Hidden Profits Blog

I attended an APICS event last night and the presentation by Robert Fox focused on lean & Six Sigma and why we would want to implement them. Most of us associate ‘lean’ with manufacturing as the concepts which originated at Toyota were focused on the manufacturing process to reduce cost in manufacturing, reduce lead times and improve quality. 

These concepts also apply to non-manufacturing businesses and to the non-manufacturing processes in all business, which I have referred to as the Financial Supply Chain (see my blog posts How to Evaluate the Financial Supply Chain http://www.hiddenprofitsblog.com/how-to-evaluate-the-financial-supply-chain and The Financial Supply Chain http://www.hiddenprofitsblog.com/the-financial-supply-chain).

While in last night’s presentation the concepts were not new, the approach and the reasons were certainly very thought provoking.  Lean processes and going lean are almost always associated with reducing cost.  That of course is a very laudable goal.  Last night the focus was on the goal of increasing throughput or capacity.  Which of course once you reduce waste and time of the process you automatically increase throughput.  We normally do not look at that side of the coin.  In manufacturing, Mr. Fox talked about how increased capacity provided the opportunity to make and sell more products without increasing the costs of production.  We usually think of increasing a capacity with the need to add plant space and/or additional locations machinery and people.  However, if we have reduced waste, thus freeing up capacity we can in fact increase the quantity produced and sold without increasing cost.  This makes the additional products produced very profitable. 

The same is true when we look at non-manufacturing processes or the Financial Supply Chain.  Even though the focus for the last couple of years has been on the slowing economy, layoffs etc., the reality is that many companies are growing.  As companies grow they rarely are evaluating their processes to be efficient.  The workload grows with the company, often faster, and they simply keep hiring staff and increasing office space to manage the workload.  Often as part of this lead times increase.  So what does this look like in the financial supply chain?

The number of AP invoices increases and often the number of late payments increases.  So the AP department grows and everyone scrambles to find ways to make sure that invoices are paid on time. The assumption being that the more people in AP the more invoices can be processed in a timely manner.  This often results in chaos.

As the number of customers increases, the number of AR billings and cash receipts increases.  Often the time to get invoices out to customers increases.  AR personnel are busy with billing and applying payments and they don’t pay attention to collections.  So, often cash inflow slows down.  And of course the number of AR personnel increase to handle the billing and cash receipts.

Slowed billing and payments start to create an imbalance in cash flow so now there becomes an increased reliance on working capital lines of credit, which of course increases interest expense.

Month end close processes become more cumbersome and more accountants are hired in accounting to address all the needs of the close process and management’s increasing need for information. 

Of course you also have the ancillary costs of more office space, additional locations, increase personnel in HR and Payroll and increased management levels.

What would happen if at this point the company embarked upon implementing lean business processes to optimize the financial supply chain? We could increase capacity and throughput in the non-manufacturing processes! The business would be able to grow at the same pace or maybe even faster, without the explosive growth in personnel and cost.  Management would have better information for making decisions which could further enhance growth.  Customers would probably have less complaints which would also further enhance growth.

This has in fact been my experience with many clients.  In my most recent project, the client was planning to double in size, which would have made them almost a billion dollars in revenue with locations all over the US and Mexico. By designing lean processes for AR/Cash Application, Purchasing/AP, HR/Payroll, Budgeting, Capital Assets and Financial Close, they project they will be able to absorb that growth with the current staff levels.  An accomplishment most CFOs would consider impossible. 

If you would like an assessment of how your company could benefit from lean business processes contact us at 818-709-6583 or info@ljrconsultingservices.com

At some point you have probably heard the quote, ‘If you fail to plan you are planning to fail’.  And with that individuals create goals and plans for their careers, life, vacations and companies create corporate strategies, annual plans and budgets etc.

However, how often does a company create a strategy for Information Technology.  I’m not talking about an IT budget although there are plenty of companies that don’t even have those.  An IT budget just defines how much of the corporate funds that IT department is allowed to spend and on what products/services.  What I am referring to is a strategy on how the company will utilize information technology to create competitive advantage, to open new markets, to brand the company and to support the operations of the business.

What do I mean by an IT Strategy or IT Roadmap?

An IT strategy or IT Roadmap is a detail plan that defines how and where information technology will be utilized in the company.  It identifies areas where management believes IT can be used to:

• Improve productivity and reduce cost
• Create a competitive advantage
• Improve intra-company communication and cooperation
• Improve financial controls
• Increase market share and open new markets
• Provide new opportunities for customers, partners and vendors to interact with the company 

It defines the priorities of the opportunities/initiatives, assigns responsibility/ownership and defines date and timeframe for each initiative. 

Like most plans it should encompass both short term and long term goals.  So it should include a vision of what the company would look like with all the desired functionality implemented over a 5 year time frame.  Then each initiative should be prioritized and placed on a 5 year, 3 year or 1 year schedule.  Finally a detailed 18 month plan should be defined that includes initiatives, projects, timelines and estimate cost and resources.

Why do I need to have an IT strategy or IT roadmap?

IT is no longer just about how to document the business transactions so it can be accurately reported to the IRS, the bank and other outside entities that need a picture of the financial status of the company. 

IT impacts every part of the business.  As a result there are many competing priorities from all areas of the company.  At one time accounting was the primary consumer of IT services, however, today IT touches everyone in the company, customers, vendors and partners.  So needs must be assessed, solutions identified, costs estimated and priorities set for all those competing interests.  In addition a path needs to be defined on how to get from where you are to where the company wants to be.  One of Dr. Stephen Covey’s 7 Habits is ‘First Things First’.  This is critical to define in an IT strategy.  Every IT initiative requires infrastructure, systems, and resources.  If those are not addressed in the correct or most logical order, the result is a failed and/or significantly over budget project.  A good IT strategy will define prerequisites and enable you to put the initiatives in the correct order for success.

To get more information regarding creating an IT Strategy, contact Lynda at 818-709-6583 or email info@ljrconsultingservices.com 

Have you gone on a corporate crash diet in the last couple of years.  After the binging in the early 2000’s and the financial collapse in 2008, many companies felt it necessary to put themselves on a crash spending diet.  So what do I mean by that.  They did one or more of the following;

• Reduced staff corporate- wide by 10%, 15%, 20%
• Halted all spending on marketing, training etc.
• Halted all capital spending on improvements, acquisitions, product development

So now it is almost 2 years later and the problems from these actions are starting to be felt.  These actions were taken to preserve the company but now the results may very well have put the company on an unsustainable path. Why does this seemingly correct response become unsustainable.  Frequently this creates a downward spiral in which

• Customers become unhappy because service suffers
• Employees become unhappy because of increased workloads and overtime
• Productivity suffers because of increased workloads
• Sales suffer because of lack of marketing and the above results of downsizing

Or the second scenario is that the company weathers the storm and sales come back company starts to grow and now they begin hiring again because they are short handed.  The end of this scenario is that they have brought all the cost back that was shed and now they are vulnerable to the next downturn.

A better approach and one that will lead to sustained improvement is to evaluate all business process and systems.  Determine where there is waste and inefficiency and quantify the impact to profit and cash flow of eliminating or reducing the waste and inefficiency.  Often by identifying and implementing these sorts of targeted cost reducing strategies not only are the costs in the business reduced to be in line with the economic conditions, but the company becomes stronger and more competitive.

We have discussed the Financial Supply Chain and the importance to cash flow and profitiabilty for optimizing it.  Optimizing the Financial Supply Chain is a function of optimized business process and effective information technology.  In my last post, I recommended that business process be addressed before selecting new information technology systems. You want to optimize in this order so you can define requirements for the systems needed and the functionality required in each system.  So how to go about evaluating the effectiveness of the current Financial Supply Chain, selecting and prioritizing the processes to be optimized and creating the new system requirements. I  recommend the first step is an assessment to determine where your problems are and cost to the company of the current Financial Supply Chain processes. 

What is involved in an assessment.  A good assessment will address 4 key areas:

1. Information technology infrastructure
2. Information systems – ERP, Operations, Reporting, Document Management etc.
3. Business Processes
4. Organization – Finance and IT

The first step is to evaluate the business processes in operations, finance, sales and other supporting departments.  Inefficient processes that you are looking to identify are:

• Duplicate data entry
• Extensive use of Excel spreadsheets
• Duplication and multiple filing of paper such as invoices, purchase orders, employment applications etc.
• Manual processes to support lack of system integration
• Non-standardized processes due to multiple systems i.e. multiple ERP or accounting systems
• Lack of integration with customers, vendors & bank
• Processes that employees feel are inefficient
• Departments that do not have access to ERP, CRM systems
• Month- end close process that requires more than 3 days

The second step is to evaluate the information systems and technology infrastructure.

• What ERP or CRM system is being used, is there more than one
• When was the last time ERP system was upgraded & what is the technology platform
• What processes are a result of issues with the ERP, CRM or other key operational systems
• What custom in-house developed systems are being used, how old are they, how are they supported
• What systems are used to create financial reports/information for finance, outside organizations, operational management
• What are the issues the frustrate the IT organization
• Is there a consolidated data center
• Do all employees have access to the core systems and servers
• How are applications integrated
• Are applications outsourced

The third step is to evaluate the Finance and IT departments

• How are the departments organized – are there multiple IT and/or finance departments
• Who heads the IT department and do they address strategic business issues
• What skill sets do each of the members of the IT department possess
• What functions are outsourced and with what organizations

These are the key components of an assessment.  By evaluating these areas you can define functions within the organization that are inefficient.  After you have identified inefficient processes the next steps are to create continuous improvement teams to define solutions to improve efficiency.

Often a consultant trained in lean methodology may provide key insights in the business processes and be able to recommend technology solutions.  If you would like assistance with your assessment or process design please contact LJR Consulting Services at 818-227-5025 or email me at lynda.roth@ljrconsultingservices.com

In the competitive economic environment on the 21st century, finance is expected to be strategic and focus on providing accurate and very timely information for operation decision making and optimizing profits and shareholder value.  In addition the finance team in today’s businesses is responsible for developing appropriate controls and reducing risk to the operation. That puts big demands of the CFO and finance function.

In my last post I discussed the Financial Supply Chain and the importance of its optimization on working capital and sustained profitability.  This week I found an article from 2006 which again reinforces the importance of an optimized Financial Supply Chain in enabling the Finance Function to be more strategic.  The title of the article is ‘Best Practices in Creating a Strategic Finance Function’ by Katharina Muellers-Patel.

http://whitepapers.zdnet.com/abstract.aspx?docid=28204

In 2006, the author showed the breakdown of Finance function and the time devoted to them as follows:

Transaction Processing – 44%

Controls   –  21%

Management – 18%

Decision Support – 17%

So 65% of the finance function in companies is consumed by transaction processing and the controls of the transaction processing function.  Most of that time can be eliminated through efficient use of information technology and organizational and process efficiency.  The article sites that at that time top performing companies allocate only 30% to transaction processing and 45% to decision support and management activities. While that is a significant improvement I believe it can be better. The article sited that the main source of differences between the top performing vs. lower performing companies are the organizational structure for finance and the type of Information Technology (IT). 

The organizational structure generally focused on shared services finance organizations and outsourcing.  The primary benefit from outsourcing is the use of lower cost labor.  In my experience the problems associated with outsourcing of financial transaction processing is that the information transfer between the company systems and the outsource company’s system makes the organization cumbersome.  Also, since the primary  benefit is lower cost labor, eventually the cost of that labor will begin to increase thus lessening the benefit.  Also, there is no additional benefit to profitability.

In general companies tend to opt for a shared services organization.  The key to the success of this structure is not just creating the organization, but also creating optimized process and efficient utilization of technology.  For example, creating a shared services organization in which each of the combined organizations utilize different financial systems or different instances of the same system does not provide any benefit to the company.  Instead it places greater strain on the employees in the shared services organization as they must learn the different systems and continuously log on and off of systems in order to process all the transactions.  I have seen this situation at multiple clients and they are always a mess.  The article sites 3 different examples of companies that created shared services organizations especially one that continued to obtain improvement by changing technology platforms.  The shared service function was AP.  The initial structure the shared group used the multiple systems from each of the original companies.  Then they made significant improvement by just moving to a single ERP  platform and at the time of the writing they were changing the platform again to create a completely automated and integrated procure to pay function.

The study in the article showed that in general companies that had automated more than 66% of their finance processes had average finance costs of 1.2%  of revenues while companies with less automation had average finance costs of 3.0% of revenue.  Companies that relied on manual process and spreadsheets had process costs of $2.21 per $1000 of revenue while those with efficient automated processes had costs of $0.72 per $1000 of revenue.  The study also showed a correlation between the significance of the cost reduction and the simplicity of the information technology systems.  IT simplicity refers to standardized applications, integration of systems, and use of ubiquitous user interfaces such as web and smart phones and integration with partners (banks, vendors, and customers).

Today automation is much more that simply implementing ERP systems.  For an assessment of your companies finance processes and technology call LJR Consulting Services at 818-709-6583.