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Ways to Improve Finance Functions through Lean Six Sigma

written by: Russ Katzman • edited by: Tricia Goss • updated: 10/29/2010

Lean Six Sigma methodology lends itself to improving the efficiency and effectiveness of transaction-heavy processes within the finance organization, such as accounts payable, accounts receivable, and procurements. This methodology is no longer seen as just a way to improve operational function.

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    Finance Bears Fruit

    The fact is many businesses send a great deal of activity through administrative functions, such as the finance department, as well. Here are examples of some administrative “low-hanging fruit” that would be easy wins for your Six Sigma initiatives.

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    Accounts Payable (AP)

    In most organizations, AP is the center of much financial activity. This group will interact with vendors, users, banks and employees to ensure that all received items are properly paid for in a prompt and accurate manner. A number of key questions can be considered when looking at AP processes:

    1. What is the turnaround time from receipt of invoice to payment?

    2. What is the rate of accuracy for invoice or voucher entry?

    3. Are vendor payments made on time and within the discount period?

    4. How much money is being lost by not meeting discount periods?

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    Procurement

    The procurement and purchasing arena is also a common facilitator of waste in the financial department. It is often the case that demands on this group are so urgent that standard processes and best practices are sacrificed for the sake of “getting the job done.” Let’s look at a few items that might be considered when looking to make the procurement function more Lean:

    1. What is the DPMO (defects per million opportunities) for key components of the purchase order? This is the source for most purchasing information, and often has the greatest opportunity for error.

    2. How quickly is a business need translated to a purchase requisition, a purchase order, and ultimate receipt of the product?

    3. Is the requisition approval process so cumbersome that users attempt to sidestep it? How can the organization streamline the approvals, without sacrificing management’s need to know what will be purchased?

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    Accounts Receivable (AR)

    We have discussed cleaning up the processes of spending money, but let’s not overlook what it would take for us to get paid. The AR group ensures that all customers are properly paid once goods or services have been rendered. This group is often the source for receiving cash payments and ensuring that the payments are properly applied to customer accounts and deposited in the bank. In reviewing AR:

    1. How many steps are necessary to get a bill to a customer after services are rendered? How long does it take?

    2. Do you receive many credit memos? Are these memos due to mistakes in the billing or receipt process?

    3. What is your average DSO (days sales outstanding) and how does it compare to others in your industry?

    4. Is there a significant difference in the amount of time it takes to be paid from a large customer rather than a smaller one? Can you make changes to the process, or negotiate terms with the customers that would impact this differential?

    This is just the tip of the iceberg in how financial departments can benefit from Lean Six Sigma. I’ve found that many of these areas are like onions: there are many layers of inconsistency that must be peeled back before you realize the true nature of the process.