Published on April 5, 2023
By Chris Gaetano - As first seen on CFODive.com
Think back to what corporate finance departments looked like 20 or 30 years ago. There were endless rows of cubicles and desks, the whirs and hums of fax machines, hand-filed invoices, payroll and bank statements along with massive archives of ancient receipts and thick envelopes full of tax forms.
Think back to all these things and you’ll be picturing something much different — and much bigger — than today’s typical finance department. Technological advances and business model innovations mean that companies are increasingly equipped to do more with less, especially when it comes to the finance function. As a result, CFOs have been running leaner and meaner departments over the years, focused less on mundane tasks and more on strategic planning and business development.
This is not to say that all finance departments are small today but, rather, no matter how big they are now, they’re likely not as big as they were a few decades ago. Part of this is because many of the routine tasks that used to consume so much time and energy — things like accounts payable or payroll — can now be either automated with computers or outsourced to a third party, according to Mark Ellis, CFO of the Amika and Eva-NYC hair care companies.
“You don’t have as much to do on the operations side as you might in the past … so the finance team itself also shrinks,” he said.
Downsizing over the decades
The size of a finance department can vary greatly and hinges in part on the type of business it is in. But Ellis estimates that a theoretical 500-person company today would have 50% fewer old-style finance department staff roles compared to a similar company in the 1990s, although he said there would be a 20% add-back for the new analytical functions.
In one example of the old tasks on their way out, he pointed out that bank reconciliations went from requiring a lot of time and effort to almost none. Before, the department would get a paper statement and staff accountants would be “ticking and tying all that stuff.” But now, through portals and data, the process is largely automated. Automating tasks like these has meant that finance departments are also looking for different skill sets in their staff, which further moves things away from the way things were, according to Ellis.
“It’s not just you need fewer people. The skill set of the people you need today is much more analysis weighted and that is what is exciting and what accounting people today enjoy. They want to feel much more like part of the team and they are more embedded. … In those teams they’re integral to the overall ecosystem of the business,” he said.
Finding people with these skill sets, however, is not always easy. Beth van Bladel, a CFO services consultant and a former member of the Financial Accounting Standard Board’s Private Company Council, noted that not being able to find the right people at least partially drove the demand for technological solutions.
Choice or necessity?
“That is where digital transformation comes into play. We’re having to do more with fewer people so we have to lean on technology and we have to look at other resources,” said van Bladel, who is also a director at New York-based BST & Co.’s CFO-for-Hire Division.
Meredith Brinkman, another director at the firm, made a similar point, noting that many times companies will turn to professionals like herself because they can’t find the right people. She added that this will likely continue to be a problem, as the number of students in accounting programs has been shrinking, meaning companies are competing for a smaller pool of professionals. In this regard, outsourced CFO services are intended to fill the gap.
“They can’t find people–or they’re turning over people without the skills and competencies they need to do the job and they ask us for solutions and the easiest one to go after, when we go in, is get a hold of the accounting department, look at their processes and procedures and start building from there,” she said.
Whether out of choice or necessity, data shows that finance departments have been getting more efficient in general. A 2020 analysis by McKinsey found that finance departments during the past decade alone have reduced their costs by an average of 29% across industries.
At least some of these cost savings has gone into technology investments, with a recent report from the Controller’s Council noting that finance leaders intend to maintain or expand their spending in a number of areas such as cybersecurity, data storage and back-end accounting operations. Outsourcing has also been on the rise, with a Robert Half report from last year showing that 72% of accounting and finance leaders expect to increase their spending on contract and project professionals.
While these tools allow companies to operate smaller finance departments than before, in terms of absolute size, what’s appropriate can vary greatly from company to company.
Douglas Beck, CFO of pharmaceutical company Relmada Therapeutics and a specialist in small startups, said that it’s less about finding the right number and more about assessing the needs of a specific company. Even if a company is small, if it has very complex financial activities, it may need a larger finance team. Conversely, even if a company is large, its hundreds of thousands of transactions may all be routine and straightforward.
“The first thing is really understanding the nature of the business, and how things are coming in, how the revenue is [handled], it’s really taking a hard look at everything and really listening and learning more,” he said.
Sizing up stakeholders
Van Bladel said a good heuristic is to look at the stakeholders. Creditors, equity investors, regulators and others all need different things from a company, and oftentimes the needs are what indirectly determine the entity’s level of complexity and, therefore, the optimal size and skill of its finance team. Sometimes, even for a smaller startup, this compliance infrastructure can be substantial.
“[Startups] are maybe not taking into consideration the cost and complexity of what is expected of them, but it’s important to coach them so that when they are growing in their next stage of development, and they’re wanting to attract investors and maybe turn public, they need that infrastructure in the beginning,” she said.
Or, conversely, it could be next to nothing or even, according to Brinkman, nothing at all.
“When we get to work and streamline things through technology, oftentimes what we find is we can eliminate the accounting department entirely … We’re able to take transactional low level work through the use of technology and move that into our back office and then use the information we’re given to help clients make decisions,” she said.