Hidden Profits Blog

Finding the Gold in Your Business

Hidden Profits Author:

Lynda J. Roth

As the president and founding partner of Woodland Hills-based LJR Consulting Services, Lynda advises clients on ways to improve profitability and productivity through both technology and business processes. She also works with companies and private equity firms on the role of information technology in mergers and acquisitions.



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Creating A Strategic Finance Function

Filed under: business process,finance department,Information Technology,lean accounting — Lynda Roth at 6:40 pm on Saturday, March 20, 2010

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.

 

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