VideoYou can't benchmark the performance of one finance department against another, says Blythe McGarvie, CFO of the Paris and New York-based BIC Group. The same numbers, she argues, are handled by different companies in too many differently nuanced ways for direct comparisons to be practical. Many finance chiefs, consultants, and academics are willing to make those comparisons — but they disagree on where to draw the lines.
McGarvie and the others we interviewed for this article, however, all agree on several indications that do provide a certain measure of a finance department's effectiveness. (Within this article, "finance department" refers to all those areas over which the CFO holds sway.)
Steer clear of these treacherous areas, and you have no guarantee of success; run afoul of them, on the other hand, and your finance department simply cannot be considered among the best. Your company and your career may fare poorly as well.
1. Slow Closes
A properly skilled staff should produce a complete financial statement within ten days of the quarter's end, says Miles Stover of Crossroads LLC in Irvine, California. Seven days, he adds, should be long enough to produce a preliminary "flash" report suitable for internal distribution.
Stover, who's been an interim CFO on behalf of Crossroads at multibillion-dollar conglomerates and at tiny private concerns, grants an exception for companies with annual revenues under $50 million — but even for these companies, he maintains, the quicker the better.
Dave Peralta, CFO of software provider Arbortext in Ann Arbor, Michigan, doesn't hold to such a strict rule of thumb, but he agrees that "the longer it takes to close, the more inefficient the department becomes." Tasks tend to expand to fill the available time unless the finance chief has the discipline to fix a date, then push the department to meet it.
Efficiency aside, why else should you concern yourself about a leisurely close? It can be a sign that policies may need some tweaking — say, because closings are held up by laggard invoices that trickle in on the last day of the month. There's a simple remedy for that one: Move up the deadline to earlier in the month to give your staff some breathing room.
Sometimes, of course, appropriate policies and procedures are in place, but they're being ignored by employees outside your department. "That's when the CFO needs to put in some calls to get things back on track," offers Peralta. (For more on the efforts of CFOs to close the books more quickly, see "Virtual Close: Not So Fast.")
Now there's slow, and there's very slow — it's not simply a process problem when the close is a full quarter behind. Witness power producer Mirant, which filed its 10-Q for the period ending June 30 on November 7, and pharmaceutical giant Bristol-Myers Squibb, which plans to file its third-quarter 10-Q in February 2003.
"If this was just a process problem," says James Owers, a finance professor at the J. Mack College of Business at Georgia State, management might have felt compelled "to bring in a new cast of characters in the CFO function." Owers notes that these tardy filings indicate wider problems — restatements coupled with investigations by federal regulators, in the cases of Mirant and Bristol-Myers Squibb.
2. Outrageous Audit Fees
Insiders and outsiders have different opinions about whether high fees spell trouble for the finance department. Kris Onken, CFO of Logitech International, a manufacturer of personal digital devices based in Fremont, California, maintains that rising audit fees are often an indication that a company's business is becoming increasingly complex. At a previous employer, she saw audit fees jump 25 percent while the company worked through growing pains.
Daniel Weinfurter, president of Parson Consulting in Chicago, counters that high fees, including those for non-audit services, can be traced to an underperforming finance department that requires an abnormal amount of "cleanup." Weinfurter, whose Chicago-based firm specializes in ferreting out corporate finance problems, warns executives to keep tabs on the fix-it bills for such things as slow shipments, bloated inventory, out-of-control receivables, and big write-offs for items that should have been handled earlier in the reporting cycle.
Paying a CPA $500 per hour to correct general-ledger mistakes is throwing money away, adds Miles Stover. Accounting errors should be corrected in-house by a staffer who makes $60 per hour. (Another option, many firms have found, is to have their outside audits performed by one of the many "Second-Tier Audit Firms.")
3. High DSO
Days sales outstanding (DSO) — the average time taken by a company to collect payment from its customers — can be calculated using figures from the 10-Qs or 10-Ks of a public company. When DSO rises, it also appears on the radar screens of company shareholders.
Daniel Weinfurter says an increase in DSO usually stems from a lapse in the accounts receivable process. Collection calls, for example, might not begin until 30 days after the past-due date. A related headache manifests itself as high customer adjustments, which can lead to higher DSO as well as hinder the usefulness of forecasts.
Reader Comments» Post a comment