Thursday, 02 July, 2020

FINANCIAL PROCESS STANDARDIZATION


Before we elaborate on financial process standardization, we must know the meaning of the term standardization: its relevance, its effects, and the types of standardization.

Standardization

Standardization is the process of coming up with standards. These standards guide on the creation of goods or services based on the agreement of all parties concerned. The goods or services produced by a particular industry are made comparable with other products of the same industry. Standardizing processes brings some benefits such as interoperability, compatibility, and safety of goods produced in the industry. The parties involved in making the standards are the users, government, corporations, groups of interests, and standards organizations.

The goal of standardization

The main goal of standardization is to guarantee uniformity of the significant practices carried in the industry. The focus of the standardization is on the process of creating products, operation of businesses, technology in use, and how specific is the methods that are carried out compulsorily.

Standardization of business processes

Business process is one of the areas where the most common form of standardization is applied. Internationally known companies typically refer to the documentation of a detailed process. The normalization ensures that the quality of products and services is all the same and will not change with time. Most importantly, it does not take into consideration where the customer visits the store.

Manufacturing businesses

Those that are in the business of manufacturing oftenly form agreements that ensure that the products they produce have similar specifications with other businesses in the industry. This standardization covers goods manufactured locally or worldwide. For example, manufacturers of an LED or LCD televisions follow particular standardization rules of products that govern similarity in features of the ones sold in the market. The standards may cover elements such as screen resolution, input devices, and internet connectivity, etc. Due to the advancement of technology, these features may change from time to time. Therefore, standardizing in financial processes ensures products have similar specifications across all stores around the globe. The benefits of standardization in manufacturing industries include; reduced cost of production, improved quality of products, improved operational flexibility, and timely response.

Product marketing

Standardizing products that can be available across various places of the world ensures that the buyers get the same products and services without considering where they buy. It applies to popularly great brands that buyers are already familiar with such that if they make any alteration, it would be noticed immediately. Coca-cola is one of the companies that use this kind of standardization. Internationally known companies also standardize their advertisement by maintaining uniformity in theme designs. This uniformity is one of the ways that reinforce their brand image to global customers. Even when presented in different languages, the theme design and color do not change at all.

Standardization of trading

This form of standardization is made by the exchanges of which the securities are traded. It ensures that then efficiency of trading is the same for all investors, and they are provided with higher liquidity. For example, in options markets, exchanges set standards to establish the minimum bases of trades for contracts. Oftenly in options trading, 100 shares of the underlying stock are represented by each option contract an investor holds. In the future, the type of asset being traded will affect the size of arising contracts.

Effects of standardization

Standardization will affect the following;

1. Firms

When standards are applied to the products and services of the competing firms, then the competition will shift from integrated systems to individual components. Therefore, the strategy must change for firms that depend on integrated systems to sell their products. The change will therefore favor a focus on the system’s individual components. However, firms can be advantaged by creating competition in selling sub-systems or parts of an integrated system to other businesses. These other businesses must be compatible with the business model of the firm.

2. Consumers

Consumers benefit a lot from standardization due to increased compatibility and interoperability between products. For instance, if gadgets of communication are standardized, consumers can share information with a large number of people who don’t have limitations of specific products and services. Also, consumers can match up components of a system to fit their preferences. However, consumers can be affected such that they have limited options to choose from. Producers are also affected in a way that they are not able to provide more value for customers due to constraints of the standards.

3. Technology

The effects of standardization on technology are diverse, and they may bring positive and negative outcomes. The positive effect is that the standards set can help remove the outdated and incompatible forms of technologies that are hindering the growth of technology in general. Therefore the standardized technology will enhance growth in the technology industry. For instance, standardized technology allows software programs that are compatible with the windows operating system. For the negative impact, the quality of innovative new and existing technologies is restricted by the standards.

FINANCIAL PROCESS STANDARDIZATION

Generally Accepted Accounting Principles (GAAP)

GAAP is a set of rules and procedures set to govern financial reporting and corporate accounting in the United States. The Financial Accounting Standards Boards (FASB) developed these principles jointly with the Governmental AccountingStandards Boards (GASB). It is required by the US law that, all companies that trade publicly and the ones that release a financial statement on the public to follow the GAAP guidance.

Therefore, GAAP makes transparent and standardized financial reporting using accepted common practices, terms, and procedures. The principles have also resulted in the consistency of the presentation of financial reports. It has become easier for investors and other interested parties to comprehend financial reports and compare them with those of another company.

Key to accounting success

We need to have a clear understanding of what it takes to run a smooth back office. This understanding helps us identify and resolve the breakdowns in our accounting department. Basically, there are three types of accounting processes. They include;

I. Individual transaction

II. Batch transaction

III. Financial data management

Individual transactions entail a one-time transaction, which includes the issuance of invoices, posting of cash receipts, or the approval of a payable. Batch transactions occur when we carry out multiple transactions, such as payroll and check runs. Data management involves both individual and batch transactions. This management includes processes such as making changes to the general ledger account, updating the master file of the employee, and adding new vendors, consumers, or employees. For maximum efficiency and accuracy, financial process standardization must take place across our organizations. A written policy that has been agreed upon will help to end all differences among business partners and staff; thus, the work and the standardized process will be consistent.

In particular, most small to mid-sized companies don’t have a standardized policy in place. This is contributed by the fact that our small companies can’t have similar controls to those of large companies. The few staff available in the small companies are tirelessly working on running and growing business. Launching standardized policies to these small companies pushes us to the back burner, and as a result, the accounting processes occur. When the accounting processhappens, it is not reviewed or approved in any manner, thus leading to delays and mistakes. Also, there is no communication when the staff is not aware of the critical changes made within their organization.

At this point, RFSWorkflow comes in. RFSWorkflow is a cloud-based accounting software that uses the best practices of standardizing all accounting processes. Also, it features in the manager’s approval, thus ensuring proper communication between the accounting department and the manager. It minimizes the dependence of an employee and allows the employees to work remotely because all the financial documents are available online.

Capital budgeting

Capital budgeting is the act of choosing projects that add value to the company by determining the cost of a potential investment project. There are factors considered in capital budgeting, which include; payback period (PBB), internal rate of return (IRR), net present value (NPV).

It is an essential aspect of the investment because it creates measurability and accountability. If you are making decisions based on capital budgeting, then you are investing and committing your finances. All businesses exist to fetch a considerable amount of profits. The capital budgeting process is a measure of long-term profitability in any investment project. The three metrics of capital budgeting ( PBP, IRR, NPV) should make an indication such that one final decision is made for the investment project.

FAQ

How does standardization reduce costs?

Achieving excellence is the ultimate goal of many organizations worldwide. While cost reduction is one of the most frequently addressed issues in any business, they do it all the time since it is a permanent finance process. This is because they always seek to process improvement in the company’s profitability and, consequently, productivity. That is to say, to try to “do more with less,” which is to produce more with what you have or to provide the same with fewer expenses. In both cases, the objective is to reduce costs (cost saving). 

Standardization would further minimize production costs by 50 percent. By buying the leverage, manufacturing companies could also significantly decrease their purchasing costs. If the acquisition of components and items has also been systematized, inventory costs would coincidentally go down. In brief, a company can reduce costs for many reasons: a drop in sales, lack of liquidity, no access to credit, etc. And when this happens, cost-cutting occurs in the areas of human resources with the dismissal of staff, restructuring the standardization process, changes in suppliers, among other measures. 

Why is standardization important in business?

Every company needs to go through standardization. Since it has become a necessity in today’s societies, these societies do not exist in isolation, and they are increasingly connected. Implementing standards ensures fair competition, avoids unnecessary trade barriers, and facilitates access to global markets, to improve trade relations. Within the company, there is a low risk as it helps to optimize operations, reduce costs, and provide incentives to improve quality and internal control. As a result, they increase customer satisfaction and improve overall productivity and competitiveness. As an obvious benefit, implementing technical standards allows companies to reduce their environmental impacts and consequently benefits the environment of financial institutions.

What is effective workflow management?

A workflow management system is useful because it simplifies and organizes financial information. It helps to manage and to monitor the manual and robotic process automation of sophisticated financial services, integrating the optimization of the cash flow of clients and the automation of the administrative office or financial management. There are many tasks, such as providing financial data generated during production, supporting logistics processes, and processing orders, which a system can handle. When it works properly, doing all that it can do means that it is effective. One competitive advantageis that it provides tools for the staff or a finance team to manage their tasks and administer the flow of information. At the same time, managers can monitor the operational processes of a business unit.

What is the purpose of standardization?

Standardization is a crucial tool for the industrial and commercial development of a country, as they serve as a basis for improving the quality of business management, product design, and manufacture, and delivery service—increasing competitiveness in national and international markets as a finance function. The purposes of standardisation are simplification, elimination of trade barriers, protection of consumer interests, communication, production economics, safety, health and security, and improving the quality and competitiveness of products and services. Data standardizationbrings benefits to consumers and users, allowing them to obtain a reference to know the level of quality and safety they should demand from the products or services they use.

Does the tech in your workflow integrate?

The technology will always help in every area of the work, as it evolves more, it will make the duty more comfortable by bringing in many things. Nowadays, there are new technological tools that achieve more significant increases in the efficiency of business processes. The workflow, which is helped by the use of technology, manages to generate essential tools that increase agility and increase the decentralization of administrative activities. Currently, it is imperative to access information in an agile and efficient way. Thanks to technology, these systems seek out and automate work processes and their total control of the different stages, during which documents, information, or tasks move from one participant to another. The time lost in accessing and retrieving data is much less when using this tool.

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