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How to Measure the Cost of the Finance Function

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How to Measure the Cost of the Finance Function

by Jonathan Collins, 10 November 2010
topics:
Business Expense Management
tags:
benchmarking cost-of-finance study finance function Jonathan Collins metrics

Depending on the part of the world you live in, what keeps the finance executive up at night can be vastly different. For those in the US, making sure you maintain market share is paramount. For those in Asia Pacific, finding and retaining top talent without overpaying might be at the top of your list.

 
But a common theme for all finance executives is making sure your organization is operating as efficiently as possible. Undertaking a cost of finance study can help to provide objective measures in determining if you are getting the most out of your finance team.
 
The objective of a cost of finance assessment is to benchmark a company’s finance function relative to its industry standards and organizational size and to quantify the cost of the finance function, based on full-time equivalent (FTE) activities. The assessment should identify strengths and weaknesses that exist within the finance function and produce an actionable plan for improving areas where the company is operating below the agreed upon standard. 
 
Scope of Review
The first step in the review is to agree on the scope. The term finance function should be treated broadly and all functions (whether they report to the CFO or not) should be included if time and budget allow. The finance areas typically considered include:
 
  • General Accounting
  • Risk Management and Compliance
  • Treasury and Cash Management
  • Corporate Planning (annual budget, long range planning)
  • Corporate Strategy
  • Corporate Development (M&A)
  • Business units
  • Payroll
  • Tax
  • Sarbanes-Oxley - Internal Controls Process
  • Accounts Payable
  • Fixed Assets
  • Project Accounting and Reporting
  • Billing and Accounts Receivable
  • Finance IT
 
Process Documentation
Each process for the in-scope areas needs to be documented. If you are a public company subject to Sarbanes-Oxley or other controls-based regulation, then it is likely that you can utilize your controls documentation as a baseline and supplement where needed. Regardless of where you start, you will need a list of each task performed within each major activity of the finance function, based on FTE time allocation. 
 
Metric/Measure Development
Once you are clear on the tasks that each function performs, you should develop a list of metrics/measures that you will include in the study. They need to be relevant and you need to be able to capture the data. Many databases and studies exist to serve as your benchmark and these should be referenced for industry standard metrics and measures. 
 
Examples of metrics include: 
  • Finance Costs as a % of Revenue
  • Revenue per Finance FTE
  • AP Cost as a % of Revenue
  • % of AP Invoices Automated
  • Total AP Invoices processed per FTE
  • Total AP Invoices Lines processed per FTE
  • Average Salary in AP Department
 
While a robust database is critical to this type of analysis, it is not without certain limitations. Differences such as organization structure, process design, technology, and industry may drive disparity in both entity performance and the interpretation of relative performance. Despite efforts of practitioners to structure data collection efforts in a consistent manner, the unique circumstances of each participant will influence this process, in turn influencing the outcomes. Make sure that the differences have been normalized before making decisions on the results. 
 
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