Become Lean and Mean — March 2016

This post concerns Financial Management

Financial management is a crucial aspect of any growing business. An effective CFO can improve the firm’s financial management function by adopting methodologies that have proven successful in other facets of the business of enormously successful companies. One methodology is known as Lean. We believe successful application of Lean for financial management will help maximize the returns from profitable growth.

Lean is a concept that was originally applied to manufacturing. Well known success stories include Toyota, and many U.S. industrial firms. Improved service metrics, process times, delivery times, and costs as well as reduced bottlenecks result from the proper design and implementation of a Lean system. As it applies to finance, a Lean system must be implemented so that the finance mission is aligned with the business strategy by recognizing the interrelationship between financial and non-financial goals.

In the remainder of this post we examine the goals and concepts of a Lean system, what the Lean system accomplishes, means of implementation and operation, and applications to the various financial functions at the firm.

To design an effective Lean system, the CFO must think in terms of process rather than function. Such a paradigm drives the finance function to be service oriented to other parts of the firm as well as customers and suppliers. Thus, the CFO must craft a finance organization that is tied to competitive and operational realities while remaining aligned with the company’s strategic mission. The results of such an approach include reduced transaction costs through technology, metrics, benchmarking, shared services and outsourcing.

This goal is achieved by a focus on continuous improvement to all relevant processes. The effort entails constant efforts to reduce waste and improve profitability and is driven by rigorous analysis of operating data.

Since lean concentrates on process rather than the structure and function of various departments, the CFO must look at the flow of data, information, and cash. Successful design of process flow is characterized by automated workflow (such as touchless and paperless procedures); integration of the financial process with operational needs; replacement of periodic reviews or examinations with a system that reviews exceptions to expectations. This approach helps avoid waste, low value work, micro managing, bureaucracy, and under utilization of personnel.

The first step in the implementation of an effective Lean system is to adopt the process flow to the company’s overall strategy and competitive differentiators. The key elements involved in achieving this goal include listening to the customer; empowering employees to enable a self serviceable system; and flexible processes that can be customized.

The design of a Lean system must focus on service to all aspects of the organization from the CEO to customer service and delivery personnel. The key driver for this process should be a responsive and user sensitive attitude. To achieve this, the CFO must strive to reduce cycle time, integrate technology to serve diverse areas of the firm, collaborate with users and stakeholders; and ensure the system can automatically adjust to changing conditions.

Effective operation of a Lean system requires the development of cost targets and performance metrics. The effort DOES NOT entail emphasis on searching for the largest cost to cut, but on reviewing the processes and make them more efficient and result in reduced costs. To do this, the CFO must concentrate on and understand the entire enterprise. One must listen to the people on the front liens (i.e. credit and collection and inventory control) and resist the temptation to propose “across the board” solutions.

Performance goals must be measurable and benchmarked to respected industry leaders. There must be constant analysis of raw data to determine how tasks can be performed more effectively, moving towards a zero exceptions environment, i.e. driving towards perfection.

If successful in accomplishing the foregoing, the results will reflect a finance function that provides business analysis, develops innovative solutions, reduces operating costs, utilizes quick analysis to adjust to unexpected change, and focuses on overall business performance. These results will drive profitable growth.

The subsequent paragraphs will show how Lean methodology can be applied to various financial functions.

For service driven, transactional functions like billing and inventory control, the Lean system must emphasize flexibility to improve service.

For cost driven, shared service or outsourced functions such as payroll, accounts payable, general ledger accounting and travel & entertainment, the Lean system should stress process uniformity and best practices to drive down costs.

For strategically focused functions, for instance, performance analysis, budgeting, pricing decisions, planning and acquisitions, the Lean system should devise processes that provide maximum flexibility, responsive service, and innovation to drive efficient and optimal decision-making.

For externally driven functions, for example, corporate governance, financial reporting, taxes, treasury, and regulatory relations, the Lean system should develop processes that encourage cost control, uniformity, and alignment of functions that minimizes friction amongst related functions. The result will be to avoid costly mistakes and unnecessary expense.

Financial management is a crucial aspect of any growing business. An effective CFO can improve the firm’s financial management function by adopting methodologies that have proven successful in other facets of the business of enormously successful companies. One methodology is known as Lean. We believe successful application of Lean for financial management will help maximize the returns from profitable growth.

Capitol CFO Solutions serves clients in Washington D.C., Maryland, and Virginia. Please contact us for a free consultation.