Client Case Study: Improve Cash Flow with Process Improvement
This case study provides an overview of the benefits that a leading international industrial service provider experienced as a result of The ISO 9001 Group’s process improvement services.
Prior to working with The ISO 9001 Group, the organization had a few company-wide policies and guidelines established. The organization was also very invested in its people, property, equipment and systems to support their day-to-day operations and customer projects. However, management was aware of critical systematic issues that caused severe cash flow implications. The organization also lacked formal standard operating procedures (SOPs) for the major processes that impact cash inflow and forecasting, including order entry, project management, payment, requisition and accounts receivables.
As a result of experiencing negative cash flow impacts, the company decided that immediate improvements needed to be made. The organization selected The ISO 9001 Group to properly identify the causal factors that placed them in a negative cash flow situation, and provide recommendations for immediate action to systematically address these issues.
Prior to contacting The ISO 9001 Group, the organization was experiencing several issues, which were negatively impacting their ability to accurately forecast cash inflows and collect payment. The issues included:
1. Billing the correct amount to customers for work performed;
2. Long waiting time to receive project data to bill customers;
3. Submitting invoices in a timely manner;
4. Invoices not approved by customers in a timely manner;
5. Extended approval time of Vendor invoices;
6. Amount of time needed approve invoices internally;
Our Customized Solution
The scope of the process improvement project was to assess and provide recommendations for improvement to address the process issues that caused the negative cash flow impacts. The project focused on 4 sites in the Southern and Midwestern United States, which included the organization’s headquarters, 2 regional offices and a local job site. The ISO 9001 Group consultant presented an overview of the project plan, project expectations and recommendations for how employees should prepare. This helped gain employee buy-in and ensured they understood what to expect during the project.
After traveling to the individual sites, The ISO 9001 Group consultant conducted interviews with the respective process owners and subject matter experts (SME’s). Records regarding the processes were collected to identify causal factors. During the interviews, our consultant designed flow charts of the “As-Is” steps of each process. The process steps were identified, including the cycle time for each step, the parties involved, required documentation, inputs, outputs and the interrelation between each step. Once the “As-Is” flowcharts were finalized, the consultant analyzed each process and identified opportunities for improvement to address the negative cash flow impacts.
Our consultant proceeded to develop the “Future” state maps of each process. This focused on redesigning each process to address structural issues, which were contributing to the client’s cash flow problems. Once the “Future” state flow charts were approved, our consultant developed documented standard operating procedures to standardize and implement the recommended process improvement actions.
Identified Causal Factors
Upon analyzing each process, The ISO 9001 Group consultant identified several major factors that were directly causing negative cash flow impacts, which included:
1. Estimating. Poor change order management processes and contract requirements caused estimating to be problematic. It was also discovered that in some cases the organization was obligated to perform work, and not receive compensation. The organization lacked formal training programs and SOPs for estimating, which led to inconsistencies.
2. Project Start Up & Planning. It was discovered that project costs that were incurred in early project stages were not properly captured and invoiced. Employees also did not have a thorough understanding of how to properly set up projects in their ERP and project management software.
3. Contract Management. Our client frequently complied with unfavorable contract terms and conditions. Their customers also exploited the fact that the organization lacked established payment terms. Project Managers were not very familiar with contract language.
4. Incorrect Coding. While the project setup occurs initially, changes in the project phases were not managed well. Due to incorrect coding, purchase orders and invoices were being placed on hold. These coding issues impacted their ability to correctly bill time and material.
5. Project Management. The position responsible for many of the activities that impacted the payment of supplier invoices and submittal of customer invoices was over-allocated. Other positions lacked proper training for the financial and administrative duties they are responsible for.
6. Change Order Management. In several cases, work, time and expenses were incurred without change orders generated or approved. There were change orders in their system representing millions of unbilled dollars, and there was no evidence that the implications of the change orders were analyzed.
The following recommendations were provided by our business consultant that should have a high impact on our client’s cash flow situation:
Our client will have the ability to increase the accuracy of estimates and reduce the need for change orders by implementing more effective project controls and allowing the Procurement department to have more input during the estimate. It was also recommended that they establish a formal and documented Estimating training program, which will ensure that the estimation occurs in a consistent manner.
2. Project Start Up & Planning
In order to ensure early billable costs are accrued and billed properly, The ISO 9001 Group consultant recommended the organization establish a process to capture start-up, planning time and costs.
3. Contract Management
It was recommended that our client implement stronger stances on collection of its Accounts Receivables, in order to mitigate further cash flow risks and damages. This could include penalties on late payment, formal late notifications with penalty warnings and ultimately stopping work if payment is not received.
In contrast, it was also recommended that the company implement incentives for customers who pay invoices early or on-time. This should help the organization’s invoices get paid quicker, which would improve cash flow.
By improving and implementing stricter negotiations on cash flow critical language, our client will be able to mitigate negative cash flow risks once the project starts.
4. Incorrect Coding
Sites were recommended to immediately discontinue the practice of bypassing the Procurement Department. When employees bypassed the purchase order process, including purchasing with their own funds, our client lost the ability to effectively and accurately capture and code costs properly. By enforcing the purchase order process, our client would regain the ability to capture billable costs more effectively and accurately, and invoice billable charges based upon proper codes and accrued purchase order line items.
5. Project Management
A formal and documented training program was recommended to be established for Project Managers on the financial and administrative aspects of their positions, in order for them to have a greater understanding of the cash flow implication of their daily actions. This will assist with reducing or eliminating negative cash flow risks for projects.
6. Change Order Management
Our client was recommended to discontinue the unacceptable practice of starting work with an unapproved change order by the Customer and the organization. Work was often started without any change order, or with customer-only approval. By requiring the approval of the customer first and then the organization internally, our client can prevent time and material expenses from being incurred prior to approval or captured as a billable back to their Customer. This can also prevent our client from being stuck with the expenses without any revenue if the change order is rejected by the customer. It was also recommended that our client established punitive consequences when employees incur time and cost for change orders that haven’t been approved.
The ISO 9001 Group consultant recommended that our client establish a single central and controlled Change Order Management focal point, instead of having a change order log for each project. This would allow the organization the ability to analyze the schedule and financial impacts, adjust phases and expedite change order processing.
This case study proves that there are valuable business and cash flow benefits for organizations that implement process improvement strategies. Prior to working with The ISO 9001 Group, our client’s processes were inefficient and caused them major negative cash flow issues. By selecting The ISO 9001 Group, our client was able to properly identify the direct causal factors causing the issues and implement effective corrective actions. Inefficiencies can cause negative cash flow issues for organizations in any industry of any size if their processes are poorly designed. If your organization is ready to drive efficient operations and improve cash flow, contact us to speak with our business and management system consultants today.
Victoria Ontiveros | Marketing Supervisor
Victoria focuses on creating quality educational content that provides value to current and potential clients. By collaborating with members of leadership and sales, she is able to develop informative articles that answer common questions and connect with current trends. Victoria earned her Bachelor of Science in Sociology with an emphasis in communications from Texas A&M University.