Naturally, each prong works to different degrees in each company, but if you use all four of them, I can guarantee you will see amazing results. The first prong I discussed with specific examples was: “Understand fully an entity’s operations and develop the key financial metric that truly makes it ‘tick’.” The second was: “Educate the management team about finances and have them “take ownership” of their operations.”
Here is the third ingredient in my approach:
PRONG #3 - Create scalability in the Financial Department through automation.
In order to maximize profits, you have to scale the financial operations to handle an ever-growing volume with virtually no increase in manpower. The CFO has to concentrate on ensuring that the costs of the Financial Department are as close to fixed as possible. He or she can accomplish this goal by partnering with the organization’s CIO to look for additional ways to automate the growth in repetitive processing.
For example, during my five-year tenure at a NASDAQ distributor of medical supplies and equipment (in the late 1990’s), the annual billings grew from $120 million to over $380 million. By working closely with our excellent CIO, I kept the Accounts Payable staff constant at four employees even though they were processing over three times the number of vendor invoices. This was achieved through the use of electronic data interchange (EDI) as well as the automation of the “three-way” match process.
By having the our suppliers EDI their invoices, the invoices were automatically received and recorded in the accounts payable records without manual input. Besides consistently promoting EDI to all of the ongoing suppliers, we made it almost imperative for new suppliers to invest in EDI capabilities or we would not do business with them.
Once the vendor invoice was recorded in our system (either through EDI or manually), the invoice was matched by the computer to both the original purchase order and the quantity received in the warehouse. If all three of these records matched, the invoice was accepted for payment. Again, without any manual work, the check containing the approved invoice was automatically produced. The only manual steps in the process were to stuff the check in a window envelope and mail it. In the case of unmatched invoices (a small minority of the total invoices processed), manual research and additional work prior to payment were required.
Having to add additional clerical personnel to account for the tripling of the volume would have presented an unneccesary drag on earnings.
Besides using automation to keep an entity’s accounting and finance personnel costs fairly constant even though revenues and transactions are increasing rapidly, it can be used effectively to reduce other hard costs (like postage, paper, bank fees, interest expense due to improved cash flow, etc.) at the same time. Two perfect illustrations of major annual hard cost savings occurred when I became the CFO of a $1+ billion pharmacy benefit manager.
When I arrived at the pharmacy benefit manager, the pharmacy payable department had been processing and mailing over 20,000 checks per month along with a paper trail of the millions of claims being paid. Besides mailing a weekly check to CVS, the listing of the claims being paid by that disbursement averaged over 800 pages per check (that is over 40,000 pieces of paper per year). I redesigned the pharmacy payable system at an annual savings of $200,000 by eliminating the voluminous paper detail of claims paid (through a web enabled process) and by replacing the checks with electronic funds transfers.
Secondly, the Company had been mailing paper copies of the semimonthly invoices to their customers. Many of these invoices (listing every paid prescription) were well in excess of 1,000 pages. I quickly established more robust accounts receivable billing and collection processes (including the automation of the billing distribution process and creation of a reporting system to better prioritize collection calls). These changes reduced the average days an invoice was outstanding by five days. Besides saving tremendous amounts on postage, paper and printing supplies, increasing the cash flow by the five days amounted to an annual interest savings of greater than $500,000.
I think you can now see that there is plenty of “low hanging fruit” and annual expenses to be saved when you concentrate on creating scalability in an entity’s financial operations through greater automation.
Stay tuned for the fourth prong to profitability which will be published shortly.