How Does Your Finance Department Measure Up?

Journal of Accountancy, January 1997 | Go to article overview

How Does Your Finance Department Measure Up?


A report card on the state of finance and accounting.

Although more and more companies have streamlined, outsourced and automated their finance departments, there still are plenty of. companies that do business the old-fashioned way. The traditional companies--the ones that spend the bulk of their resources processing generic transactions and assembling data from unintegrated systems--will not realize the cost benefits that more efficient finance and accounting processes, such as automated controls and soft closes, have to offer.

An ongoing benchmark study, sponsored by the American Institute of CPAs and The Hackett Group, a Hudson, Ohio management consulting group, has examined the finance and accounting practices of more than 650 U.S. and multinational companies, including over 40% of the companies listed in the Fortune 100. Virtually all major industry sizes and organizational structures are represented--companies range from $50 million to $90 billion in annual revenues and finance departments range from 50 to 14,000 employees. The following is a look at findings from the most recent analysis of the study.

TRENDS

* The average cost of finance has dropped by 36% in the past eight years--to 1.4% of revenue in 1996 from 2.2% in 1988.

* Finance staffing had decreased by approximately 9% during the past two years, with the largest reductions occurring in the transaction processing areas.

* Larger companies benefit from economies of scale in both the manufacturing and service sectors. Companies with more than $1 billion in revenues report 20% to 40% lower finance costs than smaller companies.

* On average, finance staffs devote 84% of their time to activities with a lesser value--no change from prior-year results. In these companies, highly skilled finance managers and professionals are still spending approximately half their time on transaction processing rather than supporting decision making by management.

RISING ABOVE THE AVERAGE

In the study, the gap between the average and top performers is stark. Here is a look at a few measures of efficiency and effectiveness:

* The average billion-dollar company handles 12,500 invoices per accounts payable employee annually, at a cost of $3.55 per invoice, while companies with world-class finance departments spend approximately $0.35 per invoice.

* Average companies process 23,200 payroll transactions annually per payroll employee, at a cost of $1.91 per transaction. The top 25% of companies in the study do the same work for $0.36 per payroll transaction.

* The typical company requires 95 days to prepare the annual budget. Companies with world-class finance departments do it in fewer than 60 days.

"Companies often use benchmarking to raise awareness of the need to change," said Greg Hackett, president of The Hackett Group. "When they see how best practices can deliver significant bottom:line improvements, the job of selling change to top management is much easier. It's hard to say no to productivity improvements that deliver millions of dollars in annual cost savings and redirect precious resources to more valuable work."

World-Class Finance vs. Average Department in a Billion-Dollar
Company
                        World-class              Average
                        finance                  finance
                        department               department

Cost as percentage of   1%                       1.4%
revenue

Full-time equivalent    less than                more than
employees               130                      150

Processing locations    1                        more than 3

Systems per process     1                        2 to 3

Budget cycle            60 days                  95 days

Closing cycle           less than 2 days         5 to 8 days
source: The Hackett Group, [C] 1996. … 

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