Chief financial officers’ (CFOs) poor visibility of key financial information is undermining confidence in their departmental and company performance, and ultimately leaving doubts around profitability, according to the annual The Cost of Control independent report, released by Basware. Constrained by this limited visibility, businesses are struggling to make informed decisions and effectively forecast and manage costs.
The Cost of Control 2010 is the second annual global study of its kind by Basware, producing insight into the opinions and priorities of 550 finance executives around the world. Direct comparison with the 2009 research enables analysis of finance and procurement department trends over an economically turbulent 12 month period, while new investigations identify the levels of – and reasons for – confidence among senior finance professionals. The report is prepared with professors Markus Maedler and Adrian Done of Barcelona’s IESE Business School, and Steve Jones and Mark Frohlich from the Indiana University Kelley School of Business.
Just 50% of finance executives participating in the study declare a high level of confidence in the performance of their department and only 44% continue this level of confidence when considering the company’s performance overall. Confidence in the regional economy drops to just 19% and to 9% for the world economy. Successful collaboration between finance and procurement was most strongly linked to confidence in company performance although 40% believe the relationship between finance and procurement could be improved. By working together, these two much too often isolated departments can share responsibility for both cost and risk reduction when it comes to reducing expenditures, cutting transaction costs, mitigating potential liabilities and identifying ways to improve the bottom line.
Financial executives that ranked their performance in ‘efficiency’ as high were most likely to give equally positive scores for confidence in their departmental performance. Overall, visibility of cash within the business was the broadest driver of confidence – an area in which finance executives rated themselves poorly (just 45% percent claim to have a high visibility of cash within the business).
In April 2009, 64% of CFOs claimed that raw cost cutting was top of their list of priorities over the next 12 months but this year that focus seems to have fallen away (to 59%). In its place, CFOs cited much more strategic goals of improved profit margins and increased top line performance (58% and 51%, up from 39% and 37%, respectively in 2009).
Possibly reassured by the sharp cost cutting efforts over the last 12 months, finance professionals are more likely to consider that procurement has a positive effect on profitability (48%) than in 2009 (29%). Finance is also becoming more aware of procurement’s impact on risk. A more vigilant 39% of respondents cite procurement as a financial risk exposure, up from a more insulated 28% last year. These findings indicate that lessons have been learned in the last 12 months, probably as finance departments were rocked by unpredicted turbulence within supply chains.
Automating purchase-to-pay processes from requisitioning to invoice handling and approval is gaining traction globally with 72% of companies either implementing or planning more invoicing automation in the next 12 months, and with 65% having or planning for more purchasing automation.
To help tackle the challenges identified in the report, Basware recommends a four-step plan for CFOs:
- Visibility: It is vital that all organisations have 100% visibility of spend – both direct (such as raw materials) and indirect (such as services) – across the business. Only once it has a single, unified view can a business make strategic financial decisions.
- Cost management: Managing cost was the most cited driver of confidence in company profitability. The research identified a small increase in the amount of indirect spending that is captured in procurement systems, however it is still less than 50%. Indirect spending includes utilities, capital expenditure and services. Businesses should ensure that the right controls are in place to give precise control over who spends money and what they can buy, leading to improved business processes and capital management.
- Efficiency: Efficiencies are already being found through integration and automation of systems, both of which were up on last year, however companies enjoying the benefits of full finance and procurement automation are still in the minority. The clear correlations of efficiency with confidence in performance indicate that automation brings reassuring rewards.
- Collaboration: Collaboration, a key recommendation from the 2009 Cost of Control report, also featured strongly in this year’s research; identified as the key driver of confidence in company performance. Only by working truly strategically and driving common objectives aligned to business goals can finance and procurement make the decisions that will benefit the business as a whole.
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