The financial manager's objective is to achieve the goals of the owners of the company, which is to increase, for the latter, the benefits as much as possible. Strategically this implies achieving consistent returns in the medium and long term.
What does it mean to achieve consistent returns in the medium and long term? For this, consider a company that, wishing to maximize its profits in the short term, buys cheaper and lower-quality machinery and inputs, while making huge sales efforts to market its products at a price that yields high profits per unit.
Such a strategy would perhaps work well for a year, but in subsequent years profits would drop significantly as consumers and users realize that the product is of poor quality, and that they are paying for it a price higher than its value.
On the other hand, due to the fact of using machinery of inferior quality and design, the high costs corresponding to maintenance and repairs are increased.
The impact of reduced sales and increased costs will therefore tend to reduce profits in the long run and, if this method is not changed, it could even lead to the bankruptcy of the company.
The potential consequences of short-term profit maximization may be reflected in the current share price, which should be lower than it would be if the company had pursued a better long-term strategy.
Well, from the above, the need arises not only to manage the finances of the company, but also to do it in such a way as to achieve consistent results.
Making such consistency feasible implies first of all adopting a systemic attitude, this means, on the one hand, seeing how decisions in other areas of the company affect financial results, and on the other, planning and budgeting for it to obtain harmonious operation of the organization.
Secondly, a continuous improvement methodology must be adopted, for which it is necessary to have control and information systems that allow permanent monitoring of the various ratios of the company.
Continuous improvement is the way to achieve positive results both in the medium and long term, through the systematic improvement of the company's processes, products and services. Thus, instead of seeking immediate results, what must be pursued is continuous improvement of processes, which will ensure the profitability of activities.
Increasing income, reducing costs, and increasing investment turnover is what allows generating a better flow of funds, which, updated, increase the value of the company for its owners.
Of course, this must be accompanied by an optimal level of liquidity and solvency that allows the company to face its obligations with creditors without inconvenience, in addition to having the necessary cash to face the acquisition of various supplies and services necessary for the productive and commercial operation.
The question is: how to achieve it? Achieving this is facilitated by the implementation of the kaizen system of continuous improvement.
What is kaizen?
Kaizen is a Japanese philosophy and system, which aims to continuously improve quality, costs, productivity, response times, and satisfaction levels among others.
For which it pursues the systematic improvement of each and every one of the elements or components of the organization, be it its human resources, products, processes, areas or sectors, and services. Thus, by improving the components of the system, and as a consequence of the system itself, the improvement of the various ratios that make up the competitive capacity of the company becomes feasible.
In a first step, kaizen requires statistical data from the company, because only with them is measurement and control possible, and from there set objectives and aspire to continuous improvement. It is not possible to improve what is not measured and controlled.
Among what requires measurement for kaizen is the various levels of waste and generation of added value by activity. For waste (change) all those activities that do not generate added value are considered for the final customers or the company.
These wastes are the ones that complicate the finances of the company, by generating cost overruns, wasting resources, generating idle resources, requiring stocks higher than necessary, losing customers due to quality defects or poor services, among others.
It is only enough to take into consideration that according to studies carried out, traditional companies make use of twice as many personnel as necessary, four times more physical space and up to ten times more time to complete the production cycle, which is used by competitive companies that follow the philosophy kaizen.
Kaizen begins with quality, because in this rests the feasibility of achieving higher levels of productivity, lower costs, shorter response times and higher levels of satisfaction.
Thus, through each and every one of them, it is possible to reduce costs while generating greater income, which does not imply anything other than reducing the costs per monetary unit corresponding to sales.
How does kaizen affect finances?
First of all, we must mention the factors that tend, to a greater extent, to reduce the profitability and liquidity of companies.
- Excessive inventory levels of inputs, products in process and finished products. These generate lower liquidity, high financial costs, maintenance, insurance, obsolescence, and physical space Total cycles, from the payment of inputs to the collection of products or services sold, long Excess assets, which generate less turnover and Higher opportunity cost High production, administration and marketing costs. Total costs tend to absorb most of the sales revenue.
Regarding excess inventories, they are generated by errors in sales projections and / or predictions, other important reasons are given by the low reliability of suppliers, the bottlenecks in the production process, the long times for the preparations or change of tools, the unproductive times due to the breakdowns, the failures in the quality and the layout design.
In this way, the application of the following kaizen systems and methods contribute to eliminating the causes of excess inventories.
- Application of systems based on statistics and probabilities for calculating projections Strategic alliances and cooperation with suppliers that ensure short delivery times, reliability in terms of quality, quantity and delivery on time The application of the SMED system to the effects of radically reducing the time necessary for the preparation and change of tools The implementation of Total Productive Maintenance, which contributes both to reducing the quantity and extent of repairs due to breakdowns, but also avoids quality and safety problems in production of goods and service provision. Total Quality Management combined with the Six Sigma System leads companies in search of defect levels by millions of opportunities.As quality increases, safety inventories are not necessary to deal with production failures.The improvement in the layout, going from the organization by processes or functional, to the one focused on the product, with a high preponderance of the organization of cells of I work in "U".
With regard to long business cycles, these can be reduced by applying the Just in Time production system, with special attention to the correct use of kanban.
By working on the basis of market demand, response times tend to be lightened, reducing inventories and demanding supplies from suppliers to the extent that they are necessary to satisfy customers and consumers.
Just in Time is only feasible insofar as the systems and methods listed in the previous paragraph are applied.
The reduction of assets is achieved both by reducing the size of inventories, which in itself automatically generates a decrease in physical space and other assets related to the holding and management of inventories.
Like making use of machines and installations of more flexible and generic use, in contrast to the so-called monuments made up of large machines and installations possessing a very high level of specialization.
Another way to eliminate unnecessary assets is by systematically evaluating the various activities and their corresponding added values. By proceeding in this way, activities that do not generate added value are eliminated, consequently reducing the assets that support it.
The systematic elimination of the various types of seedlings (waste) allows, experience curve through, obtaining competitive costs in a consistent way.
The sum of lower costs and higher quality allows us to offer consumers and users products and services of greater value, thus generating a greater number of customers and a higher repetition of sales to them.
Thus we have that at the same time that income increases, costs are reduced, reducing the possession of assets and increasing their turnover levels.
The effect is clear: a greater flow of funds, which generates a higher present value of the company for its owners and investors.
As the flow increases and liquidity increases, financial risks decrease, with which the cost of financing is greatly reduced. A company with high profitability is always well regarded by bankers and investors.
Conclusions
The need to achieve shorter cash cycles and higher cash turnover leads to the urgent need to improve internal processes. It is not profitable, nor does it generate greater added value, having dormant resources in warehouses, taking away from the company the possibilities of having such resources more profitably available.
Finance has objectives to meet, and kaizen is the appropriate tool and instrument to achieve them.
Eliminating waste (changes) whatever the industrial activity or service, allows to greatly reduce costs while preserving and improving quality levels.
Higher quality and lower costs are two strong elements in establishing a sustainable competitive advantage.
These lower costs allow us to compete through the price factor, but we also have a level of quality that makes it feasible to use this and differentiation as means destined to make products and services generating high added value for consumers and users.
The application of Statistical Control to variations in financial ratios and indices allows knowing the company's ability to generate profitability within certain liquidity and solvency parameters.
Kaizen does not determine success, but sets the foundation for a company to compete in current and future global markets.
Kaizen responds to new paradigms, and as such it is ingrained with knowledge management and the creative capacity of the company.
It is through the sum of creativity applied and in action, that improvements are constantly and systematically generated in the economic-financial results of the organization. An organization that does not improve is doomed to suffer continued degradation of its profits.
Only the fear of change, the tendency to immobility, staying firm in useless paradigms, make that companies cannot ostensibly improve their results. It is the commitment and leadership capacity of the most competitive entrepreneurs, which will lead and make possible the existence of companies that can pass through the 21st century.
