Taking the middle path

9 July 2012
Rough economic waters can have a much more dramatic impact on smaller ships than supertankers and so mid-sized organisations have to master manoeuvrability and change to keep an even keel through some of the most challenging periods in a company’s development. If the government succeeds in its mission to make the mid-market even more critical to national economic performance, those organisations in the £50 million to £500 million turnover range may soon find themselves going through even greater change and disruption than ever. Business processes that are adequate today won’t be fit for purpose tomorrow. A mid-sized organisation’s ability to improve its internal controls will be as important a success factor as seizing growth opportunities. In particular, greater purchasing cycle visibility, keen overhead and cost control, and reducing paper, manual process and errors are the areas on which mid-market organisations really have to focus. A common area of business management that comes under scrutiny as organisations grow is reviewing what they purchase, the efficiency of the purchasing process and, vitally, being able to see exactly where their cash is at any given time. A small business usually has a relatively modest number of suppliers, a simple buying model and relatively limited opportunity to make big cost reductions. Overheads are easy to manage and, as spend is limited, so are the penalties for poor control. As the business grows, enforcing centralised controls and buying procedures becomes incrementally difficult. Supplier numbers can rapidly proliferate, with a wide range of pricing points for essentially the same items from different companies. There is little or no ability to aggregate spend and drive better value and the company suffers from the sheer cost and complexity of maintaining many hundreds, if not thousands of trading partner relationships. To be prepared for their own next level of expansion, mid-sized companies should seek to consolidate spend with suppliers that will see them well into the future. Purchasing carried out under the radar of financial scrutiny also leads to complexity and a lack of visibility in the order to cash process. Purchase orders are often non-existent or poorly policed, making it tough to forecast accurately. Adherence to any kind of standard payment terms often fails to happen, too, with ‘friendly’ suppliers often being paid for goods and services before they are even supplied. There can also be a lack of central control over timely payment, which can lead to late payment charges and, potentially, costly legal action. Without the right level of visibility and control, the entire order to payment cycle goes unmanaged and becomes a business burden. Control of cash and the cost of purchases are not the only areas mid-sized organisations have to keep under control. The side effect of these issues is the cost of the process itself. Without a centralised and automated accounts payable process, mid-sized organisations are in danger of spending excessive amounts of time and resource on management. The paper used in offline financial processes is a major cost in itself, but only one element of the inefficiency, with higher people resources, the length of time involved in processing orders and payments and the cost of correcting manual errors all cashing in. Mid-sized organisations do invest in technology and software, but there are often gaps in the armoury when it comes to internal purchasing and cost control processes. Growth demands that these are filled. Some form of financial management or ERP system is typically the core tool for financial and business management – and it’s an essential central component for managing any relatively large business growing in complexity. But where ERP software’s strength lies in planning an organisation’s resources, it often doesn’t cut the mustard when it comes to controlling certain financial processes, especially those in areas like purchasing where real-time visibility, transactional efficiency and intuitive workflows are what really matters. These difficulties are now relatively easy to address with some targeted software additions, which deliver quick returns themselves and drive greater value from the big ticket ERP investment, too. Purchasing and e-sourcing platforms are now commonplace additions for the mid-sized company’s finance team. The mid-market is the engine-room for growth in the UK economy and its potential must be nurtured and realised. What we must be mindful of is these businesses often need to ‘tool up’ internally with the right technology and processes in order to future proof themselves for change. Successful growth and realising a greater contribution to the economy has to go hand-in-hand with this. ☛ Daniel Ball is director of Wax Digital
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