Benchmarking: Is Your Finance Function First Class?

The cost of finance as a percentage of revenues is one of the metrics that CFO Innovation looked at when judging the recipient of the 2013 CFO of the Year Awards. China Resources CFO Frank Lai Ni Hium, this year’s CFO of the Year, reports that the cost of finance at his company is equal to 0.2% of turnover – the lowest among the seven nominees except for Jollibee Foods (reported cost of finance: 0.16% of sales).
 
Rightly or wrongly, cost of finance is regarded as one of the more important metrics when benchmarking the finance function. But as PwC’s latest finance effectiveness benchmark study makes clear, it is not the only measure. Among the metrics it considered are the following:
 
  • Cost of finance as a percentage of revenues
  • Days to complete the budgeting and forecasting cycle
  • Percent of finance full-time equivalent in business partnering
  • Percent of time spent on data gathering versus analysis
  • Percentage of key controls automated
 
The PwC study, Unlocking Potential: Finance Effectiveness Benchmark Study 2013, involved more than 200 companies in the UK that have participated in benchmarking projects. The resulting benchmarks may thus be a bit limiting from the Asia Pacific perspective. Even so, the PwC benchmarks are helpful in giving a rough indication of where a particular finance function in Asia is in relation to the best-in-class in the UK.
 
Cost of Finance
In fact, retail and beer conglomerate China Resources and fast-food chain Jollibee actually perform better than the top-quartile companies in the UK in terms of cost of finance. As shown by the chart below, the median cost of finance for their industry (tourism, travel, retail and consumer) is 0.5%, while the top quartile is 0.26% – higher than China Resources’ 0.2% and Jollibee’s 0.16%.
 
Finance cost as a percentage of revenue
Source: PwC finance benchmarking data
 
In general, says PwC, the cost of finance is highest in the financial services industry. “Financial services companies live in a world of high regulation, and their deployment of finance FTEs [full-time equivalents] reflects that – 21% of finance FTEs in financial services fall under the umbrella of compliance, which is 50% more than the average across all industries,” according to the report.
 
On average, financial services firms also spend 1.48% of revenues on the finance function (top quartile: 0.86%), compared with the median of 0.93% across all industries, 0.96% in manufacturing, professional services, technology and energy (top quartile: 0.63%), and 0.5% in the tourism, retail and consumer sectors (top quartile: 0.26%).
 
“Consumer industries, which generally operate with low margins, must explore efficiencies wherever they can to preserve that thin profit margin,” explains PwC. “Meanwhile, technology companies in our benchmarking sample are paying a premium for human talent, about 30% more in average remuneration per finance FTE than the overall average across industries.”
 
The Big Four accounting firm points to shared services and outsourcing as strategies that can bring down the cost of finance, particularly among technology firms that pay a premium for finance talent. “Even companies in relatively high-cost can develop systems and operational cultures that mitigate costs and accelerate performance,” it says.
 
PwC also benchmarked the budgeting and forecasting cycle (see chart below). The median of days needed to complete the budgeting cycle in 2012-13 is 103 days, with the top quartile companies needing only 90 days. The typical UK company took 17 days to finish the forecasting cycle, with top-quartile enterprises requiring only 7 days on average.
 
Budgeting and forecasting cycle (in days)
Source: PwC finance benchmarking data
 
Business Partnering
For PwC, best-in-class finance functions must move beyond budgeting and control towards providing business insight and taking on the role of business partner. “Finance leaders need to create the conditions for effective navigation,” it argues.
 
This means that, rather than merely acting as a support function, “leading finance departments must actively drive the organization to its chosen destination, while at the same time acting as mediators to a much broader set of stakeholders, with varied points of view and differing expectations.”
 
How would the CFO know where he or she is in this journey? One way is to compare the percentage of finance FTEs (full-time equivalents) devoted to business partnering activities against the benchmark. In the UK in 2012-13, the median FTE percentage is 11%, with the top-quartile finance organizations devoting 18% of finance FTEs to business partnering (see chart below).
 
Percentage of finance FTEs in business partnering
Source: PwC finance benchmarking data
 
For the provision of business insight, PwC benchmarks the percent of time spent on data gathering compared with the percent of time spent on analysis (see chart below). For 2012-13, the finance function of the median UK company spent 36% of its insight-focused activities on analysis, with the rest on data gathering. The top quartile company did not spend as much time on data-gathering (53%), opting to devote more man-hours on analysis instead (47%).
 
Percent of time spent on data gathering versus analysis
 
Source: PwC finance benchmarking data
 
Technology Tools
Finally, PwC benchmarked how companies in the UK used technology, the primary metric being the percentage of key controls automated (see chart below). While the median enterprise has automated 11% of key controls, those in the top quartile have automated 25%.
 
Percentage of key controls automated  
Source: PwC finance benchmarking data
 
Like shared services and outsourcing, technology has the potential to speed up processes, promote efficiency and free finance talent from control activities and devote more time to partnering and insight analysis, rather than manual data gathering.
 
However, PwC observes, “despite the existence of many platforms designed to enhance reporting efficiency and accessibility, many companies are still mired in manually generated spreadsheets. Additionally, organizations find themselves struggling with multiple legacy systems which effectively silo crucial data.”
 
These are observations that apply to organizations in Asia as well. But like in the UK, there are undoubtedly companies in Asia Pacific that have implemented a self-service reporting application, data warehousing and standard data taxonomy. These enterprises have also stopped relying on manual spreadsheet manipulation and automated most of their key controls.
 
If you’re the CFO of such a company, and your cost of finance and other metrics compare favorably with those of the top quartile enterprises in the UK, you deserve to be honored as CFO Innovation’s CFO of the Year.  
 
About the Author

Cesar Bacani is Editor-in-Chief of CFO Innovation. 

 

Photo credit: Shutterstock

 

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