The beginning of a year is a great time to evaluate the effectiveness of the finance function and the role it plays in helping drive a  company’s success. This month’s metric — total cost to perform the finance function as a percentage of revenue — is part of a set of finance process key performance indicators that every CFO should have on their radar as they look for ways to continuously improve and enable growth for their companies in 2020 and beyond.

Data from APQC’s Open Standards Benchmarking database shows that little has changed when it comes to the cost of the finance function since we first wrote about this metric in 2015 and again in 2018. Costs have leveled off: Top-performing companies today spend 0.56% of their revenue on the finance function, a marginal decrease from 0.7% in 2018 and 0.6% in 2015.

The cost for bottom-performing companies has remained relatively stable as well, shrinking from 2% in 2015 to 1.6% in 2019. Bottom performers continue to spend more than three times the amount that top performers spend for the same set of processes. Closing this gap could result in significant potential savings for both median and bottom performers. Given the fact that costs relative to revenue have leveled off, top-performing organizations are not likely to see any additional significant savings. The goal for those companies should be to reinvest time savings from process efficiency into higher value-added activities like strategic growth.

Many top-performing companies spend less on finance as a percentage of revenue because they have optimized, efficient, and effective processes. Those processes have lower cycle times and require fewer full-time employees. These benefits are often accomplished through best practices like process standardization and automation, which free finance teams from low value-added activities so they can be redeployed into value-added business advisory roles. When companies spend less to accomplish the same amount of work, they have opportunities to reinvest those resources in improving the bottom line.

APQC has found that there are four key drivers that can potentially raise the effectiveness of the finance function: the right structures, processes, technology, and people can all have a demonstrable impact on the ability of finance to drive better results for the business.

Structure

Leading organizations, particularly those that are large and globally distributed, have organized their routine and highly transactional finance processes (such as accounts payable and invoicing) into shared service centers in order to reduce redundancies, standardize processes, provide higher service levels, and cultivate expertise. And recent research has observed an increase in the prevalence of higher-value finance processes (such as planning, budgeting, and forecasting) in shared services.

APQC’s research has found other potential associated benefits. For example, an analysis of APQC’s Open Standards data in general accounting found that companies that leverage shared service centers generally have faster cycle times, a faster annual close, and fewer errors in journal entry line-items, all of which lessen the cost to perform financial processes.

Process

Leading organizations continuously work to document, streamline, standardize, and build governance and accountability structures for finance processes. Finance teams that have standardized and adequately documented processes save time as well as money. Leveraging a standardized chart of accounts and common finance data definitions can also help lower costs and make processes more efficient. At APQC, the time it took for me to hit the ground running as CFO was greatly reduced by the fact that I could pick up and reference a 250-page binder documenting our finance processes as I prepared to run the first monthly and annual closing processes two years ago.

Last month’s metric on cycle times for the annual close detailed some important practices like pre-closing activities that can also help finance work smarter and faster. These practices are associated with fewer overall FTEs for finance processes like general accounting, which contributes to a lower overall cost for finance.

Technology

The last few years have seen an explosion of tools and technologies that are empowering finance to do its work smarter and faster. The costs of technologies like cloud computing have dropped, meaning that small as well as large companies can reap benefits in terms of increased efficiency, increased productivity, and enhanced strategic insights.

People

With the right technology, processes, and structure in place, companies can free up capacity for finance professionals to focus on value-added forms of work. APQC has found that when companies invest in building financial modeling skills, business partnering skills, and analytical skills, finance professionals can play a much more effective role in driving bottom-line results.

Whether you are a top or bottom performer, you can always find ways to make finance more efficient and re-invest resources into value-added activities that drive the bottom line. Doing so is critical for companies of any size because you can only play defense for so long —there’s a point at which cost-cutting becomes counterproductive and hampers growth.

Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston.

Philip James Corwin/CORBIS/Corbis via Getty Images

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One response to “Total Cost to Perform the Finance Function: Metric of the Month”

  1. Perry
    Good article as are your other metric of the month articles.

    Perhaps in a future article you can discuss some of the indirect or opportunity costs associated with finance like the cost of over borrowing (extra interest expense), under investing (loss of interest income) or exposure to market rate changes (FX, commodity prices). Then there is the cost of banking services which can often be as larger / larger than salary expenses for internal finance functions like Treasury or FP & A.

    Glad to discuss what other success metrics could address the issues of liquidity and risk from the factors above as we enter 2020

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