Background
From a perspective limited to corporate, tax and banking aspects, financial management was initially concentrated on the fundamental aspects that are to achieve the highest profitability by ensuring liquidity without putting financial solvency at risk.
Within this framework we have activities restricted to matters of measurements, calculations of ratios, analysis and preparation of reports.
In a second phase, finances make use of the basic activities of the company, to mount on it a series of financial activities that ended up becoming the main reason for income and profits for it.
Today we are witnessing a new phase that, passing through financial engineering, progresses to what is called financial reengineering.
This new concept of reengineering is based on financial benchmarking, in such a way that, based on the comparison with the best financial practices of companies in the same line of activity or of others, the basic fundamentals of actions are questioned, both in their form of operation. analysis, as in its relationship with other areas and processes of the company, as well as in the way decisions are made.
Within this new framework, concepts and tools such as Statistical Control applied to Finance, Activity-Based Costing (ABC), the Balanced Scorecard, Continuous Improvement, motivational behavior strategies, Pareto analysis, come to take special preponderance. study of the behavior of different income and expenses, and the use of new technologies aimed at improving financial response capabilities (Internet and Intranet, new computer systems, greater data processing capacity).
Undoubtedly, technological advances have changed not only the environment in terms of production, marketing and finance, but also the possibilities of the different areas of the company to generate added value and competitive advantages.
The development in the field of business strategies, negotiation, and game theory forced new and substantial rethinking of financial processes.
Under these new perspectives, with a systemic approach, oriented to processes, and a strong component of statistical analysis, finance seeks through reengineering radical changes both in the approach and in the way of treating and directing the finances of the company. In this process, the very foundations of the current system are questioned, building new systems and methodologies that allow greater efficiencies and efficiencies both at the administrative level, as well as in information and decision-making, and above all, new ways of generating financial gains.
The objective of finance is to achieve the highest Net Present Value (NPV) of the future flow of business funds, as well as the best synchronization between income and expenses in order to obtain optimal liquidity.
For this, it is essential both the continuous redesign of financial processes, as well as all those business activities that result in a higher NPV.
Conceptualization
Rather than a generic definition, it is more feasible to conceptualize financial reengineering as a process of refocusing on financial thinking, and a re-design of the activities and processes of both the financial area, as well as the activities that generate an impact on the flow of organization funds.
As there is no activity that lacks effects on this flow, finance and its reengineering must be involved in each and every one of the modifications made in the organization.
Thus, financial advisers must participate in each of the measures adopted at the organizational level, be they of a strategic or tactical nature.
Each action is always reflected in the flow of funds, since this is its main reason for being, therefore the financial area must evaluate what effects these changes have on said flow, and therefore on the Net Present Value.
This change in the flow of funds is exposed to a range of probabilities, and from the application of the latter the standard flow will emerge.
Then, in the subsequent application, we will have the values against which to compare the previously projected flow, adopting the necessary adjustments and readjustments to achieve the planned objectives.
Stages of reengineering
- Stage 1: Understands preparing for change and consists of two phases. In the first phase, the entity's management is made aware of the need for change, and therefore of the imminent need for reengineering. Once this need for change has been approved and supported by the managers, it corresponds to mobilize the workforce, showing it the imperative need to generate positive actions in favor of an organizational and financial redesign. In this first stage, awareness of all those paradigms that prevent us as entrepreneurs and the company as such from achieving the highest objectives by systematically adapting to changes in the environment is of crucial importance.
Discovering these paradigms and changing them for others more in line with our possibilities and capabilities, is like having a room full of wealth but which we cannot access due to a malfunction of the lock, this lock is our paradigms. Discovering what is wrong with it and correcting it to open the door is what will allow us to access that remarkable wealth. In the same way, in the real life of people and organizations, many times it is that impediment constituted by the “lock” (invalid paradigm) that prevents us from progressing.
- Stage 2: Financial reengineering is planned. A vision, mission and guiding objectives, clearly defined, are conceived. Strengths and weaknesses are analyzed, and the effects they have on corporate finances, at the same time, it is about glimpsing opportunities and threats, and their corresponding financial effects in the medium and especially in the long term.
The mission statement is not a minor issue, it must serve as a compass to guide and reorient the capacities and financial resources in pursuit of those returns that more efficiently cover the weighted average capital costs (WACC).
Long and medium-term plans should be established, such as annual and semi-annual plans and budgets (or for shorter periods if feasible and / or necessary).
- Stage 3: The changes are thought, designed and executed. Creativity, participation and teamwork are of the utmost importance. It is not about copying or repeating old formulas, but about re-creating and generating new forms and visions destined to produce sustainable competitive advantages. Generating better financial processes, and modifying the other organizational processes in order to produce a more voluminous flow of funds is the reason for this stage. Stage that can only be fully developed if the previous stages have been carried out in depth and breadth before.
Benchmarking is a fundamental tool to observe what our best competitors or organizations to emulate are making special, in order to serve as inspiration and object of projection of change over time.
The use of methods and tools such as Mind Maps, Lateral Thinking and Systemic Thinking take on a very special importance, especially since they are tools that the better they are used, the more positive results can be reaped. Application of Operations Research for financial purposes, in search of the absolute and relative optimum.
- Stage 4: Stage for evaluation, for which the measurements to be carried out must be previously established, and who, how, and when they will take place. Trying to be as precise and objective as possible is the watchword at this stage of change.
Orientation of the change approach
| ACTION TO TAKE | YOUR REASON FOR BEING |
| Improve the quality and speed of information. | Having a system that quickly and efficiently provides information about the nature, characteristics and behavior of the different types of income and expenses, is essential and essential to make the right decisions. |
| Have a Statistical Process Control (CEP) aimed not only at quality levels, but also at different management ratios, be they financial, commercial, cost or logistics. | In the first place, it is crucial to know if the processes are under control or not, and consequently to know what measures to generate in order to avoid making mistakes due to an incorrect interpretation of the variations. |
| Reduction of inventories of inputs, products in process and finished. | Generate all those changes that are necessary to eliminate the stock or security inventories. Support changes aimed at improving quality, productive maintenance, better relationship with suppliers, rapid change of tools, plant lay-out, among others. Significantly reduces costs related to financing, maintenance, insurance, handling, and space costs linked to excess inventory. |
| Systematic waste reduction. | Implement all those changes and measures that are pertinent in order to detect, prevent and systematically eliminate the levels of waste and waste. |
| Eliminate activities or processes that do not generate Added Value for Clients or the Company. | Design of optimal activities and processes, generators of an increase in the generation of Added Value for end customers and the company, in such a way as to increase the volume of future income flows. |
| Make Total Productive Maintenance a fundamental source of benefits. | The elimination of waste, the reduction of waiting times and the high costs for breakdowns are more than enough reason to make preventive and predictive maintenance a profit-generating weapon for the company, and therefore a channel of positive resources. |
| Reduction of occupied physical spaces. | It allows to generate new resources either by renting the excess space, redirecting it to new activities or by stopping renting other people's properties. |
| Commercial reconversion (merchandising). | Increase sales volumes, together with profitability. |
| Manage not only physical assets, but also intellectual and immaterial ones. | Comprehensive management control of the company, with special attention to the assets that are growing the most in the business world. Valuation and control of Intellectual Capital. |
| Knowledge Management as a long-term investment rather than a short-term expense. | Consider the effects on the future flow of funds produced by research and development efforts, and internal or external staff training activities. |
| Implementation of the ABC / ABM System. | Intended to redirect the use of funds. |
| Implementation of the Balanced Scorecard. | Improvement of operational and financial monitoring, together with better strategic planning, with a high participatory content. |
| Generate the systematic practice of contingency plans | Being able to quickly adopt course changes in new but conveniently planned situations. |
| Implement Financial Engineering | Achieve maximum benefits with existing resources, reducing the possible generation of losses. |
Who needs to reengineer
| In the short term |
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| In the medium term |
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| In the long run |
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Who needs to reengineer
- Organizations that face continuous problems in responding to the demands of the different entities or funding agencies Organizations that have been systematically losing the ability to react to national and foreign competitors Organizations that urgently need to rehabilitate their finances Companies that require keep up with their competitors. Those companies that possess an optimal response capacity, need to maintain their supremacy in the market.
Conclusions
Not all companies will need or be able to resort to Financial Reengineering in all aspects previously developed, what if they cannot escape is the enormous need to change in order to continue to exist in an increasingly competitive and implacable world.
For companies whose size and activities are destined to fight for their survival and competitiveness, both financial reengineering and strategic finance are essential.
Lacking a longer-term vision is like the driver who drives in the fog, "runs the serious risk of crashing or running off the road." Under such conditions, improving planning, information and decision-making systems is crucial.
Bibliography:
Finance - Bodie / Merton - Prentice Hill Publishing - 2003
Process reengineering in the company - Balle - Inforbook's - 1998
X-engineering in the company - Champy - Deusto - 2002
Financial Engineering - Díaz de Castro - McGraw Hill - 1994
E-finance - Navalón / Santana - Management 2000 - 2002
Benchmarking of the financial function - Suárez - McGraw Hill - 1996
Companies of the Future - Bolland / Hofer - Oxford University - 2001
