From November 2005 till April 2006 Deloitte CFO Services investigated through a detailed benchmark study the functioning of the finance department. The study highlighted that both the CFO and his finance team are still spending quite some time and resources on the “finance basics” (accounting, controlling, etc.) and on improving those basics. This is also reflected in the priorities of the finance department.
The benchmark was based on a thorough benchmark at 24 Belgian based international companies and Belgian companies. The companies were both questioned on the function of the Chief Financial Officer (CFO) and the working of the Finance department. With this benchmark Deloitte is giving a starting point for the CFO’s on their continuous journey to improve the working of their department.
The tasks and priorities of the CFO
Although the importance of the CFO in the strategic decision taking process of the company is increasing, the CFO is still spending about 50 % of his time on the day to day finance activities (finance and accounting). Due to increased reporting requirements he also spends about 20 % of his time on reporting (internal and external). For a listed company the time spent on reporting is even more significant.
The importance of these day to day activities is also reflected in his priorities for the coming year. About 28 % of the companies consider the optimization of the Finance organisation as a top priority for next year. The CFO is constantly looking to find the right balance between the cost of his department and attracting and keeping the right people. High on the agenda for the coming year remain priorities such as Corporate Governance and Risk management. However, in the companies that were recently involved in mergers and acquisitions, the CFO is highly involved in the post merger integration process.
The Finance Department
On average the companies spent about 1,2 % of their revenue on the finance department. Two elements seem to be the driver of the finance department cost:
Economies of scale: bigger companies clearly seem to enjoy economies of scale effect. Their finance cost as a percentage of revenue is clearly below the average;
Listed companies: as listed companies need to comply with more stringent rules, they need to spend more on their finance department.
The increased cost is reflected in the number of people employed by the finance department. Companies are however looking for different ways to improve this cost effectiveness of their finance department. Companies are trying to reduce costs by sharing services or by standardizing certain activities across the company. Over 60% of the companies have taken this measure with respect to treasury, accounts payable and taxes. Standardization and sharing services seems to be a lot less obvious in case of billing and payroll.
When it comes to systems and applications, about 75 % of the participants have more than 3 applications supporting the main finance processes. However, only 14 % of the companies are still working partially with in-house developed applications. 40 % is using spreadsheet applications to support its main finance processes.
When reviewing the different sub-functions (Close the books, reporting, Accounts receivable management, etc) of the finance department the above outlines evolutions are also reflected in the specific priorities of these sub-functions. Cost reduction through automation (electronic invoicing, purchase order system, improved billing platform, etc) and processes re-engineering (days sales outstanding management, improving closing procedure, sharing services, etc.), and control in the broad sense (accuracy of the billing, tax planning and documentation, improve credit check, etc.) are constantly returning themes and priorities. As mentioned by one of the participant however: “one should always take into account the cost-quality balance. An adequate reporting, a good controlling department and a performing collection department always come with a price.”
Conclusion
Although strategy is and will stay an important element of the CFO function, the CFO and the finance department as a whole are still spending quite some time on the day to day management of the finance department. In addition, a lot of the priorities for the coming year for the CFO and the finance department are linked to optimizing those key day to day activities of the department. The CFO’s still have challenging roads ahead of them.
