Financial Supply Chain Management: Unleashing Capital to Make Gains
In today’s global markets, everyday business activities can involve thousands of processes and individuals. When these activities are efficiently managed and coordinated across the enterprise, powerful synergy results.
In reality, many organisations struggle to make sense of silos of information drawn manually from a myriad of disparate systems. Information is often duplicated, making it difficult for financial controllers to create ‘one version of the truth’. However, by developing an information system that integrates the finance function with the rest of the organisation and utilises information exchange with trading partners within its supply chain, significant cost and time savings can be gained. Furthermore, much greater visibility across the enterprise can be achieved.
For organisations to stay on top of changing market conditions and ahead of the competition, they need a combination of tools and techniques. Effective Supply Chain Management (SCM) helps organisations plan and manage activities across the enterprise including sourcing, procurement, production, and logistics. It also allows them to better coordinate and collaborate with channel partners such as suppliers, intermediaries, third-party service providers and customers.
While effective SCM of an organisation’s physical operations is critical to its success, to remain truly competitive it must also implement an ongoing process of identifying the financial benefits within the supply chain simultaneously. This is where Financial Supply Chain Management (FSCM) plays an important role as it allows CFOs and other guardians of an organisation’s financial resources to identify metrics for monitoring and benchmarking. It also provides them with the ability to continually evaluate and take advantage of opportunities to the benefit of not only the organisation but also shareholders and customers alike.
Put simply, FSCM is not a product; rather, it’s a key to developing streamlined financial processes that are designed to integrate with an organisation’s physical supply chain operations to produce a positive impact on the business. It allows CFOs to compare performance through key indicators versus projected outcomes, while at the same time helping them to keep a close eye on factors such as industry trends, competitors or peers.
In addition, FSCM allows CFOs to identify the amount of working capital within their organisations’ assets that is tied up in the overall ‘cash to cash’ cycle. This allows them to assess whether the organisation is obtaining its optimum level of reward. Conversely, FSCM also allows CFOs to identify the financial burden of supporting their current physical supply chain in terms of interest charges, as well as the cost of labour and other overheads.
The key focus of FSCM is to ensure that the business, in meeting its strategic objectives, remains as profitable as possible, while at the same time optimising its cash flow. To achieve this, an organisation must first identify areas for improvement in its business processes then prioritise and quantify the benefits or pitfalls of any changes. This practice of identifying process-driven profitability based on financial merit coupled with the ability to rank changes in operations based on achievability enables the business to carefully pick the ‘lowest hanging fruit’. The upside of this approach means that the business is able to free up funds to support larger more profitable opportunities down the line.
The human element also plays a part in optimising FSCM. Approaching process improvements and change management in isolation of each other will result in neglect of the true impact on the organisation. For example, offering sales personnel and customers tiered bonus incentives or retro discounts can create unpredictable sales trends. This in turn can cause difficulties in managing cash flow projections as sales are held back or pushed forward to meet an individual’s personal agenda. Furthermore, problems can also be created by funds being tied up in inventory due to abnormal stockpiling.
For an organisation to streamline its operational supply chain processes with the goal of improving visibility on its financial supply chain, it first needs to identify the ‘real’ costs to the business. For instance, shorter lead times may be a great goal to have operationally. If, however, this results in invoicing inaccuracies or additional reconciliation work, then it would only result in longer processing times and the need to dedicate more resources to chasing credits. Therefore, in this example, shorter lead times would not add overall financial benefit to the organisation as it simply shifts costs from one department to another.
In contrast, the benefits of shorter lead times could be realised if improvements were synchronised with the financial department’s processes. However, an issue such as this would first need to be identified upfront and measures set in place to monitor deviations.
FSCM can be particularly beneficial for companies that have significant levels of outsourcing to low cost countries such as those operating in high volume manufacturing and related distribution industries. Technology and information systems play a key role in streamlining processes and helping these types of companies gain better visibility on financial data. This is achieved by seamless communication with external suppliers and customers.
One of the benefits of FSCM is that it can provide trading partners with access to an organisation’s system. By making these tools available – especially to smaller, less technically sophisticated suppliers – administrative and financial barriers are often removed.
With system access authorisation granted to suppliers, companies face less confusion over duplicated information as the information being created is a single source of truth. As a result, suppliers benefit as their costs are reduced and there is less need for reconciliation. Further to this the risk of error is reduced, disputes are minimised and invoices are settled faster. As a result, companies are able to build and nurture stronger relationships with their suppliers and be more attentive towards their financial well-being. They can also secure longer term arrangements that facilitate getting products and services to market faster, in addition to being in a better position to negotiate more favourable trading terms and pricing structures with suppliers.
To be able to fully transform an organisation from enterprise resource planning (ERP) and customer relationship management (CRM), to FSCM, several key changes are required. First on the list is the conversion of paper documents to electronic documents. With the availability of improved and more affordable optical character recognition and scanning technology, conversion is becoming more mainstream for many companies.
Next, companies need to automate wherever possible financial transactions. Automatic creation of financial transactions from externally sourced files such as major suppliers, as well as automatic reconciliation processes from files issued by banking institutions, are now commonplace.
Then companies need to automate debt and liability management; not just for the receipt and payment processes but also the constant monitoring of accounts enabling management by exception, isolating the workload focus on delinquent accounts. This helps CFOs understand who is in dispute and the reasons behind the dispute. As a result, the CRM aspect of the business is better supported by gaining a clearer understanding of the needs of trading partners. If necessary, preventative measures can be put in place before problems arise, which further enhances service levels on both sides.
The final step of the transformation involves the utilisation of Business Intelligence (BI) tools. These allow a CFO to easily monitor KPIs within the organisation. BI tools also provide automatic triggers or alerts for events such as cash shortfalls, or incidents of cash surplus that are expected to provide the ability to redeploy funds to higher yield alternatives.
By improving efficiencies within the cash payment and cash collection processes, organisations can reduce the overall cost per invoice or cost per transaction, as well as remove inherent errors. This will also help to free resources to manage exceptions such as delinquent customers. Further to this, CFOs will benefit by being able to better predict future cash inflows and outflows through integrated cash flow planning. They will also further increase efficiency within the finance function by reducing unnecessary duplication of certain administrative tasks.
An example of an company practising effective FSCM is one that works closely with its corporate credit card provider to pre-analyse all transactions placed on cards. The analysis occurs on the credit card provider’s systems initially, with the data then cross-referenced and interfaced to enable automatic posting of expenses to relevant general ledger accounts. Due to the high number of corporate credit card holders, the process has allowed the company to reduce the amount of resources needed to process transactions. It has also helped the company to stay on top of spending and avoid unnecessary interest charges and fees.
In many aspects, effective FSCM involves a simplistic approach to solving rather complex business problems that can ultimately waste time and money. For instance, by simply removing budgeting spreadsheets and incorporating data onto a single platform, a company can gain the ability to share information across the enterprise. It can also simultaneously reduce the need to duplicate data input, while at the same time increasing accuracy. Further to this, financial controllers can integrate information relating to real transactions occurring within the end-to-end physical supply chain with predicted budgeted financial transactions. This provides them with an accurate cash flow forecast, allowing for long-term cash coverage and shortages to be identified and remedial action taken sooner.
So, how can organisations wishing to overcome the issues associated with inefficiencies in the management of financial transaction processes switch to effective FSCM? As a start, a future-proofed ERP backbone needs to be in place to allow integration with other sub-systems that produce data on factors such as raw materials ordering and customer cash receipts. They then need to adopt the integration and standards (or de facto standards) of the particular industry it belongs to, such as fashion or distribution. Further to this, business intelligence tools incorporated into the system provide organisation-wide reporting and analysis via role-based dashboards, helping deliver the right information to the right people at the right time.
Once these foundations are in place, processes can be built into the system allowing for a high degree of automation internally that facilitates collaboration with customers, suppliers and other business partners. The natural effect of the Internet will of course add to the ‘enablement’ through Java and XML technologies ensuring an open architecture is created. This makes it easier to collaborate seamlessly with external systems and to adopt new technologies in the future.
Ultimately, FSCM can help CFOs steer their companies towards being more profitable and resistant to market volatility. It ties together a multitude of financial transactions that take place in the supply chain every day and provides visibility on areas of opportunity, as well as those that need improvement.
Graham Young is a Financial Solutions Consultant for Lawson Software Australia. He is a member of the Institute of Chartered Management Accountants (ICMA) and a former London-based financial analyst. Article Source:http://www.articlesbase.com/software-articles/financial-supply-chain-management-unleashing-capital-to-make-gains-949691.html
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