I am reading a new book ‘Optimizing Back Office Operations: Best Practices to Maximize Profitability’ by Zahid Khalid. While the title may sound a little boring, I was so excited to find this book. It is a very good read and definitely not boring! Zahid has gone into detail of the business case for creating lean business processes in back office operations. He has given the name ‘Financial Supply Chain’ to all the operations that are performed to consummate the business transactions for a company and document them per accounting and regulatory requirements. This is a perfect description of these processes because
1. It is a simple and easily understood metaphor for all the business processes
2. It describes the importance of these business processes.
Most business people understand the importance of the Operations Supply Chain and impact on the businesses profitability. If your operations supply chain is inefficient, manual, and ineffective, most businesses would be out of business in today’s competitive environment. As Zahid points out many companies like Dell have grown dramatically and become leaders in their industry because of the advances and often complete redesign of their Operations Supply Chain. As with Dell, the Operations Supply Chain has given them a competitive advantage.
Zahid asks the question ‘What is the compelling reason for taking the plunge into the world of financial supply chain?’ Answer ‘ CASH’! He states that independent studies conducted by several research firms estimated that between $500 billion and $1 trillion is tied up in unnecessary working capital globally in the financial supply chain. That is a lot of money and a lot of lost profitability!!!! As Zahid points out ‘Working capital optimization improves cash flow, thereby minimizing reliance on lines of credit and other short-term borrowing.’ It also reduces time required to perform the tasks of the financial supply chain, reduces the number of employees required, improves the accuracy of the information produced and provides that information in a timelier manner for decision making.
Let’s discuss each of these benefits in a little detail
1. Minimize reliance on lines of credit and borrowing. In the easy money days of a couple of years ago most executives did not worry about how much they used credit and just accepted it as a need in business. Now, however, with banks pulling back on credit, executives are seeing their ability to meet the demands of their businesses severely restricted. Reducing dependence on credit now means survival to many businesses.
2. Reducing time required to perform the tasks of the supply chain. This has numerous benefits since when we reduce time we reduce cost of each transaction which goes directly to profit. As we all know $1 of reduced cost translates directly to $1 of increased profit. However, usually reduced cost means pain but by creating a lean optimized process, you can have reduced cost without pain.
3. Reducing the number of employees is part of the reduction in cost. It also helps to improve accuracy because we all know that the less hands in the soup the better it is.
4. Improving the accuracy of the information produced is one of the most critical aspects of Financial Supply Chain optimization. It is the equivalent of reducing errors and waste in the Operations Supply chain. Poor quality of information leads to embarrassing restatement of financial results, poor management decisions, loss of revenue, and increased cost from late charges, and inaccurate payments.
5. More timely information for decision making is probably the most significant benefit. In the days when business moved at a slower pace it was ok to use information that was aged for decision making. But information is not like a fine wine that gets better with age, it rots. Today information has a very short shelf life and to manage a successful business information is needed when it is happening not 30 days after the fact.
As we have discussed on some of these posts creating lean or optimized business process requires a combination of process change enabled by information technology and services from financial supply chain partners such as banks. It also requires team members that have knowledge of finance, change management, and information technology. Optimizing your Financial Supply Chain may be challenging and time-consuming but also extremely profitable. Contact us at 818-227-5025 to discuss how an Optimized Financial Supply Chain can improve your profitability.