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Accounting practices benchmarking study spots mistakes companies make.

Results from a benchmarking study that measures the efficiency of 150 companies' finance and accounting practices are emerging, and they paint a disparate but encouraging picture of how business managers are responding to the new era of keener competition and the need to rightsize.

As expected, a vast gap exists between the so-called world-class companies--those whose financial and accounting operations are most efficient and cost-effective--and those that score poorly in that area. Gregory Hackett, head of the Hackett Group, the Hudson, Ohio, consulting firm conducting the study in cooperation with the American Institute of CPAs, says it appears many companies are showing some improvement. "Since 1988, when we began to track how much businesses spend to close their books and operate all their other accounting functions, the average cost of that operation has declined by a third," he says. In 1988 the average cost was 2.2% of annual revenue; now it's about 1.5%.

A wake-up call

Only companies that have undertaken the AICPA-sponsored benchmarking are included in the survey, which in part explains the improved results. "The fact that a company is willing to invest the effort to be benchmarked implies it is open to a wake-up call--willing to discover how it's doing compared with other businesses," explains Hackett.

So far about 400 businesses have signed up for benchmarking. The companies range in size from $50 million in revenue to $80 billion.

World-class companies are spending as little as 0.5% of revenue on finance functions, says Hackett. At the other end of the scale, some organizations are spending as much as 7.5% of revenue--a fifteenfold spread between the best and the worst.

To illustrate how a relatively small savings in finance costs affects a business's profits, consider this: In general, the average business generates a pretax profit of 7% of revenues. Reduce finance costs by a third and all those savings go to the bottom line. It would take a fourteenfold increase in sales to generate a comparable increase in profits.

What does it take to reduce finance department costs? Hackett, who has worked on many corporate reengineering projects, says, "It's not as complex or difficult as many people think. It rarely involves major corporate changes. What it does require is a readiness to break out of illogical traditional practices and invest the time to do 101 small but important things a little smarter."

When a benchmarking study indicates a company is running its accounting and finance operation inefficiently, Hackett says he usually finds it is committing the following mistakes:

* Senior finance managers are spending more than 50% of their time on transaction processing and control issues that do not add value to the business. They should be performing business analysis functions instead.

* The company is not sharing accounting and reporting services across business units.

* The accounting department is using the general ledger to store detailed business information.

* The business is still conducting a full monthly close--a costly operation that provides little useful information.

* The average budget takes four months to prepare yet the company does not regularly use that information to run the business or make decisions.

* The organization maintains multiple, redundant computerized accounting systems that are more than seven years old. Some larger companies support up to 50 different accounts payable, receivable and inventory systems across their business units.

* The company is spending about 85% of its current finance budget on activities that add little Here are some preliminary results from organizations that have been benchmarked:
 World-class companies Average
Finance function cost
as a percentage of revenue 1% 1.5%
Number of full-time
finance employees per
$ billion of revenue 120 160
Accounts payable
locations 1 3
Number of accounts payable
transactions per year per
full-time accounts
payable employees 25,000 12,000
Number of accounting
systems for each
business process 1 5
Budget preparation cycle 60 days 120 days
Monthly closing cycle 4 days 7 days
or no value to the business: transaction
processing and accounting.

How to get benchmarked--free

Companies that want to determine their true finance and accounting costs--with an eye to cutting them and making their operations more efficient--are welcome to join this program. Interested companies receive a diskette that contains a detailed questionnaire about their finance functions. It takes about two person-days to respond to all the questions for each finance location, so a business with 10 separate accounting centers would take 20 person-days. Hackett analysts resolve any inconsistencies or obvious errors in the company-supplied information before incorporating it into the database.

Once the results are computed, the processed information will be relayed back to the company with an assessment of how it did compared with other benchmarked organizations. All the data about any one company or any identifiable industry are kept confidential.

The resulting analysis becomes a guide and target for managers seeking to reengineer their finance departments.

For more information on the benchmarking program, write to John Morrow, AICPA, 201 Plaza III, Jersey City, New Jersey 07311 or call (201) 938-3011.
COPYRIGHT 1995 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1995, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Publication:Journal of Accountancy
Date:Mar 1, 1995
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