When a company is operating at its optimal level, all facets of the business are running effectively and in tandem with one another. Assessing certain aspects of the business can be tricky, however. While some areas have a lot of metrics to utilize – production teams by output, sales teams by new orders, and inventory management teams by scrap – other areas such as the accounting team don’t always have clear metrics that can be used to assess productivity and efficiency.
Due to the lack of clear metrics, it can be difficult for owners and executives to know when and how they need to right-size the accounting department, especially in times of rapid growth.
Below are a few key metrics that can be used as a quick assessment tool for accounting departments.
- How quick is the monthly close? Every organization is different with varying levels of complexity, but a monthly close of five to ten business days is a sign of an effective closing process. If the monthly financial statements aren’t typically ready until near the end of the following month, that’s usually a clear sign that the department is understaffed or the process is ineffective. Find out what’s causing the delay; does the team need to complete a lot of manual processes, such as reconciliations in Excel outside of the system? Are they waiting for additional data from other departments? Or are they simply juggling too many tasks and not prioritizing the close?
The longer it takes to close the month, the less effective the reports will be. Executives need statements quickly so they can make informed decisions and respond operationally, whether that’s controlling spending, refocusing sales efforts, managing working capital, etc.
- How accurate is the information being produced? Inaccurate information can be a sign of several factors: (1) the internal control structure could be lacking, leading to errors not being identified timely; (2) there could be an issue within the ERP system, such as incorrect inventory costing or order tracking; or (3) personnel within the department are taking on tasks they’re inexperienced in and can’t handle.
Some key indicators that the information being produced might not be reliable:
- Previous month-end statements regularly change during the following month-end close
- There are significant fluctuations month-to-month in areas that should be consistent throughout the year, such as gross profit percentage or accounts receivable turnover
- Balance sheet accounts never change. This can be a sign that the department is not fully completing the close and updating all areas. Usually this occurs with ancillary accounts such prepaid expenses, accrued payroll, or certain reserves
- What type of reports are being produced? The monthly financial reporting package should include all of the necessary information for the executives and owners to make informed decisions in a timely manner. Ineffective reporting packages can be both too brief and too voluminous; it’s important to learn what data the users need and to be able to generate appropriate reports. Generally, a balance sheet, income statement, and cash flow statement at the company level and by division are a good start. Certain sales data, backlog, and profitability reports should be incorporated, as well as a brief qualitative summary. A dashboard of key metrics generated directly from the enterprise resource planning (ERP) system is also a useful tool in highlighting key information.
Unlike operational departments, businesses don’t typically have access to benchmark data when assessing their accounting department, so it can be a difficult area to evaluate. An Accounting Department Diagnostic can help in this assessment, by not only addressing accuracy, timeliness, efficiency, and quality, but also by benchmarking against other organizations of similar size and complexity.
If you have any questions or would like assistance in assessing the productivity and efficiency of your accounting department, please contact us.