Financial Flow Management

Gains Through Inter-Departmental Efficiencies


Martin Schneider, Tomato Financial Flow Management, 6 April 2004

 

What is Financial Flow Management and what is its purpose? Each product and service involves a multitude of resources that are interconnected, each of them having monetary value. Financial flow management involves optimizing the work- and financial flows across and between these resources. Financial Flow Management (FFM) goes beyond cash and treasury management. In essence, cash management and treasury's function is primarily to steer, monitor and report the status of cash flow. Their reporting is static.

FFM goes beyond the treasury function. An FFM specialist focuses on processes that involve all departments inside a company as well as vendors and customers. This function is more dynamic than the traditional treasury function.

This article includes practical examples of how idle capital can be better employed through optimized FFM. It pertains mainly to large companies. Smaller businesses are often more aware of liquidity and short-term cash flows and interconnections between all departments.

 

1. Accounts Payable and Suppliers

Too often, a purchasing manager's main objective is to get the best deal. They may be unconcerned with any negative consequences that a cheap deal can have for the recipient of goods or services. Here are some examples of processes we were asked to examine in a bid to optimize FFM:

  1. Slow processes that don't allow companies to take advantage of previously negotiated discounts.
    Deals with suppliers often involve previously negotiated terms and discounts, e.g. a 2-3% discount if paid within 10 days. However, the process of having the invoice signed by purchasing and forwarded to account payables may be so slow that the 10 days' limit for deducting the discount has elapsed. Based on our experience, companies too often are unable to take advantage of discounts simply due to time consuming processes.
  2. The negotiated price for products or services is so low that vendors are forced to minimize what the offer includes.

When the purchasing department shops for the lowest price, the vendor, in a bid to keep costs down, may not include manuals, training time, after sales service for installation etc. While the purchasing department registers a successful sale, the department using the product or service must now pay the price. It's only purchasing that wins in these situations. In addition, this scenario can negatively impact the long-term relationship.


2. Accounts Receivable and Clients

As has been reported of late, customers are becoming less willing to make payments on time. Despite the typical payment terms of 30 days (typical for Switzerland), many consumers tend to pay 10-20 days late. The least a company can do is send out invoices that are concise and easy for customers to deal with. That's not always the case.

For example, in many businesses with large numbers of end-users, the marketing department, responsible for client communication services, determines invoice design and text. Sometimes they even get rewarded for creative designs. Little do they consider that a fancy invoice may confuse the recipient. The client may, as result, delay dealing with it.

When invoice mailings also include flyers from marketing and sales departments, invoices degenerate into mere supplements. It's no wonder then, that such invoices end up at the bottom of the pile of things to do, or even get lost.

The lost revenue from late payments may mean that actual revenues from sales are much lower than reported by the sales department. In addition, the company's reputation is hurt when call centers too often need to get involved in payment issues. Clearly improved FFM can make a huge difference in such a situation.


3. Sales-Department

The objective of sales is to sell as much merchandise as possible to whoever is willing to buy it. If pre-paid or payment by cash are not part of the deal, the risks are huge and expensive collection methods sharply reduce revenues. At the end of the year, the sales volume may look great but the gross margin will be unsatisfactory.

In short, as long as employees in purchasing, sales and marketing do not understand the connection between the company's departments and the ramifications of their actions, the company as a whole will not be able to reach its objectives. This requires a CEO and relevant managers to orchestrate activities in such a manner that the organization as a whole reaches its goals.


Recommended Solutions

The finance department, cash management or treasury need to heighten their awareness of financial flows in all areas of the company. The CEO or the CFO of a large company should consider creating a position that deals with nothing other than the loss of 'hidden' cash. Here's is a checklist of questions a firm should ask itself when attempting to close leaks in the cash flow:


A. Accounts Payable and Suppliers

  1. How many days after the invoice date does the debtor pay?
  2. How long is the time-lag between the supplier sending an invoice and the actual payment of the invoice?
  3. Have alternative methods of payment collection been evaluated? (Example: e-procurement for ongoing vendors)
  4. Are the individuals who order products or services aware of the purchasing policies and do they agree with the prices and terms the purchasing department negotiated?
  5. Which processes can be simplified after the goods or services are received?
  6. Are invoices cleared within 10 days, thus allowing Account Payables time to maintain standardized payment runs?


B. Accounts Receivable and Clients

  1. How do clients pay for their goods? If they pay at the point of sale with cash, this has the advantage of having no invoice period. However, funds may be tied up in the cash handling process due to the logistical and security measures involved. Credit and debit cards may be good alternatives.
  2. How much time passes between the delivery of goods to customers and mailing an invoice? Late settlement can result in a temporary loss' of liquidity that can, in turn, result in a missed investment opportunity.
  3. Contacting a large client personally may be helpful if payers default. We've seen examples where liquidity problems were resolved by taking an active part in personal debtor management.
  4. What payment options do customers have? Are there better recurring payments solutions? A variety of payment options, such as credit cards, direct debit and online payment can attract new customers. Bear in mind that each manual step in a process greatly reduces the gross annual rate of return.
  5. Do clients pay their bills with payment slips? Who creates the invoice text? Is it as simple and clear as can be? A test in the call center or customer contact center can highlight problem areas. Test calls and customer satisfaction calls are a good way to find out whether invoices are clear and easily understandable.
  6. Who is responsible for mailing invoices? Mailings should not include any flyers that are unrelated to bill payment.


C. Sales Department

  1. Which sales channels are used?
  2. Are purchased addresses verified through credit rating agencies? Every bank and insurance provider verifies does this.
  3. Can the financial default risk be reduced through selective customer targeting?
  4. What is the standard risk in the business?


D. Accounting Department

Apart from new software, accounting has remained much the same during the past 50 years. Putting stamps on documents and obtaining signatures are still an integral part of the accounting department's routine tasks. Some of these accounting procedures can be improved by automation without harming the auditing. The above lists should be viewed as starting points for any firm wishing to optimize financial flows. All procedures serve a single purpose: to minimize losses due to process or time barriers, to take advantage of opportunities and to create a shorter flow of money; and in the end, to demonstrate improved productivity figures.

We've seen again on many occasions businesses searching for cost reduction opportunities outside of the company or reducing employees. Few pay enough attention to improving their cash flow by managing their financial flows interdepartmentally.


Conclusion

The purpose of financial flow management is to create the shortest, most cost-effective processes that involves the exchange of money in purchasing and sales as well as the flow of money within an organization. The above examples involved marketing and purchasing, but other departments may also be involved. A financial flow manager ideally has a combination of finance and information technology knowledge and experience. He or she may report directly to the CEO or be appointed by the CFO.

From our experience, companies are often aware of leaks but don't realize the huge cost of maintaining present procedures. Individuals within a company often perceive addressing such a problem as awkward because it is interdepartmental. That's why any large company should engage a financial flow manager.

 

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