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again, Chris Bintliff back with create the next from Pro CFO partners today. I'm with Jeff Wheatley and Jeff, were talking about operational finance, which is a pretty fancy phrase. So let's start by just helping me understand what that is. How do you define operational Finance?

Hey, Chris, how are you today? Great. I think operational finance is it's really a couple of things. First, I think that it's translating financial metrics into operational KPIs, as well as transforming financial KPIs into operational process improvements. And what that does is it allows the realization of either financial opportunities or the mitigation of financial risk through operational action.

That is really interesting, because one of the words that that you used was transformation, which is powerful. So talk me through that a little bit more? How does? How do I take all this operational stuff? And how do I help that transform? These are these different parts of my financial fixed function and sort of organizational picture?

Sure, I think a simple example of this is, you know, somebody's looking at a financial report, they're looking at a p&l, and a monk's performance doesn't meet their expectation. And it's off by 5% 10%. And the CEO or the owner comes down and says, Well, why were we off 10%? And what are we going to do to get that 10% back? Well, the transformation of 10%, into actionable items to allow you to achieve that 10% improvement. That's operational finance, it's where it takes a financial metric, such as a 10% Miss in performance, and it digs down into understanding at a real kind of at a rate volume, actionable level, it digs down into what caused that Miss or what caused a change in trend or change an expectation. But more importantly, it allows a pretty direct and easy way for a business to attack, or put together an action plan, in order to in this case, mitigate that shortfall or it could be, it could be leveraging an opportunity somebody performs really well or a business performs really well. And you want to understand how that happened. And what you can do to continue. so awkward the transformation is tourney, a non operational, non actionable term, such as a 10% bonus, or even a $5,000. This and turning that into an action and an action plan, they then can be executed throughout the organization.

This is really where the rubber meets the road, I think on on some of what we talked about a lot with some of the different pros that we meet with in our conversations is doing more than just looking at numbers doing more than just observing reports and sort of having a passive relationship with that stuff, but really getting active and digging into. So do you find that a lot of organizations struggle with this, don't do this well or effectively ignore this when they shouldn't be what's what's the kind of the default posture that you see a lot when people are in need of digging in, but they're just not for some reason.

I think it's one of two things, right? If if it's the CEO or the business owner, they, they see they feel they know the business. And when something happens to throw them off track. They understand that there's something that's throwing them off track, but they just don't know how to quantify or measure or turn that innate gut feeling that they have into something that can actually be actionable. And if you think about it from the CFO standpoint, you know, a good CFO is going to know the business, not the financial metrics of the business, they're going to know how the business runs almost as well as the CEO. Because what they do is they're the partner with the CEO to say, Hey, this is what's happening from an operational standpoint, and this is how it translates into results, whether those are p&l results, whether it's balance sheet growth, whether it's inventory, whether it's debt service, this is what's going on within the business, that translates into into the financial results. Good CFOs understand that in relationship where it falls apart is when a CFO is not thinking about the business as it business owner, but rather, as a finance professional or an accountant, or they're just thinking about the process of finance, as opposed to the business aspect of how do financial metrics help guide and manage my business? from an operational standpoint,

this is really important because I think there's a an idea of of key performance indicators, these KPIs that we all, you know, we all kind of think we know what those should be across the board in a generic sense. But then in our own organization. You know, we think these are what we need. Part of what I'm hearing you say is that investigative sort of operational financial leader won't just read those KPIs, but will help determine if those KPIs are even the right KPIs, and what should be the right KPIs and almost sits as a cog in the wheel of all these different departments or business units and reporting that comes from each of those to sort of make sense of all of these aspects. Is that accurate to agree with that?

I think that's right. I think, you know, every business has, has KPIs. Whether they're acknowledged as KPIs or not, they exist, and every business owner understands what the drivers of his report, his or her business are translating those KPIs and understanding which ones are really the important ones. That's what the CFO does. That's what a good CFO will do. You know, there is in today's technological age, there is no dearth of data that's available, and having good data. measurable data. That's the starting point for any kind of effective operational finance strategy. But it's more than data. It's translating data that is nice, but not necessarily impactful, into something that's very impactful to the success of the business. Good CFOs are going to bring that perspective to the table and partner with their CEOs in order to produce meaningful and efficient results.

What are some illustrations you have or some experiences, you have kind of deconstructing some of these KPIs into this meaningful sort of operational sense? I'm sure that you've been in organizations of different sizes and work with clients and customers of different sort of industries. How is this in the real world shaped some business dynamics from your perspective?

Sure, let me let me give you an example from that I personally was part of, it's been, you know, five or 10 years ago now 10 years ago, now that this occurred, but there was a business that I was a part of, and it was a small box retailer with about 1000 stores across the country. And so, you know, with 1000 stores, we had, you know, some pretty robust financial reporting mechanisms. And we started looking at p&l trends and realized that our revenue yields, what we considered a revenue yield kind of a gross profit margin perspective, it started to slide a little bit, and we didn't understand why because our unit sales were of our primary products were right where we thought they would be, and we hadn't made any pricing decisions. And our product mix was stayed about the same. So we didn't understand why we were seeing this decrease in gross profit margin. So we started to dig down a little bit deeper. And, and started to notice that, you know, part of our business was service related. So we'd sell the product, and then we'd service the product. And the service of the product was an ongoing relationship that we had with our customer base. And we charged kind of a fee for service type of arrangement. And what we what we noticed was that our fee revenues relative to our transactional volume, the transactions of our fee, revenues were not declining. But the fee revenues themselves were declining. So we went in and started and realized that there were some operational pockets of the country, or they were performing the service, but they just weren't charging for, for whatever reason, they just weren't charging for it. And so we went in and said, No, this, this is a value service that we provide. We know the number of transactions that we're doing, and we're paying for those transactions on the cost side. Let's put an action plan together that says watch, try to understand why are we Why are we not charging for these fees? Is there a good business reason to do that if regulations change in the market that prohibited us from charging those fees? Was it a competitive issue that came in said we felt like we needed to waive those fees in order to be competitive. And on a national basis? It was all of them. Actually, there were there were all of those factors were impacting it, but understanding the specificity of where those calls Where existing where those gaps were existing, then let us design very actionable plans within the operational group to say we're going to we're going to measure how many transactions we have every week, we're going to measure how many we charge for, we're going to look at the price that we do charge for those. We're going to report on that every week. And oh, by the way, in order to reinforce this behavior, we're going to put some incentive compensation and align incentives all the way from the frontline folks doing the work all the way through the CEO. And then we started reporting on that month after month after month, and over about nine months, we were able to improve the performance of this financial metric and operational KPI to a result of about a million and a half dollars of incremental profit that we would not have had, if we hadn't had the operational finance techniques in place in order to identify action and measure those financial

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One of the things that really stuck out in this illustration wasn't just sort of this operational finance, but this culture of investigation where you didn't just say, because I think there would be a tendency to say, well, we got to raise some price, or we have to raise some metric across the board, just do this. But instead, you figured out that there was a pocket going on inside different parts of the country. And then you also said, Well, maybe that's maybe we should look into that, like maybe that's valuable. Maybe there's a reason for this. That's interesting. What do you find that there's a tendency to overreact or under react or react in the wrong way, instead of having some methodical patient analysis in these things?

I do. I think oftentimes, you know, a business's reactionary approach is just to say, Well, okay, we're X percent off. So we're going to go do X, Y, and Z across the board by tomorrow, in order to recover XYZ. And oftentimes, if you step back, and you can try to be efficient in how you look at these things, you can either determine that the answer that you originally thought might not be the best approach, or that the answer that you thought is not possible. And the net result of that is your you have a more efficient allocation of your resources, right? There's a fixed amount of either labor resource or infrastructure resource that you can put against any individual initiative. And if you understand the right approach up front of what is achievable, and what's not achievable, again, back to the concept of actionable items, an actionable metric that you can physically move and physically impact through your operational plans, then your organization is just that much more efficient in how they allocate and handle their resources.

This is fascinating, do you have guidance or advice for us? If I'm in an organization, and we're not used to thinking about our finances in this sort of actionable operational way? Maybe our CFO is really great at the reports and, you know, determining what the readouts are from these KPIs, but is less investigated? How do I get started? What's my sort of first essential step or two, to really start to think about this in a meaningful way?

I think, you know, good CFOs. And good organizations are going to have one thing in common with a very basic, and that's an intellectual curiosity. You really do have to just think about the business as a business as if it was your own business. And when things don't don't look, right. Just have to ask why. Right? That's the main question is why? Why did this happen? Why did it not happen? Why did it change this way, as opposed to that way? Understanding the business from a business perspective and having the intellectual curiosity in order to answer those questions. That's and then having an open and honest dialogue with your management team partners. That's where The value of this type of exercise will come. That's hard to do at the beginning, because people oftentimes don't want to ask questions. When they're not sure the answer, they don't want to ask a question. A CFO may not want to ask a question to a head of operations or a head of manufacturing, if they think they're going to be ridiculed for not knowing the question, or or not knowing the answer, or they're going to be second guessed about the offerings that they ask or the recommendations that they make. So there is a big cultural aspect of intellectual curiosity to get people comfortable with asking those questions. And then once you get that process started, then the rest of it usually flows pretty easy, because it's it really it's not a question anymore, of businesses not having the data to enact to ask these questions and get the answers. The data exists everywhere. It's understanding what data is important, not only from a financial perspective, but how that translates to an operational perspective. And then how you can take action against those things that you find through an intellectual curiosity, perspective, approach and discussion, in order to take advantage of the tools that you've got,

what data is important, and what to do with that data to achieve some specific, new actionable outcome.

And Chris, you hit on the key word, actionable outcome, right there, there's a lot of key data. That's very important. But it may not be actionable. If it's not actionable, it doesn't mean it's not important. It's just you have to tackle a different way you have to mitigate it. A good example is if you're in a regulated business, and a local regulation, changes to where you're either prohibited from doing an activity that you've always done, or you're restricted from doing an activity in a certain way. Well, you may understand exactly what the issue is, there's not a thing that you can do about it, because it's no longer available to you. So it's not an actionable piece of information. It is actionable only to the extent that you determine mitigating steps and mitigating processes to work around what is now an obstacle. So the actionable piece of information to me is the most critical, you have to discern what's what's nice to know and nice to have with what you can actually do something. And

that is where the guidance of a, as you pointed out kind of this intellectually curious, not just culturally and organizationally, but this CFO or this financial, you know, professional who sits in this role has to have those capabilities to be able to steer and guide other leaders in the company towards understanding what is actionable and what isn't. So that again, we don't get into this sort of over reactionary or under reactionary space, where we are obsessing about things that we can't do anything about, rather than focusing on the things that we can take action on.

Absolutely right.

Jeff Wheatley, I feel like we just scratched the surface. I hope you'll come back and dive deeper into some of this. I love some of your illustrations and add notes. And there's a lot to learn in this stuff. Thanks so much for joining us today. We

learned a lot. Thanks a lot, Chris. Good to be with you.

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