Accounting and finance departments have always strived to improve the management of cash flows, reduce working capital and financing costs, track long-term indicators of solvency and contain transaction-processing costs.
However, the centralized accounting function, due to intra- and inter-enterprise collaboration and integration, is no longer centralized in many organizations.
Accounting processes are handled by different pieces of software, costs are not only internal but also spread across the supply chain and accounting information is contained not only in the general ledger but also is scattered in data, information and knowledge warehouses. These changes pose new challenges in dealing with old problems and offer new solutions for the same problems.
The financial supply chain, also referred to as financial value chain, is the new area emerging to deal with the new financial processes. This term has been around for at least a decade, though consultants and software vendors have put a new spin on it.
Now, the area of financial supply chain, similar to SCM, has multiple interpretations, multiple perspectives and no single departmental owner.
Aberdeen Group defines financial value chain as follows:
A range of B2B, trade-related, intra- and inter-enterprise, financial transaction-based functions and processes” (Best practices in streamlining the financial value chain, 2002, www.aberdeen.com). Killen & Associates Inc. categorizes all the services provided by financial supply chain into three categories: “performance measurement and control, decision support and transaction processing (Optimizing the financial supply chain, 2002, www.killen.com).
SAP, on the other hand, includes: order-to-cash, purchase-to-pay, bank processes and relationship management, and cash management (mySAP Financials: Next generation integration, 2003, www.sap.com) as four processes in the financial supply chain management.
These definitions evidently cover all aspects of accounting and finance. Functionalities explored, from the revenue cycle to treasury functions seen in the last section, fall under the gamut of financial supply chain. Problems encountered by accounting departments in identifying costs, let alone controlling those costs, are formidable. Illustrative internal problems include disparate ERP systems, lack of consolidation and budgeting software, patchwork of add-on modules and absence of an organizational strategy. External problems may include establishing relationships with suppliers and customers, banking relationships, lack of access to real-time data and managing funds in an uncertain external environment. A number of these problems were reviewed earlier in the book. Financial supply chain management tools are available, though a concerted strategy to employ those tools for optimizing financial supply chain is missing in most organizations.
Aberdeen Group forecasts that optimization of financial supply chain can result in substantial savings. The savings forecasts for a billion-dollar company are as follows:
- Reduction in working capital by 20% to 25%
- Reduction in financing costs by $4 million per year
- Proactive warnings for delayed receivables and reduction in Days Sales Outstanding (DSOs)
- Approximately $13 million savings from transaction processing costs
According to another estimate, the cost to finance products moving through the supply chain is approximately $360 billion, or 4% GDP. If these forecasts are correct, then major corporations can achieve billions of dollars in savings by optimizing financial supply chain. But, how does a corporation optimize the financial supply chain?
Solutions offered by consultants and software vendors primarily revolve around the new tools seen so far. Suggested tools can be classified into three categories: ERP systems to integrate internal functions, Web-based tools to facilitate free flow of information with trading partners, and hybrid tools that use functionalities of ERP and the Internet.
Due to the convergence of software tools, no distinction in these categories was made in this post. However, most of the tools and software that we have seen is from the second and third category. A summary of these tools for each cycle is provided:
(a). Revenue Cycle
- Online credit check
- Web-enabled WMS for order fulfillment
- Web-based tracking of shipments
- Electronic invoice (bill) presentment and payment
- Online management of receivables
- Web-based cash collection and payment methods
(2). Expenditure Cycle
- SRM tools
- Procurement cards
- Employee self-service features
- Online management of expenses
- Online management of assets
(3). Conversion Cycle
- Supply chain planning tools
- Supply chain execution tools
- Supply chain collaboration tools
- Supply chain coordination tools
(4). General Ledger Cycle
- Technical and managerial requirements for virtual close
- BI tools
- Planning and budgeting solutions
- Enterprise portals
(5). Treasury Functions
- Cash and liquidity management tools
- Debt and investment management tools
- Risk evaluation tools
Financial supply chain management aims to reduce costs in financial management, transaction processing and financial reporting. Financial supply chain is optimized by automating, outsourcing Web enabling and rationalizing financial workflows and business processes. The tools to achieve these objectives are available. However, the cost effectiveness and efficacy of these tools is not proven. The optimal investment in information technology for financial supply chain management is a difficult question to answer, and the answers are probably unique for each organization. It seems that consultants and software vendors will thrive in this area for a while!