Benchmarking back office costs against industry averages is a quick way of ascertaining if your small business is spending too much on back office tasks.
If you own a small business you are always looking to reducing ongoing costs so a good place to look is the back office. The back office does administrative tasks like bookkeeping, tax compliance, record keeping, and financial management. Although back office tasks are an essential part of doing business, there are many opportunities for reducing back office costs.
To identify if your small business is spending too much on back office tasks you can use using a financial technique called benchmarking. In its simplest form benchmarking back office costs compares back office costs as a percentage of revenues against other businesses in the same industry. This can highlight if your back office costs are above or below the industry average and if further investigation of cost saving opportunities is warranted.
However, there is much more to benchmarking back office costs than a simple comparison against an industry average.
Small business back office costs
Overheads are generally seen as areas where expenditures should be managed down. Overheads are ongoing business expenses not including direct labour or materials used to create a product or service. In this regard overheads can broadly comprise:
- sales and marketing expenses
- warehouse and distribution expenses
- general and administration expenses.
It is within the general and administrative expenses that back office costs will be recorded in addition to costs attributed to managing your small business. Back office tasks may be performed by in-house by employees or outsourced to specialists like accountants and bookkeepers. Some common back office tasks often used by small businesses include:
- Accounting and bookkeeping
- Financial and management reporting
- ATO compliance
- ASIC compliance
- Record keeping and data backup
I’d argue these tasks are essential for operating any business. However, it is possible that your business is spending too much time or money to complete specific back office tasks and provide scope for cost savings.
Benchmarking is useful because it helps you understand how well you are performing against other businesses in the same sector. Having this information can help you in a number of ways including:
Having access to back office benchmarks will help you identify specific tasks used by your business that are more expensive than the national industry-wide average. You can use this information to introduce efficiency targets for back office tasks. This information may also indicate if your current third party service providers are offering good value-for-money or not.
Setting efficiency targets for time consuming back office tasks will generally lead to a more efficient and productive workplace. Your business will have more resources available to use in other areas or even result in headcount reductions.
Goal setting made easy
Having benchmark data available makes it easier to identify key performance indicators that the business should aim for. This will help your business continually improve over time.
A more competitive business
Once you have reduced your business’s back office costs, you can apply the savings towards growth initiatives – purchasing assets, new/additional marketing campaigns etc. Making your business will be more competitive, successful and profitable.
Helps startups succeed
If your business is a startup, the last thing you need is back office costs draining an excess amount of capital from your enterprise. Benchmarking back office costs will help you identify any out-of-the-ordinary expenses that may be holding your business back.
Benchmarking Back Office Costs
- costs as a percentage of revenues i.e. back office costs are X.X% of revenues
- cost per transaction i.e. the average costs to pay a supplier invoice.
This information is readily available from reports generated by your accounting system.
Sometimes the costs are not available in existing financial reports. It may necessary to source through a series of quantitative questions. This may be as simple as asking for the weekly hours a week spent on bookkeeping or other back office tasks. For example, loading and paying supplier invoices.
Benchmarks are usually calculated on an annual basis to provide a a more realistic view of costs. These figures are then compared to other businesses of a similar size that are in the same industry.
Many organisations provide information that is useful for benchmarking your business. Sources include industry associations, banks, and government organisations. Yet, analysis of the outcomes of your benchmarking activities is critical. To avoid drawing false conclusions seek the guidance of an experienced accounting professional.
Risks of Benchmarking Back Office Costs
Managing costs down is a legitimate means of improving business profitability. Yet it is critical that excessive and not necessary costs get managed. Accountants and bookkeepers are easy targets as it is hard to quantify their value. Rather than seek cheaper alternatives why not better utilise the data they generate?
Driving down costs to meet minimum ATO and ASIC compliance can be done but at what cost to your business?
For example, you could buy a new car with only a speedometer to save money but would you? I doubt you could even get something so basic these days. We’ve all grown accustomed to fuel and temperature gauges, trip computers, air conditioning, smart phone integration and navigation systems.
Consider extra management you can derive from basic transaction processing and compliance. Don’t manage back office costs to the detriment of useful financial information. Make decisions about the the future of your business supported by meaningful financial reports.
You may even benefit by investing in your back office. Say to generate efficiencies or the financial reports necessary for good business management. Consider the following:
- revamp your chart of accounts
- put in place an annual budget
- create 5 year financial plan
- implement a customised monthly/quarterly management reporting pack.
Once implemented your business will have all the financial equivalents of the standard mod cons found in most new cars these days.
If your high-growth small business or startup is considering benchmarking back office costs or seeking back office efficiencies to provide financial reports to support sound business decisions I can help. To arrange an initial, complimentary discussion click here, email me at email@example.com or call 0418 697 701.