Accounting & Tax

Better Forecasts Mean Tougher Closes

To feel good about their financial forecasts, executives have had to spend more time and money closing the books.
Marie LeoneMay 20, 2004

More executives are feeling confident about their financial forecasts, says new research from The Hackett Group. But with more self-assurance have come increased costs and slower closes.

Initial findings from Hackett’s 2004 World-Class Performance study of corporate finance departments indicate that executives from 67 percent of the 2,400 companies surveyed say they are confident in their financial forecasting and reporting output. That’s up from a lowly 9 percent a year ago.

Confidence doesn’t come cheap, however. For the first time in many years, companies were unable to reduce their overall finance costs, says Cody Chenault, Hackett’s Finance Practice leader.

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More tellingly, monthly closing cycles have been extended, albeit slightly. For the average companies in Hackett’s survey group, close times rose from an average of 5.2 days in 2003 to 5.5 days in 2004. For the “world-class” companies — which Hackett defines as companies that rank high in efficiency and value creation — the increase was even greater, rising from 4.3 days in 2003 to 5.1 days in 2004. Chenault reckons that close times will inch up again by the end of the year, topping out at about 6 days.

As for finance department spending, stable costs over the past two years represents a step backward, says Chenault. Indeed, during 2004, average companies spent 1.08 percent of revenue on the finance function, compared with 1.01 percent in 2002. Although finance-department costs dropped 58 percent from 1992 to 2002, average companies have seen little or no reduction in costs since then, even though clear cost-cutting opportunities still exist, maintains Chenault.

Meanwhile, world-class companies now spend 31 percent less on the finance function than do their average peers — only 0.74 percent of revenue, a slight increase over the 0.72 percent in 2002.

Labor costs are the largest component of the finance department budget. World-class companies spend 0.46 percent of revenue on labor costs to support a staff of 63 full-time equivalents per billion of revenue. In contrast, average companies spend 0.76 percent of revenue, and they employ 122 full-time equivalents per billion of revenue — nearly twice the staff.

Hackett attributes the leaner staffing levels at world-class companies to better use of technology. For example, world-class companies spend 30 percent more than their peers on technology, and they customarily use a single ERP system, while average companies rely on two.

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