utilizing all efficiencies available to us, such as balance sheet efficiencies, process efficiencies, acquisition and spending efficiencies?
Analyzing the answers to these and other questions offers insight into operational efficiency and creates the foundation for an actionable plan to address areas of concern. Developing a plan provides an opportunity to save costs, enhance productivity, and ultimately, maximize profitability. This also allows for the implementation of management tools that can indicate when and where changes are needed in operations to ensure operational efficiency is an ongoing area of focus and that cash flow is protected consistently over time.
How Does Operational Analysis Promote Future Growth?
Operational analysis and cash flow management are fundamental components of creating a solid, healthy foundation for your business. Such a foundation is vital to achieving not just growth for your business, but growth that can be sustained over the long-term. Once you obtain a clear understanding of your operations and an effective cash flow management strategy, you can determine what your business can achieve, both now and in the future.
It’s also important to understand that the systems that support your business today are not the same systems and processes it will need as it grows. This is where operational analysis can provide additional value, allowing you to project operational capacity needs as the company grows to determine how capacity can be expanded.
And of course, a key aspect of all this work is implementing the right management reporting tools so that you can track progress and make decisions effectively, both of which will drive your performance and your strategy. These tools will empower your management team to continue optimizing operational efficiency over the long-term. While these tools and specific key performance indicators (KPIs) will vary depending on the industry and the business, there are a few standard approaches that can inform the reporting process:
- Develop manageable metrics that focus on profitability by product line;
- Determine what metrics drive revenue, gross margin, and working capital;
- Report key operating metrics as frequently as needed – whether daily or monthly.
Who Conducts Operational Analysis in a Business?
Operational analysis is a team effort. Often, particularly in small to midsize businesses, the CEO and members of the management team play a vital role in the process, as do operations directors, managers, and business analysts. It’s also important to have a financial leader involved. This could take the shape of a full-time or fractional chief financial officer, who can drive operational analysis from a cost efficiency perspective. “The CFO must work with the CEO and management team and others to develop a plan to implement operational strategies and develop metrics to ensure that the long-term strategy is on track, or to determine if corrective actions need to be taken,” says Ken Fruscella, an Ohio-based fractional CFO with FocusCFO.
Another key point: Operational analysis is not a one-time event. As a business evolves, it is important to continuously take stock of how operations are performing and where improvements can be made. This will allow you to maximize cash flow over time, which will set your business up for success now and in the future.
