Despite dramatic shifts in labor markets and technology in recent years, the relative cost of managing all aspects of an organization’s finances has remained roughly constant.
That’s according to cross-industry benchmarking data gathered by the American Productivity and Quality Center (APQC) and reported as a percentage of total revenue: top-performing companies spend .66% of their total revenue to perform finance-related functions (a slight increase from .6% a decade ago); middle-of-the-road companies spend 1%, and bottom-performing organizations spend 1.5% (down from 2% in 2015).
These expenditure levels have plateaued, but that’s not a reason to ignore them. As a finance leader, it’s important to track the total cost of performing all financial functions — from forecasting and budgeting to payroll, accounts receivable and more — and measure it against peer organizations within and outside your industry. Why? Well, there are a few reasons, and their applicability depends on the size and current performance of your organization.
Cost savings or time savings
Bottom-performing organizations spend more than double what top performers spend to complete the same set of processes. Closing this gap could result in significant savings for both median and bottom performers.
Top-performing organizations, on the other hand, are unlikely to see any significant savings, given the relative stability of spending levels over time. These companies should instead aim to reinvest time savings from process efficiency into higher-value activities like strategic planning and growth.
Smaller organizations ($100 million or less in annual revenue) will find it difficult to match top performers on this measure because they lack access to the economies of scale that global enterprises can leverage. But for organizations both large and small, benchmarking the total cost to perform the finance function against peer organizations can help guide important decisions. Finance leaders at smaller organizations especially should consider using a dashboard to visualize this metric alongside related ones, such as the cost of the finance function per finance employee, for a fuller picture of process performance.
Managing your human capital
Regardless of your organization’s size, salaries and benefits for employees are the biggest factors driving the cost of financial operations, hands down. Decisions about salary levels and benefits have serious implications for the organization’s ability to attract top talent.
Especially in smaller organizations, it might be tempting to decide that you “can’t afford” to compete with compensation levels offered by larger competitors. But this can ultimately lower the effectiveness and efficiency of your finance and accounting teams, raising the cost of getting work done.
Before making such decisions, perform a cost-benefit analysis. Salaries that attract highly skilled employees might allow your team of three people to accomplish what otherwise would require 10 or more. Investing in the right people can yield substantial benefits in the form of process efficiency as well as systems design and roll out.
In business, human capital is often more important and valuable than financial capital. You’ve heard it before: Your people are your organization’s greatest asset.
Technology and processes
Ideally, upgrading financial systems and automating certain aspects allows an organization to increase revenue without necessarily increasing the headcount in the finance department. In some cases, technology implementations might even facilitate cost-cutting.
However, optimizing these systems requires having the right people to implement them. This relates to the discussion on human capital or potentially to vendor selection if you’re looking outside your organization for assistance.
In general, larger organizations have a greater capacity to identify and streamline financial processes that cross multiple departments. However, smaller organizations must devote energy to these challenges as well. Understanding gaps in cross-functional workflows and improving related processes can result in substantial efficiencies in the finance function.
Setting up shared service centers, for example, or offshoring call centers can facilitate standardization, shorten cycle times, reduce errors, and free up other staff to focus on higher-order tasks, all of which lessen the cost of performing financial processes.
For finance function leaders, process intelligence is essential. Take the time to walk your processes from end to end. Ask employees about their pain points. Locate the bottlenecks.
Rolling up your sleeves and learning about the workflows in different locations or regions might not always be possible. But when combined with a comprehensive approach to benchmarking, it’s extremely helpful for managing the big picture and promoting sustainable long-term growth.
