Financial Analysis: A Controller’s Guide, Second Edition

Chapter 12. Analyzing Process Cycles

Although many analysts believe that all the major processes, cash flows, and key functions of their companies are fully documented and reviewed with periodic measurements, the majority of them are ignoring a gaping hole in the overall structure of their analysis. This is the process cycle, which has a major impact on the accuracy and speed of information flowing through a company. In the worst possible situation, a poor process cycle can even bring down a company. And yet, because a process cycle is such a low-profile item, few analysts think about it, and rarely try to measure it. This chapter corrects the problem by describing the key process cycles and the ways in which errors can arise through their usage, as well as how one may measure their performance.

Definition of a Process Cycle

A process cycle is the complete set of activities needed to complete a task. The typical company has only a few major ones, which are described in the following chapters. One of the most important is the purchasing cycle, in which an item is requested, usually through an internal purchase order system, then ordered by a purchasing agent or some similar method, received at the receiving dock, and paid for through the accounts payable staff. Another is the revenue cycle, during which a product is sent to a customer, the accounting department issues an invoice, collects the cash to pay for the invoice, and clears the payment through the accounting system. The final ...