A business process or business method is a collection of related, structured activities or tasks that produce a specific service or product (serve a particular goal) for a particular customer or customers. It is the way a company handles a business request, eg. a loan request in a bank, or an incoming order in a shipping company. It is nothing concrete, it is the way people and systems interact to handle a business request. Business processes reflect the nature of a business. Here three types of generic business processes are mentioned below.
Types of Business Process:
- Management processes, the processes that govern the operation of a system. Typical management processes include "corporate governance" and "strategic management".
- Operational processes, processes that constitute the core business and create the primary value stream. For example, taking orders from customers, and opening an account in a bank branch.
- Supporting processes, which support the core processes. Examples include accounting, recruitment, call center, technical support.
What is business process modeling?
As we all know business process is chain of related structure tasks performer to deliver value to stockholders, business processes also comprise a set of sequential sub-processes or tasks, with alternative paths depending on certain conditions as applicable, performed to achieve a given objective or produce given outputs. Each process has one or more needed inputs. The inputs and outputs may be received from, or sent to other business processes, other organizational units, or internal or external stakeholders.
Importance of Understanding Business Process
Major reasons of understanding business process are mentioned below.
- To understand workflow: Workflow is the movement of information or material from one activity or worksite to another. Workflow includes the procedures, people and tools involved in each step of a business process. From business process one can easily define workflow from start to end. If there is any defecate or option of improvement can be identify quickly.
- To do business process re-engineering: Business Process Re-engineering (BPR) was originally conceptualized by Hammer and Davenport as a means to improve organizational effectiveness and productivity. It consisted of starting from a blank slate and completely recreating major business processes as well as the use of information technology for significant performance improvement. If someone has better understanding about business process capable of doing re-engineering on existing process.
- To improve business process management (BPM): Business Process Management also termed as BPM covers how we study, identify, change and monitor business processes to ensure they run smoothly and can be improved over time. It is a continuous evaluation of existing processes and identification of ways to improve upon it, resulting in a cycle of overall organizational improvement. By better understanding we can divide one business process and manage them well.
- To ensure Total Quality Management: Total Quality Management (TQM) emerged in the early 1980s as organizations sought to improve the quality of their products and services. By defining business process organization can find out gap among expected quality and delivered quality which increase chances of quality improvement and management.
Basic Business Processes
A basic business process includes all the individual process from creating value to delivering value. It explains major objective and ways of doing business. For a manufacturing company it may be following:
Here company buys raw materials from suppliers and keeps raw materials to warehouse. To manufacture products, they took those raw materials into plant. After production, they store final products into storage or floor. Then they sell products to distributors and from distributors, retailers buy products. Finally the customers buy product from retailers.
Now let’s see a business process of a trading company.
Here company buys finished products from suppliers and sell them to its distributor or customers. If it sales product to distributors, then only one layer of stakeholder included into the flow.
Selling is a process involving reaction between potential buyer and a person hired by the company to sell its products to potential buyer. A sales process is an approach to selling a product or service. In a sales process, some common entities like a product or service, one legal entity, way of communication and a media of transaction exists.
A generic sale involves following flow of activities:
- Gain Prospects: Prospecting, just as the word implies, is about searching for new customers. Like product knowledge, this step may seem fairly straight forward but upon closer examination it becomes more complex. The key to prospecting effectively knows where to dig and what to look for. It’s also important to distinguish between a lead, a prospect, and a qualified prospect. The most important element in this step is to create a profile of existing customers.
- Need Determination: This is arguably the most important step of the sales process because it allows to determine how the seller can truly be of service. To be a highly effective salesperson, that is to sell to the prospect’s needs, s/he first has to understand what those needs are. This means s/he must think in terms of solving a prospects problem.
- Having a Solution: This step involves finding right solution according to customer requirement. This approach is more related to technical aspects. If any sales person has detailed knowledge about product can help customer by suggesting specified solution to solve his need.
- Trust Establishment: If any customer find salesperson is trustworthy then it becames easier to sell a product because it is the salesperson who involves directly with customer. Eighty percent of sales are lost because a salesperson fails to close. Closing is about advancing the sales process to ultimately get an order.
Asking for the Sales: This is where the rubber meets the road in the sales process. For our present purposes let’s consider the approach in the context of a sales call rather than lead generation. This is the step where one begins to build a relationship and the intelligence gathering continues. A good approach is crucial to sale's success because it will either identify the salesperson as a bothersome salesperson or cause a prospect’s guard to go up, or it will identify him/her as an obliging salesperson with something of value to offer.
- Follow Up: Good follow up will double your closing ratio. When a sales person makes contact with a prospect a relationship has been built, and follow up is how it is nurtured. Staying at the forefront of a prospect’s mind requires persistence and should not be confused with being bothersome. This is why it’s important to get agreement on some next step each time there is contact. Follow up therefore should never end. The pace may slow but it will never end. When a sale is made, then a new type of follow up begins.
Example of a Generic Sales Process
Purchasing is the process of buying goods and services. The process usually starts with a demand or requirements – this could be for a physical part or a service. A requisition is generated, which details the requirements which actions the procurement department. A Request for Rroposal (RFP) or Request for Quotation (RFQ) is then raised. Suppliers send their quotations in response to the RFQ, and a review is undertaken where the best offer (typically based on price, availability and quality) is given the purchase order.
A Generic Purchase Process can be shown as:
Manufacturing processes are the steps through which raw materials are transformed into a final product. The manufacturing process begins with the creation of the materials from which the design is made. These materials are then modified through manufacturing processes to become the required part. Manufacturing processes can include treating (such as heat treating or coating), machining, or reshaping the material. The manufacturing process also includes tests and checks for quality assurance during or after the manufacturing, and planning the production process prior to manufacturing.
Manufacturing process varies organization to organization. Here we can get an overall view of a manufacturing process.
Distribution involves delivery products to end customer. One organization may have different layer to distribute its goods to final customer. There include primary and secondary layer of distribution channel. Organization can distribute products by itself or may go for primary sales to distributors.
Here a common distribution process is given. It will help us to understand a generic distribution process.
What is Finance?
Finance can be defined as a science and art of managing money. Finance is the process of raising funds and utilizing the same to obtain or attain organizational goal. Finance involves taking financial decision, investment decision, and wealth maximization.
What finance does within an organization?
From the following definition of finance we can define major objectives of finance.
- Finance mainly deals with organization’s investment decision.
- Finance finds scopes to invest organization’s money to make profit, because without making profit, it cannot survive. So finance research on investments opportunities and dedicate optimal investment option.
- It is the job of finance to suggest best option from where it can arise funds for investment.
- Finance takes financial decisions from where organization can generate fund by incurring low cost.
Origination’s major objective is maximizing shareholders value. Finance investment decision is done by evaluating whether it maximize shareholder’s value or not.
Area of Finance:
There are three major areas of finance are Personal Finance, Corporate Finance and Public Finance
Let’s discuss them more specifically;
Personal Finance: Personal finance may involve paying for education, financing durable goods such as real estate and cars, buying insurance, for example, health and property insurance, investing and saving for retirement.
Personal finance may also involve paying for a loan, or debt obligations. The six key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are mentioned below.
- Financial Position: It is concerned with understanding the personal resources available by examining net worth and household cash flow
- Adequate Protection: It is the analysis of how to protect a household from unforeseen risks. These risks can be divided into liability, property, death, disability, health and long term care. Some of these risks may be self-insurable, while most will require the purchase of an insurance contract.
- Tax planning: Typically the income tax is the single largest expense in a household. Managing taxes is not a question of if you will pay taxes, but when and how much.
- Investment and accumulation goals: Planning how to accumulate enough money - for large purchases and life events - is what most people consider to be financial planning. Major reasons to accumulate assets include, purchasing a house or car, starting a business, paying for education expenses, and saving for retirement
- Retirement planning: Retirement planning is the process of understanding how much it costs to live at retirement and coming up with a plan to distribute assets to meet any income shortfall.
- Estate planning: It involves planning for the disposition of one's assets after death. Typically, there is a tax due to the state or federal government at one's death. Avoiding these taxes means that more of one's assets will be distributed to one's heirs. One can leave one's assets to family, friends or charitable groups.
Corporate Finance: Corporate finance deals with the sources of funding and the capital structure of corporations and the actions that managers take to increase the value of the firm to the shareholders, as well as the tools and analysis used to allocate financial resources. Corporate finance generally involves balancing risk and profitability, while attempting to maximize an entity's wealth and the value of its stock, and generically entails three primary areas of capital resource allocation.
- In the first, "capital budgeting", management must choose which "projects" to undertake. The discipline of capital budgeting may employ standard business valuation techniques or even extend to real options valuation; see Financial modeling.
- The second, "sources of capital" relates to how these investments are to be funded: investment capital can be provided through different sources, such as by shareholders, in the form of equity, creditors, often in the form of bonds, and the firm's operations .Short-term funding or working capital is mostly provided by banks extending a line of credit. The balance between these elements forms the company's capital structure.
- The third, "the dividend policy", requires management to determine whether any inappropriate profit is to be retained for future investment / operational requirements, or instead to be distributed to shareholders, and if so in what form. Short term financial management is often termed "working capital management", and relates to cash-, inventory- and debtors management.
Public Finance: Public finance describes finance as related to sovereign states and sub-national entities (states/provinces, counties, municipalities, etc.) and related public entities such as school districts or agencies. It is concerned with:
- Identification of required expenditure of a public sector entity
- Source(s) of that entity's revenue
- The budgeting process
- Debt issuance (municipal bonds) for public works projects
Central banks, such as Bangladesh Bank and the Federal Reserve System banks in the United States, are strong players in public finance, acting as lenders of last resort as well as strong influences on monetary and credit conditions in the economy.
Financial Institutions and Financial Market
Financial Institutions: A financial institution is an institution that provides financial services for its clients or members. Probably the greatest important financial service provided by financial institutions is acting as financial intermediaries. For example; bank, savings and loans, Credit Company, mutual funds, insurance company, pension funds.
Financial Market: A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural goods.
- Capital markets which consist of:
- Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof.
- Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof.
- Money markets, which provide short term debt financing and investment.
What Is Financial Statement?
Financial statement: The four key financial statements required by the SEC for reporting to shareholders are:
- The Income Statement: the income statement provides summery of the firm’s operating results during a specified period. Many large firms operate on a 12-monthly cycle or fiscal year that ends at a time other than December 31. From income statement firm find total income, operating expenses, net income, dividend and retained earnings.
- Balance Sheet: the balance sheet presents a summary statement of the firm’s financial position at a given point in time. The statement balances the firm’s assets agonists its financing, which can be either debt or equity.
- Statement of Stockholder’s Equity: the statement of stockholder’s equity shows all equity account transactions that occurred during a given year.
- Statement of Cash Flow: the statement of cash flow is a summary of the cash flows over the period of concern. The statement provides insight into the firm’s operating , investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period.
Financial Statement Analysis:
To take decision manager analysis financial statements by using several methods, such as ratio, forecasting.
Using Financial Ratio:
Ratio analysis involves methods of calculating and interpreting financial ratio to analyze and monitor the firm’s performance. An analytical technique that typically involves a comparison of the relationship between two financial items
Ratio analysis begins with the calculation of a set of financial ratios designed to show the relative strengths and weaknesses of a company as compared to:
- Other firms in the industry
- Leadings firms in the industry
- The previous year of the same firm
Objectives of Financial Ratio:
- Standardize financial information for comparisons
- Evaluate current operations
- Compare performance with past performance
- Compare performance against other firms or industry standards
- Study the efficiency of operations
Types of Ratio Comparisons:
- Cross-sectional analysis is the comparison of different firms’ financial ratios at the same point in time; involves comparing the firm’s ratios to those of other firms in its industry or to industry averages
- Benchmarking is a type of cross-sectional analysis in which the firm’s ratio values are compared to those of a key competitor or group of competitors that it wishes to emulate.
- Time-series analysis is the evaluation of the firm’s financial performance over time using financial ratio analysis. Comparison of current to past performance, using ratios, enables analysts to assess the firm’s progress.
Types of Ratio Analysis:
There are five types of ratio analysis. These are given below.
- Liquidity Ratios.
- Asset Management Ratios (Activity Ratios).
- Debt Management Ratios (Leverage Ratios).
- Profitability Ratios.
- Market Value Ratios.
- Liquidity of a firm’s is measure by its ability to satisfy its short term obligations as they come due.
- Liquidity question deals with this question- will the firm are able to meet its current obligations?
Two measures of liquidity are:
- Current Ratio
- Quick/Acid Test Ratio
Current ratio: Current ratio measures a firm’s ability to pay its current liabilities from its current assets.
Current ratio = Current assets / Current liabilities
Too high – Might suggest that too much of its assets are tied up in unproductive activities – too much stock, for example?
Too low - risk of not being able to pay your way
Quick (Acid Test) Ratio: Quick ratio measures a firm’s ability to pay its current liabilities without relying on the sale of its inventory.
Quick ratio = Current assets - Inventories / Current liabilities
Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account.
Asset Management Ratio:
- Asset management ratio measures how effectively the firm is managing/using its assets.
- Do we have too much investment in assets or too little investment in assets in view of current and projected sales levels –those decisions effect can find by asset management ratios.
It helps to take decisions by solving bellow’s questions.
- What happens if the firm has -
- Too much investment in assets
- Too little investment in assets
Asset management ratio includes:
- The Fixed Assets Turnover Ratio.
- The Total Assets Turnover Ratio.
- The Inventory Turnover Ratio.
- The Day Sales Outstanding.
- Receivable Turnover
- Average Collection Period
- Payable Turnover (PT)
The Fixed Assets Turnover Ratio: to measure how effectively the firm uses its plant and equipment to generate sales. Fixed Assets Turnover Ratio measures efficiency of long-term capital investment. The fixed assets turnover ratio = Sales/ Net Fixed Assets
Total Asset Turnover Ratio: Total asset turnover ratio measure efficiency of total assets for the company as a whole or for a division of the firm. Total asset turnover ratio = Sales/ Total Assets.
Inventory Turnover: Inventory turnover ratio indicates the effectiveness of the inventory management practices of the firm. Inventory turnover = Cost of Goods Sold/Inventory
Receivable turnover: Receivable turnover indicates quality of receivables and how successful the firm is in its collections. Receivable turnover= Annual Net Credit Sales/ Receivables
The Day Sales Outstanding (DSO): The day sales outstanding indicate the length of time normally required to collect a receivable resulting from a credit sale. The days sales outstanding = Accounts Receivables / (Sales/360).
Payable turnover: The payable turnover indicates the promptness of payment to suppliers by the firm. Payable Turnover (PT) = Annual Credit Purchases/Accounts Payable
Payable turnover in days: Days in the year/Payable Turnover
Debt Management Ratio:
Debt Management Ratios attempt to measure the firm's use of Financial Leverage and ability to avoid financial distress in the long run. These ratios are also known as Long-Term Solvency Ratios.
Debt is called Financial Leverage because the use of debt can improve returns to stockholders in good years and increase their losses in bad years. Debt generally represents a fixed cost of financing to a firm. Thus, if the firm can earn more on assets which are financed with debt than the cost of servicing the debt then these additional earnings will flow through to the stockholders. Moreover, our tax law favors debt as a source of financing since interest expense is tax deductible.
Implications of use of borrowings:
- Creditors look to Stockholders’ equity as a safety margin
- Interest on borrowings is a legal liability of the firm
- Interest is to be paid out of operating income
- Debt magnifies return and risk to common stockholders
Types of debt management ratio:
- Total Debt to Total Assets.
- Total Debt to Total Equity
- Times Interest Earned Ratio (Coverage Ratio)
Total Debt to Total Assets Ratio: It measures a firm’s financial leverage, percentage of assets being financed through borrowings and too high a number means increased risk of bankruptcy. Total debt to total assets ratio = Total debts/Total assets.
Debt to Equity Ratio: Debt to equity ratio shows the extent to which the firm is financed by debt. Debt to equity ratio = Total Debt/Shareholders’ Equity
Times Earned Interest (TIE): Times earned interest indicates the number of times that a firm’s interest expense is covered by earnings. Failure to pay interest can result in legal action by creditors with possible bankruptcy for the firm. Times earned interest= EBIT/Interest Charges.
Profitability ratios are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. It shows the combined effect of liquidity, asset management, and debt management on operating results.
Types of profitability ratio:
- Gross Profit Margin
- Net Profit Margin
- Return on Assets (ROA).
- Return on Common Equity (ROE).
- Earnings Per Share (EPS)
Gross Profit Margin: the gross margin ratio is a profitability ratio that compares the gross margin of a business to the net sales. This ratio measures how profitable a company sells its inventory or merchandise. Gross margin= Gross profit/ Sales
Net Profit Margin Ratio: the profit margin ratio also called the return on sales ratio or gross profit ratio is a profitability ratio that measures the amount of net income earned with each dollar of sales generated by comparing the net income and net sales of a company. In other words, the profit margin ratio shows what percentage of sales are left over after all expenses are paid by the business. Net Profit Margin= Earnings available for common stockholders / Sales
The Return on Assets: this ratio, often called the return on total assets, is a profitability ratio that measures the net income produced by total assets during a period by comparing net income to the average total assets. In other words, the return on assets ratio or ROA measures how efficiently a company can manage its assets to produce profits during a period. Return on Assets (ROA)= Net Income + Interest Expense (1- tax rate)/ Total Assets.
Return on Equity Ratio: The return on equity ratio or ROE is a profitability ratio that measures the ability of a firm to generate profits from its shareholders investments in the company. In other words, the return on equity ratio shows how much profit each dollar of common stockholders' equity generates. Return on Common Equity (ROE)= Net Income/ Common Equity.
Earnings per Share: Earnings per share, also called net income per share, is a market prospect ratio that measures the amount of net income earned per share of stock outstanding. In other words, this is the amount of money each share of stock would receive if all of the profits were distributed to the outstanding shares at the end of the year.
EPS = (net income- preferred dividend)/ Weighted average common share outstanding
Market Value Ratio:
Market value ratio is a set of ratios that relates the firm’s stock price to its earnings, cash flow, and book value per share. These ratios are focus on the stock price and compare it to earnings and book value. These ratios give management an indication of what investors think of the company’s past performance and future prospects.
Types of market value ratio:
- Price/Earnings Ratio (P/E Ratio)
- Price/ Cash Flow Ratio
- Market/ Book Ratio (M/B Ratio)
Price/Earnings Ratio (P/E Ratio): P/E ratio indicates the amount investors are willing to pay for each 1BDT of a firm’s earnings. P/R Ratio= Market Price per Share/Earnings Per Share
Price/ Cash Flow Ratio: This ratio indicates the amount investors are willing to pay for each $1 of a firm’s Cash Flow. Price / Cash flow Ratio= Market Price Per Share/ Cash Flow Per Share. Cash Flow per Share= Net Income + Depreciation and Amortization/Common Share Outstanding.
Market/ Book Ratio: Market / Book ratio indicates the amount investors are willing to pay for each $1 of a firm’s Book Value (the firm’s net assets value).
Market/ Book ratio= Market Price per Share/ Book Value per Share. Book Value per Share = Common Equity/ Share Outstanding
Human Resource Management System
Human resource management is a function in organizations designed to maximize employee performance in service of an employer's strategic objectives. HR is primarily concerned with the management of people within organizations, focusing on policies and systems.HR departments and units in organizations typically undertake a number of activities, including employee recruitment, training and development, performance appraisal, and rewarding.HR is also concerned with industrial relations, that is, the balancing of organizational practices with requirements arising from collective bargaining and from governmental laws.
Customer Relationship Management
CRM is “the development and maintenance of mutually beneficial long-term relationships with strategically significant customers”. CRM is an IT enhanced value process, which identifies, develops, integrates and focuses the various competencies of the firm to the ‘voice’ of the customer in order to deliver long-term superior customer value, at a profit to well identified existing and potential customers.
CRM is a business philosophy based on upon individual customers and customized products and services supported by open lines of communication and feedback from the participating firms that mutually benefit both buying and selling organizations. The buying and selling firms enter a “learning relationship”, with the customer being willing to collaborate with the seller and grow as a loyal customer. In return,, the seller works to maximize the value of the relationship for the customer’s benefit.
Determination of CRM
- Trust: The willingness to rely on the ability, integrity, and motivation of one company to serve the needs of the other company as agreed upon implicitly and explicitly.
- Value: The ability of a selling organisation to satisfy the needs of the customer at a comparatively lower cost or higher benefit than that offered by competitors and measured in monetary, temporal, functional and psychological terms.
Stages of building CRM:
There are five defined stages of building customer relations. These are below;
- The Pre-relationship Stage: In this stage the event that triggers a buyer to seek a new business partner. How can you trigger this relationship also called awareness building?
- The Early Stage: Experience is accumulated between the buyer and seller although a great degree of uncertainty and distance exists. Ask and answer what does the buyer want (requires extensive observation and discussion)
- The Development Stage: Increased levels of transactions lead to a higher degree of commitment and the distance is reduced to a social exchange. This is entirely based on fulfilling the objective within minimum time lag and costs.
- The Long-term Stage: Characterised by the companies’ mutual importance to each other, based on showing a win-win strategic relationship between the two or more parties.
- The Final Stage: The interaction between the companies becomes institutionalized. May even forge a contractual understanding between the two or seek task oriented partnership having outsourcing component.
The ultimate outcome of a successful CRM strategy is the creation of a unique company asset known as a relationship network. A relationship network consists of the company and its major customers with whom the company has established long and enduring business relationships.
The additional aspects of a global salesperson’s job are to:
- Manage customer value;
- Act as customer advocate; and
- Enhance customer loyalty and build a “health” and
- Profitable network of relationships.
Overall Business Process
Finally, an integrated generic business process can be shown as below:
|Purchase Order||Sales and Marketing||Sales Order|
|Delivery Order||Logistic||Goods Received Notification|