Finance Function Cost: Balance Versus Strategic Value

April 5, 2018

As a small or middle-market business owner or CEO, now is a great time to consider the role your finance organization is playing in creating a successful and profitable company. But in a world in which chief financial officers (CFOs) are increasingly expected to accomplish more with fewer resources, it’s important to track how much it costs to run your company’s finance function.

 

This metric considers the total cost of the finance function as a percentage of revenue. Total cost includes personnel, systems, overhead, and any other costs necessary for day-to-day operation of the finance organization.

 

Skilled CFOs determine how to effectively balance their focus on the cost of the function versus the strategic value they are adding to the company. They look for opportunities to improve transactional and operational efficiency and reinvest those savings into activities promoting long-term strategic growth.

 

Ideally, company revenue will grow faster than the cost of your finance function. As organizations grow larger, the relative cost of finance as a percentage of revenue should decline.

 

To gauge how well your company is performing, the calculations below are relatively simple:

 

  • Calculate your total cost to perform the finance function as a percentage of revenue in this way: total finance cost, divided by total business entity revenue, multiplied by 100 to state the result as a percentage.

  • Compare your most recently completed year to your three previous years. In which direction is your ratio moving? Are finance costs growing or shrinking in line with overall revenues?

  • Compare actual costs from 2017 to your projected annual costs and revenue for 2018. Are the numbers moving in a favorable direction?

 

Using this data as a starting point, you can begin to evaluate the role finance plays in organizational competitiveness. Is your company getting its money’s worth out of its finance function? Of the business resources being used, could any of them be implemented more effectively or efficiently?

 

Strategically-focused CFOs use company data to evaluate and then streamline operational procedures, improve profit margins, find ways to obtain better purchasing discounts, reduce inventory obsolescence and stock-carrying costs, and generate savings that add up to many times over what it would cost to hire several employees in purchasing.

 

Companies can improve their profit margins and competitive position by actively engaging an experienced CFO. For example, some highly-skilled CFOs develop strategic operational roles to support sales and positive growth efforts through predictive financial modeling, cost and cash flow analysis and profit analysis and management. 

 

If you are a small business owner or CEO within the San Francisco Bay Area or Silicon Valley, in need of an experienced part-time CFO to help your company improve financial and operational reporting, cash flow, profit margins, as well as accounting and billing process management, our highly skilled outsourced CFO services provide direct access to high-quality expertise in a cost-effective manner. 

 

CFO Growth Advisors (CGA) specializes in unique and highly effective growth strategies that are tailored to help companies grow more quickly and efficiently while improving sales & profit growth. Contact us to learn more.

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