Benefit From Process Optimization — February 2017

This post involves strategy. A key business concept that has become prevalent over the past few decades is Lean methodology, which is developing more efficient processes to reduce costs while providing premier customer service. Its development has been attributed to Toyota, and it now utilized world wide by large public companies like GE as well as smaller private companies. While initially applied to the manufacturing process, Lean is now used in many industries and applications. We believe the CFO can utilize Lean for the firm’s benefit by using it in the finance functions. This effort entails crafting a finance organization aligned with the firm’s strategic mission and driven by awareness of competitive and operating realities.

To institute Lean, the CFO must make sure that it is done in a manner that aligns it with the firm’s business strategy. This requires the CFO to recognize the interrelationships between financial and non-financial data and measure them accordingly. The CFO must determine how to balance achievement of strategic and tactical benchmarks against the benefits of reduced costs gained through a more efficient process. To effectively do so employee skills should be upgraded through best practices training. Among the most valuable skill upgrades are instilling a service oriented attitude in finance and accounting personnel..

To maintain Lean, the CFO must focus on several areas. One is to craft a finance organization tied to compensation and operating realities. The key driver is a constant effort to reduce transaction costs, while maintaining mandated service levels. This can be accomplished by focus on more efficient value streams and a focus on pull. Process flows are called value streams and involve the flow of information among different departments and functions. Pull refers to the response to actual demands rather than targets or budgets. To maximize the effect of Lean efforts, the CFO must adopt an attitude of continuous improvement. Continuous improvement is a never ending effort to reduce waste and improve productivity while creating value added analysis and business intelligence.

For effective achievement of the fruits of these endeavors, best practices must be developed. Best practices include automated workflow; minimal use of paper; integration of the financial process and operations; and intervention only when exceptions to goals are systematically highlighted. As a result, the firm avoids an over-controlled operating processes; underutilized personnel; tasks that add no value; and interruption of workflows.

The foregoing efforts are characterized by listening to the “voice of the customer”, meaning that employees are to be responsive and customer sensitive. In the case of a Lean financial organization, the customer is other employees, users of financial information, and buyers of the firm’s products. The result of this attitude will be reduced cycle time, fewer handoffs of tasks, and integrated technologies serving both finance and operations.

Success is evaluated through measuring costs and metrics relevant to a given activity. For example, personnel can set a goal of 6 days for closing the books at month end (focus on what is measurable) and drive towards perfection (consistently meeting the goal and reducing the goal). Such goals and related benchmarks must be understood across functions. For instance, an acceptable collection period for receivables must be understood by the finance team and the sales force.

To have an effective Lean finance organization, raw data from important activities must be constantly analyzed. For instance, in reducing the time required for closing the books, the appropriate personnel should examine things such as the number of ledgers maintained and journal entries that can be combined. These efforts will result in reduced costs driven by more efficient processes. Accordingly, the CFO must concentrate the implementation of Lean on areas with large expense components.

This post involves strategy. A key business concept that has become prevalent over the past few decades is Lean methodology, which is developing more efficient processes to reduce costs while providing premier customer service. We believe the CFO can utilize Lean for the firm’s benefit by using it in the finance functions. This effort entails crafting a finance organization aligned with the firm’s strategic mission and driven by awareness of competitive and operating realities.

For those interested in learning more about this approach, please see our March 2016 Topic of Interest.

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