Payments

Metric of the Month: The Cost of General Accounting

Unlike the lower-performing companies, the leaders don’t have paper-clogged workflows and armies of people performing manual tasks.
Mary C. DriscollSeptember 8, 2016
Metric of the Month: The Cost of General Accounting

Customer billing and payables processing are just two of the activities that are the bread and butter of financial management. Every process and line item that feeds official performance reports must be pristine, efficient, and reliable. There’s really no room for error. Just ask your board of directors, who are no doubt intensely interested in absolute integrity in corporate financial processes, as well as the safeguards that protect them.

METRICOFTHEMONTHWhen it comes to cost, general accounting is a centerpiece in discussions about whether too much time and money go to finance operations. Among large entities, the cost of general accounting never seems to stabilize — multiple acquisitions and unending efforts to compete globally keep corporate controllers checking and re-checking their process costs.

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It’s not uncommon to hear of finance organizations that wind up with hundreds of staffers focused on reconciling inter-company transactions using multiple patches and spreadsheet linkages. The risk of errors creeping into the workflow is magnified with the amount of manual brute force required to get the job done. Unsurprisingly, the specter of cost-creep in enterprise accounting is hard to abide.

How much are organizations spending on general accounting? Let’s look at the components of the general accounting process as defined within the APQC Process Classification Framework (PCF):

  • Maintain chart of accounts.
  • Process journal entries.
  • Process allocations.
  • Process period-end adjustments.
  • Post and reconcile intercompany transactions.
  • Reconcile general ledger accounts.
  • Perform consolidations and process eliminations.
  • Prepare trial balance.
  • Prepare and post management adjustments.

For the purposes of this article, I am excluding fixed-asset accounting, financial reporting, and policy-related tasks such as establishing service level agreements. To perform the general accounting process, the 224 top-performing organizations out of a sample of 896 companies spend 47 cents or less per $1,000 in revenue.

That’s just one-fourth of what the bottom 224 performers spend, which is $1.98 or more per $1,000 in revenue. That’s a large difference in costs to conduct the same general accounting process, including personnel, systems, overhead, and other internal and external resources.

How do the best performers get to low-cost general accounting nirvana?

For one thing, they keep manual processing down to a minimum. According to APQC’s Open Standards Benchmarking data on general accounting and reporting, the best-performing organizations manually process 10% or fewer of their journal entry line items, while the bottom quartile require human intervention to process a third or more of their accounting entries. Unlike the lower-performing organizations, the leaders don’t have paper-clogged workflows and armies of people performing manual tasks. There will always be the need for occasional human intervention, but paper-based transactions and poorly designed workflows should be the exception, rather than the norm.

Another step the winners take is to simplify the basic process model. One simplification involves untangling the mess created by an overly complex chart of accounts. Consider APQC benchmark data that captures the number of accounts in the chart of accounts among 10 companies in the consumer products sector (excluding food and beverage). The most streamlined accounting operations have 181 or fewer accounts in the chart of accounts. The most complicated have 727 or more.

The Movement Toward Change

CFOs are aligning improvement programs with enterprise goals, deploying proven process frameworks, and using IT innovations to streamline such core areas as accounts payable and general accounting. One finance improvement leader told APQC that his global telecom company is seeking to bring back in-house a range of financial management processes that had been outsourced to service providers in India. Now that the processes have been fixed and streamlined, the company hopes to automate them with robotics, at much less expense.

The movement toward IT innovations, such as cloud-based solutions, promises to ease the burden of some aspects of enterprise accounting for many companies. A recent APQC survey on finance transformation shows that 57 of the 150 finance executives polled said that new information management technology will be either very or extremely vital to their finance improvement efforts.

Organizations that find themselves performing below the median level of process cost for general accounting will want to consider mapping their end-to-end process to identify where along the spectrum of activity the need for expensive manual interventions regularly appears.

From there, the process owner(s) may want to do root-cause analyses to dig out the “upstream” sources of troublesome transaction data or faulty consolidations. The possible remedies defy general description, though. The directions chosen for process improvement — what to stop, start, and continue — must be tailored to business model, culture, and IT strategies. Nevertheless, it is folly to do nothing.

Mary Driscoll is a senior research fellow in financial management at APQC, a nonprofit business benchmarking and research firm based in Houston.

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