I attended a wonderful training session by HostAnalytics and Deloitte last week that addressed issues that finance departments at companies with $8 million to $1 billion in revenue have. I took copious notes and thought it very worthwhile to share the information with you. I’ve broken this information into two separate articles. The first identifies the issues that Finance/Accounting departments have and some ways to improve them. You may not know these exist, so I want to spend time enumerating them and explaining why they are problems and providing some basic solutions. The second identifies much broader, more involved potential solutions to overhaul your finance department activities. The 2nd article will be published on Tuesday. – TCW
Ineffective and Unproductive Activities that Finance/Accounting Does
Rekeying A/P information
Rekeying accounts payable information is time consuming. If you have large number of vendors and suppliers, this rekeying could require hours of your Finance/Accounting department staff’s time each week. You should have your suppliers send you bills electronically. With electronic bills, your staff can import information and refrain from rekeying.
Cutting paper checks
Cutting paper checks is very time consuming. Your staff has to load the information into the check, load the paper into the printer, confirm the checks printed properly, get them all signed and mail them. Switching to EFT wherever possible will eliminate all these actions, improving your departmental productivity and freeing up your finance staff’s time.
Working in monthly batches as the closing cycle
Many companies close in monthly batches. It is very inefficient and time consuming to do it this way because it involves going back to review a large number of items at the end of the month. It can create stress because of the time demands. It is much more efficient to have a closing process that is more continuous, that occurs on at least a weekly basis. In addition, having a more continuous process enables you to get data and helpful reporting information on a weekly or even daily basis. This is information that you can use to run your business in real-time.
Using standard costing for inventories
If you are a distributor, retailer or other entity that maintains inventory, you likely use standard costing. However, average annual costing, which allows you to get free costing information from your actual purchases, or target costing, which is based on your planned purchases and hence comes from suppliers or manufacturers, provides you with better numbers at a lower cost.
Issuing annual budgets
You may not know this (I know I didn’t), but the annual budgeting process was originally defined in the book “Budgetary Control”, which was written by James Oscar McKinsey, the founder of the renowned McKinsey Company strategy consulting and advisory firm, in 1922! Many companies spend weeks or even months creating an annual budget. Some don’t approve the budget until the year in which it applies! A better process is to have an ongoing budget based on target goals and objectives.
A budget is a planning tool that should help you run your business more effectively and help you be aware of issues before they arise. Because shocks and unanticipated events can occur, both good and bad, focusing only on a yearly budget that takes weeks to complete does not provide you with the flexible planning tool you need to address these events and other lesser changes that occur in your business. Quarterly or rolling budgets do.
Relying on variance explanations as the primary improvement tool
Many companies that use annual budgets use variances between actual and planned as the primary improvement tool. Doing this can cause you to focus too much on the minutiae and not enough on the overall picture. What is driving the variances? Simply trying to lower the variances may not address the underlying issue. Has something changed in your business or were your assumptions wrong? If so, it’s the planned budget that needs to be updated not the variances that need to be shrunk!
Shrinking Finance staff
If you partially implement some of the changes suggested above, you will free up your finance staff’s time. If you wholly implement some of the changes, you may actually eliminate the need for one or more members of your finance and accounting team. However, instead of shrinking your finance staff to save money, if your staff member(s) are capable, you could redeploy them elsewhere in finance to further improve financial operations or move them into more operations-driven roles to engender a stronger connection between finance and operations.
These are specific issues that have been identified as plaguing finance and accounting departments. You can take this further by looking for examples of things in your own department that are inefficient, paper-driven or otherwise ineffective that you can reduce or eliminate.
Let us here at The Resourceful CEO help you improve your financial operations. We focus on restructuring and improving operations to generate more operational cash flow and build a stronger, higher value business. Contact us for a free consultation.