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Home > Cash Flow Management Best Practice > How to Better Manage Your Financial Supply Chain

Cash Flow Management Best Practice

How to Better Manage Your Financial Supply Chain

by Juergen Bernd Weiss

Executive Summary

  • Financial supply chain management (FSCM) addresses a number of initiatives that can help to make finance organizations more efficient and improve the working capital position of an enterprise.

  • There are a number of indicators for an inefficient financial supply chain including low straight through processing rates and a high amount of uncollectible receivables on the balance sheet.

  • Key performance indicators such as days sales outstanding or days in receivables can be used by companies to benchmark themselves with their peers.

  • Microsoft decided to improve its financial supply chain to better utilize working capital, to reduce bank fees, to process payments more effectively and to gain better control of cash flows.

Introduction

Benchmarks of business performance indicate that enterprise resource planning (ERP) systems and other enterprise technologies have transformed customer and supply chain processes but that the performance of the finance function has hardly changed. Although some companies have managed to improve the performance of their financial processes profoundly, financial functions are still neglected in many businesses, and days sales outstanding (DSO) and working capital needs are very high in several industries. The working capital scorecard for 2011 from CFO Magazine demonstrates that there are significant differences between high and low performers within an industry. In the pharmaceuticals industry, for example, the best score in DSO was 4448, while the worst score was 117—two times more than the sector median of 57. Research from the Hackett Group indicates that finance department costs continue to consume more than 1% of revenues in many companies, and CFOs struggle with poor transparency of their daily cash flows.

In times when unprecedented economic uncertainty and soaring stockholder expectations are putting every function under closer scrutiny than ever before, the finance function should be driving business, not holding it back. Financial supply chain management (FSCM) can help companies to remove some of the inefficiencies in operational processes in order to become more effective.

Definitions of Financial Supply Chain Management

There are different definitions of the term financial supply chain, which appeared for the first time in 2000 and 2001. According to the research company Killen & Associates (2001), the financial supply chain “parallels the physical or materials supply chain and represents all transaction activities related to the flow of cash from the customer’s initial order through reconciliation and payment to the seller.” The Aberdeen Group, another research company, calls the financial supply chain “a range of B-to-B trade-related intra- and inter-company financial transaction-based functions and processes [which] begin before buyers and suppliers establish contact and proceed beyond the settlement process.” The two definitions emphasize different topics. Killen’s focuses on the parallelism between the physical and the financial supply chain, and it stresses a section of the cash flow cycle that I’ll discuss in more detail below. The Aberdeen Group’s definition focuses on the collaborative nature of financial supply chain management and reveals that the financial value chain isn’t limited to the inner walls of a company but includes communication and cooperation with business partners.

Both definitions focus on a process-oriented view of the financial supply chain that is basically correct; however, in many respects the explanations do not go far enough:

  • They focus very much on the collaboration between companies—specifically, suppliers and customers—and they do not consider other important business partners within the financial supply chain, such as banks.

  • They describe primarily the status quo, and do not stress the various dimensions for the optimization of business processes within the financial supply chain.

  • The motivation, as well as the key performance indicators, for an efficient financial supply chain are not obvious.

Another definition that includes these three aspects is the following: Financial supply chain management (FSCM) is the holistic and comprehensive planning and controlling of all financial processes which are relevant within a company and for communication with other enterprises. The goal of FSCM is to increase the transparency and the level of automation of business processes along the financial value chain. The purpose is to save processing costs and reduce the working capital of the company. This definition doesn’t consider where the financial supply chain actually begins and ends, because there are also analytical processes that are not directly related to a business process but which belong nonetheless to the financial supply chain. Let’s now have a closer look at the indicators of an inefficient financial supply chain.

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Further reading

Books:

  • Bhalla, V. K. Working Capital Management: Text and Cases. New Delhi: Anmol Publications, 2006.
  • Horcher, Karen A. Essentials of Managing Treasury. Hoboken, NJ: Wiley, 2006.
  • Nash, Thomas. Financial Supply Chain Management: The Next Wave. Farnham, UK: Gower, 2012.
  • Sagner, James. Essentials of Working Capital Management. Hoboken, NJ: Wiley, 2010.
  • Salek, John G. Accounts Receivable Management Best Practices. Hoboken, NJ: Wiley, 2005.
  • Schaeffer, Mary S. Essentials of Credit, Collections, and Accounts Receivable. Hoboken, NJ: Wiley, 2002.

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