Did you know that many small and medium enterprises (SMEs) that invest in their business systems and processes receive greater returns for their business? Studies show that most Chief Financial Officers (CFO) or Chief Executive Officers (CEO) attribute their organizations’ growth and profitability to the right systems and processes. An early investment of time in proper systems and processes will provide a competitive advantage in the future. However, the success of any system/process will depend on whether it’s used or not.
In today’s article, you will understand the difference between systems and processes, how to create a system, and why early investment in systems and processes is important to every CFO/CEO. In addition, I will give examples of companies that successfully implemented this strategy and ended up being successful. I will also highlight the companies that ignored this opportunity and ended up at a serious loss. Let’s get rolling!
What’s the difference?
The terms “system” and “process” both have different meanings. Understanding the terms will help when you are implementing them.
A process is anything repeated or done repeatedly in a business to accomplish a goal. A good example is in a financial institution where the process of an ATM making a transaction is carried out. The steps involved here involve using a card, putting in a pin and getting a withdrawal/deposit slip, after which the user goes to their account to check for transactions. Such steps can be repeated repeatedly until the aim of doing so is accomplished.
On the other hand, a system consists of several components, i.e., hardware, software, the process, and the people responsible for carrying out the required actions or procedures working together to accomplish a specific aim. For instance, an accounting system has an accounting software package, i.e., Enterprise Resource Planning (ERP). ERP acts as a host for the accounting processes being performed by the system users in an organization to produce financial statements and reports of various types. In addition, there is a pool of accounting personnel whose knowledge and expertise in running accounting processes, using the software, and producing financial statements or reports allow them to contribute to the successful functioning of the system.
How Do You Create an Accounting System?
An accounting system provides financial and non-financial information about the organization, helps to control operations and activities, facilitates operating decisions, and supports external financial reporting processes. Regarding documentary evidence, spreadsheets, journals, registers, ledgers, cashbooks, and checkbooks are the most commonly used financial records. Are you looking for an easy way to create and implement an accounting system in your organization? Here are four helpful steps to create an effective accounting system suited to your business:
- Analysis
The first step you should take when creating an accounting system is to analyze the situation you are working with. A good analysis should give you a realistic overview of the organization and its needs so that you can make suggestions based on sound facts. For example, what kinds of information are necessary for controlling the business, making decisions, and helping top management evaluate the performance of subordinates? For example, if are collections likely to become a challenge with a large volume of customers paying on account, and early investment in systems to automate these traditionally manual processes will payback very quickly with improve cashflows and reduced delinquencies. Alternatively, if you are selling products and holding inventory, tracking this will become critical and very painful with growth unless the appropriate systems and processes are established early – late adoption can be very costly.
- Designing
Designing involves determining the number of activities that will make the system run effectively. For example, the designer may have to determine who the various users of the system will be, where the users will work, and what equipment and software they will each require. The designer may also have to specify when the system will be maintained and repaired, which parts of the system may need to be replaced periodically, and what training users will require. For example, does your business have a field team that would be responsible for approvals or payroll and invoices? Then more consideration should be placed on systems that offer mobile applications and simple fast interfaces.
- Implementing
System implementation refers to turning a system’s abstract or formal description into a concrete and working system. For example, an organization implementing a new ERP system must create job descriptions for the various positions required to maintain the system, train employees to use the system and new processes, provide equipment and infrastructure, etc. Implementing the information system can be a major undertaking, particularly if it involves replacing an old system. This step should never be underestimated, and thorough process documenting, and system testing should always take place before migrating accounting systems.
- Evaluation
An organization must evaluate the performance of its new accounting system after successfully implementing it. Evaluating the system involves assessing the organization’s ability to use and benefit from it, assessing whether the system performs as intended, and determining whether changes are needed. After this evaluation, the organization will decide whether it needs to modify the new accounting system, expand or improve its operations, or even implement an entirely new accounting system.
Do you require professional help to create your accounting system today? Mulcahy Consulting Group Pty Ltd is only a phone call away, providing consultation and support for organizations in creating and implementing customized accounting solutions.
Is Early Investment in Systems and Processes Important to Your Organization?
Every business/organization needs to invest in one or more specialized systems (accounting, customer relationship management, customer service, inventory management, payroll, and time and billing) that are necessary for employees to carry out their daily work. Delaying these decisions will place you at a competitive disadvantage, require your employees to perform the functions manually and incorrectly, and distract your staff from their core activities. Here are the advantages of implementing and outsourcing these systems and processes sooner rather than later:
- Gaining Control
You’ll be in a position to run your business efficiently and gain a competitive advantage. The accounting system will hold important information on your business trends, allowing you to recognize business opportunities and make decisions accordingly. You will effectively control your finances and processes, but there’s a good chance that your competitors won’t have such systems in place. When Netflix invested in systems and processes such as notebook innovations, it gave the company a competitive advantage by increasing its efficiency. The company was in a position to effectively control its supply chain with automatic delivery systems.
- Increased Production and Decreased Overhead Costs
A system that will help you monitor your expenses and record any credits and debits to your company’s assets will ultimately contribute to your business’s success. Overhead costs are indirect costs related to the production of a product or service, including the cost of supplies, labor, utilities, and insurance. Overhead costs tend to decrease as your company grows and production increases, but many small businesses fail to consider overhead costs. When Covid-19 struck, David Dodge decided to invest in new systems and processes i.e. selling and delivering cars online, and formulating the lead acquisition strategy. In April 2020, the company recorded 1 car being sold while in May 216 cars had been sold. By June the company was selling around 250 cars per month. With such surplus production, the overhead costs of operating new plants and machinery began to decrease as well.
- Proper Cash Flow Management.
Early investment in cash flow management processes and systems is vital to companies of all sizes. It provides a foundation for cost savings, greater efficiency, and control over financial decisions that can scale as the business grows. Proper cash flow management involves following a cash flow forecast that helps to ensure sufficient capital for future operations and highlights the need for early investment in other operational processes, such as inventory management and human resources.
Intuit Inc., a financial management software maker for most businesses globally, invests heavily to design advanced cash flow management processes and systems that help its customers make better business decisions. QuickBooks and Online Payroll are tools that help businesses leverage processes such as accounts payable automation, which decreases cycle time and saves money by reducing error rates.
- Proper Debt Management
With a good accounting system and processes that can manage the organization’s debt properly, a company can function more effectively and, in turn, become a viable competitor in its sector. Debt management practices provide an opportunity to achieve a wide range of business objectives, such as reducing risk, improving operational performance, and enabling investments in growth opportunities.
When Enron, a large American energy corporation, fell in 2001, the public saw all too the consequences of poor debt management. The company failed to invest in power production systems and processes which resulted in continuous failing projects and deals. The company’s executives failed to construct a good risk management policy because of the way they planned business projects. This was one of the main drivers behind Enron corporation filing for bankruptcy and having to lay off thousands of employees (29,000 employees) the same year.
- Increased Partnerships
You can use the credibility of your established accounting system and process to attract interest from other potential partners, such as engineers, customer-relationship-management system providers, vendors, carriers, resellers, and other channel partners. A business with a reputation for quality, authenticity, or popularity can gain significant advantages by partnering with complementary companies. Timely investment in the right partnerships can increase profitability, decrease costs, add value to your customers, differentiate your products and services from competitors, reduce risks, and leverage other people’s resources and expertise.
Apple is a good example of this strategy, investing in systems and processes in the late 1990s and early 2000s which promoted strategic partnerships with telecommunications providers. Although the company recorded several financial losses, many of its innovations and successes can be traced to partnership strategies. Steve Jobs, the co-founder of Apple, often credited as one of the most innovative CEOs in modern history, established a special bond with Microsoft among other companies. In 1996 and 1997, Microsoft invested $150 million in Apple to keep Apple running and eventually become profitable again. From there onwards, Apple experienced financial gains by selling Mac OS and various software products, which was later considered to be one of the most profitable business deals for both companies.
Final Remarks
Every day, businesses, whether big or small, for-profit or non-profit, must make a variety of decisions that affect their ability to thrive, persist, or even just survive. Better decisions can be made, increasing the likelihood of success or expansion, when resources are invested early in systems and processes like those described here. As an example, you can invest in project management software to assist you in keeping track of your team and their respective responsibilities. To expand your company, you need to learn about your customers, figure out what motivates you and your employees, and set up a system to draw in top talent (employees or volunteers). Businesses will discover their economies of scale and scope more quickly the earlier they make the necessary investments. Companies like the ones listed above were able to succeed because their leaders recognized the importance of making early investments and understanding their businesses’ digitally current. As a CFO/CEO, it is recommended to invest early in the right systems and processes for your financial institution.
Are you stuck investing in new systems and processes (large ones, in particular) because you can’t justify them with enough data? Do you worry that your next large investment will fail because it’s not like everything else you’ve done? You can reach out to consulting firms such as Mulcahy Consulting Group Pty Ltd to assist you in making early investment decisions regarding your business direction. Mulcahy Consulting Group Pty Ltd will enable you to plan for your future growth with a firm grasp of the commercial environment in which you operate.
Amelia White
Research Assistant
Mulcahy Consulting Group Pty Ltd
