Balances are the Inventory of Finance

Two decades ago, manufacturers learned that by moving to just-in-time inventory, they could significantly reduce cost by eliminating inventory. Inventory requires forecasting demand, with all the potential errors associated with obsolescence or missed opportunities, as well as the costs of warehousing to raw materials or goods produced.

A similar cost savings is possible in our financial processes. In financial processes and financial services, balances are the inventory. Our financial systems are like the old manufacturing lines: defined at start up as to what balances they can produce, and capable of producing nothing else. We must forecast the questions the system will be able to answer, with the associated risk that new questions cannot be answered and old questions may be irrelevant. We even build “data warehouses” to keep all the manufactured results.

But just like how just-in-time manufacturing lowers the inventory management costs, just-in-time balances can reduce the costs of finance. This is episode 98 of Conversations with Kip, the best financial system vlog there is.

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