"But are my finance costs typical?" (benchmark of finance costs) (includes related article on results of benchmarking study)

• Author: Hackett, Greg

Do you believe the average cost of finance soon will drop below 1 percent of revenue? These researchers do - with one caveat.

Finance is an expensive function. It costs the typical company 1.4 percent of its annual revenues to provide financial services. This cost includes processing basic transactions such as payables, payroll and receivables, as well as management reporting, budgeting and activities like tax, treasury and financial analysis. Four components make up the cost: fully loaded labor (wages, salaries and benefits), outsourcing, systems (run time and maintenance for finance systems only) and "other" (such as facilities, suppliers and corporate allocations).

While finance costs remain high, they've been dropping quickly, as companies make a concerted effort to eliminate their unnecessary activities, streamline their organizations and leverage technology. The benchmark shows that costs have declined 36 percent since 1988, when they were 2.2 percent of revenue. Given this trend, we anticipate that the average cost of finance will drop to less than 1 percent of revenue within the next several years.

Leading the pack in our most recent analysis of the database is a multibillion-dollar global manufacturer that has finance costs of .36 percent of revenue - and incorporates a high degree of best practices into the function while providing exceptional levels of service. Yet even this stellar performer acknowledges that it still has room and plans for improvement. A point that's important to note: The best keep getting better, elevating the standard for all competitors.

While, on average, finance costs a company 1.4 percent of revenue, the range between the lowest and the highest costs is large. The top 25 percent of companies in the database have costs of less than 1 percent of revenue, and fourth-quartile companies have costs that are greater than 2.2 percent.

So you now may be asking if your company is "typical." How do you determine if 1.4 percent of revenue is a reasonable performance measure for your finance organization? Although the measure is the average, further analysis of the database shows that your size and type of business do have a significant bearing on what cost performance you can achieve.

The Low, the High and the Economical

Costs are significantly lower for larger companies, owing to economies of scale. Organizations with revenues over $5 billion have costs that are almost half those of companies under $500 million in...