Billions of dollars is a lot to lose, especially in regards to a largely avoidable mistake. A study by the University of Baltimore and Excel-based FP&A company, DataRails, lays out the full economic costs of businesses sticking with manually prepared financial reports.
Breaking down the Math
$6.1 billion is the first number that came out of the research and this represents the total amount of money lost by manual financial work. Based on the findings, FP&A teams spend at least 2 hours each week on manual processes. When this is multiplied by many skilled employees, and even more so around budgeting season, the amount of work hours lost can easily reach into the hundreds for an individual company.
The analysis is quite large as it is based on composites of 839,8000 small to large companies in the US. The scope of manual work is also quite large and covers categories such as budgets, month-end closes, and forecasts. In addition, annual company budgets can take up to six months to prepare! The average of all of these factors is what produces the $6.1 billion lost.
$1.7 billion is the 2nd half of the study. This number represents how much of an economic uplift could occur “if FP&A departments hit a conservative 0.1% revenue uplift for their businesses through projects directly linked to top line growth.”
The word “conservative” is key here, as this is a lowball number which could potentially be much higher. The most notable outcome from an FP&A driven initiative is the creation of Amazon prime. Other examples are Lego using real time data to drive revenue over the past few years, and the FP&A team at manufacturing company Chemours improving margins for industrial plants.
How the Study was Conducted
The study was methodologically conducted in order to achieve the most accurate results. The study involved creating composite organizations representing 839,880 US small, medium, and large companies and their composite revenues.
Companies with less than 50 employees were excluded as they rarely have a full time FP&A team or function. In addition, the largest US companies were also excluded, as Fortune 500 companies have incomparable budgets and FP&A teams the size of many medium companies.
“The calculation of hours lost through manual reporting was based conservatively on two hours lost on manual reporting a week multiplied by the $80,000 annual average salary of an FP&A professional based on the composite company sizes created. To arrive at the $1.7 billion unrealized economic uplift, the study used a 0.1% potential composite uplift for all companies in our study which carried out FP&A functions.”
While $7.8 billion seems surprisingly high, it might actually be a lowball estimate due to all of the intangible factors that can’t be numerically identified. Some of the indirect costs include:
Real time economic data isn’t there- Economic decisions are made much more accurately and efficiently when real time data is available. As we learned from Lego, this can propel profits to a whole new level. This is an indirect loss, because it is hard to put a number on how much a company is losing out on when they already have a positive profit margin. However, depending on the company or service, this number can be higher than many care to admit.
Inaccurate public numbers- In addition to hurting the direct profitability of the company, the inaccurate and incorrect numbers negatively impact share prices and investor relations. Investors want the most accurate data possible, and without it, trust or actual investments may be harmed. Inaccurate share prices also harm the credibility of the company and can impact long term growth through this.
Contributing to the skill shortage- A big problem in recruiting and retaining talent is that employees want to feel that they are using their skills to the best of their ability. When a scenario arises in which skilled financial specialists are spending many hours completing manual inputs, then their skills are not being used efficiently. As everyone knows, losing or hiring employees is a very expensive process, and implementing financial automation or maximizing their potential is a small price to pay for all of the negative effects that can come from not doing this.
Professor Mikhail B. Pevzner, a contributor to the study and professor of accounting at the University of Baltimore says: "Since COVID-19, the role of financial planning and analysis (FP&A) has gained even greater momentum as businesses seek better understanding of their numbers. However, despite more than a decade of efforts, the daily life of an FP&A professional still involves strategy-sapping manual processes, including identifying and correcting errors, updating reports, and collecting data. This is essentially depriving both companies and the wider US economy of billions of dollars of economic opportunity."
What this study proves is quite clear. Continuing with the old fashioned style of manually preparing financial reports has a lot of negative implications. It causes lost work hours which negatively affects employee retention. In addition, there are all kinds of implications from not using real time updates and data which directly and indirectly impact a company's finances.
Companies such as DataRails provide a solution for this, as automating financial reporting and budgeting solves the problem of lost work hours and real time data. As companies have proven, with newly freed up time and more accurate data, great things can happen.