Your Finance Department Is Second-Rate

Not certain how your finance department stacks up? Here are ten markers of mediocrity.

“If this was just a process problem,” says James Owers, a finance professor at the J. Mack College of Business at Georgia State, management might have felt compelled “to bring in a new cast of characters in the CFO function.” Owers notes that these tardy filings indicate wider problems — restatements coupled with investigations by federal regulators, in the cases of Mirant and Bristol-Myers Squibb.

2. Outrageous Audit Fees

Insiders and outsiders have different opinions about whether high fees spell trouble for the finance department. Kris Onken, CFO of Logitech International, a manufacturer of personal digital devices based in Fremont, California, maintains that rising audit fees are often an indication that a company’s business is becoming increasingly complex. At a previous employer, she saw audit fees jump 25 percent while the company worked through growing pains.

Daniel Weinfurter, president of Parson Consulting in Chicago, counters that high fees, including those for non-audit services, can be traced to an underperforming finance department that requires an abnormal amount of “cleanup.” Weinfurter, whose Chicago-based firm specializes in ferreting out corporate finance problems, warns executives to keep tabs on the fix-it bills for such things as slow shipments, bloated inventory, out-of-control receivables, and big write-offs for items that should have been handled earlier in the reporting cycle.

Paying a CPA $500 per hour to correct general-ledger mistakes is throwing money away, adds Miles Stover. Accounting errors should be corrected in-house by a staffer who makes $60 per hour. (Another option, many firms have found, is to have their outside audits performed by one of the many “Second-Tier Audit Firms.”)

3. High DSO

Days sales outstanding (DSO) — the average time taken by a company to collect payment from its customers — can be calculated using figures from the 10-Qs or 10-Ks of a public company. When DSO rises, it also appears on the radar screens of company shareholders.

Daniel Weinfurter says an increase in DSO usually stems from a lapse in the accounts receivable process. Collection calls, for example, might not begin until 30 days after the past-due date. A related headache manifests itself as high customer adjustments, which can lead to higher DSO as well as hinder the usefulness of forecasts.

Although the CFOs we spoke with consider such adjustments to be “business as usual,” all agree that when the number of adjustments creeps up month after month, something’s amiss. Perhaps it’s simply a warning of sloppy quality control on the assembly line, but faulty control procedures in the finance department are more common and more directly controllable.

There’s no rule of thumb for DSO, mainly because industries vary greatly in the speed with which they collect. Tracking your receivables aging pattern is one useful yardstick; even better would be to compare your company’s DSO with that of its peers. (To keep tabs on DSO and many other metrics, most publicly traded U.S. companies can compare themselves with their peers by entering company tickers in the CFO PeerMetrix interactive scorecards.)

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