How midsize companies can optimize finance, accounting functions as costs rise

Rising costs of capital are squeezing middle market firms, according to an RSM US Middle Market Business Index special report on financing. The rising costs will make financing more expensive and also make it tougher for businesses to access capital, which is already more of a challenge for many small and midsize businesses than their larger counterparts.

Streamlining the finance and accounting function can help middle market companies weather this environment. Optimized finance and accounting departments can provide lenders with higher-quality data and better visibility into the business.

“That will ultimately put the business in a better position to work with lenders and raise capital,” says Michael Smith, finance and accounting outsourcing leader at RSM US LLP. “But those things can’t happen unless you optimize your finance department."

Here are some ways businesses can enhance their accounting and finance departments to mitigate the challenges of surging financing costs:

• Assess opportunities for automation: Even companies that already use automation technologies should look for ways to automate manual functions to produce more timely reporting while freeing up employee time for more critical tasks.

For example, in the finance department, organizations can use robotic process automation to automate the creation of journal entries, which is often a manual process.

“Automation doesn’t have to be all or nothing,” says Smith. “Even if something can be automated but still needs to be reviewed by a person, that can still save time.” One example is using exception reporting tools; instead of an employee having to look through an entire dataset for accuracy, such tools can flag anomalies for human review.

Automation usually goes hand in hand with enabling a clear data strategy, too. Better information and analytics will ultimately allow the business to spend more efficiently.

• Explore scalable alternative staffing models: Like automation, outsourcing isn’t usually an all-or-nothing approach, either. For most companies, co-sourcing—keeping some functions in-house and working with an external provider for others—is a key solution to improve efficiency.

It’s also important to ensure your staffing approach is scalable depending on changes the business may experience throughout its life cycle. The finance and accounting teams may need to expand or contract at different times. When a company needs to adopt a new accounting standard, for example, it might make more sense to work with a third party for that adoption. Teams should continually assess which functions are better candidates for outsourcing.

• Leverage the FP&A function to its full extent: The financial planning and analysis function will be key in helping organizations navigate the implications of higher financing costs across the entire company.

“It's not just about the function of accounting and finance; FP&A plays a key role in helping the business understand itself and where capital should be deployed,” says Patrick Brennan, a financial consulting leader at RSM US LLP.

FP&A teams might zero in on customer profitability metrics, variance analysis, key financial performance indicators and operational KPIs, plus a clear understanding of cost structures, including fixed versus variable costs. Using tools such as Microsoft Power BI to pull all that information into a dashboard enables a company to tell a comprehensive story on business and financial performance.

• Revisit your pricing structure: Depending on their sector, some businesses may not have revisited their product or service prices following the disruption and inflation of recent years, and for many of those, now is the time to do so.

“We get so cost-conscious in times of rising capital costs, but we don’t always address how to price products and services,” says Brennan. “The FP&A function can also help the organization think about pricing and other untapped areas for value creation.”

• Have the right people in place: Companies need to be careful not to get too caught up in buying new technologies without having the right people on their teams to achieve success as costs rise and the margin for error shrinks.

“Profits can mask many problems. And since profits are shrinking, it’s important to have the right team and technology in place,” says Smith. The two should work harmoniously together, with employees leveraging technology to its fullest and most efficient extent.

Meeting a higher threshold

Alongside these action items, companies must also be prepared to meet a higher bar for the internal and external projects they pursue.

“In a lower interest rate environment, plenty of projects might make sense,” says Brennan. “But in this environment, potentially fewer projects achieve the hurdle rates necessary to proceed. That means certain businesses face more pressure on the investments and the capital expenditures that fuel growth.”

Middle market organizations will need to be more strategic in how they prioritize going forward, balancing cost optimization with enabling growth as market conditions continue to evolve. Working with an advisor to explore the critical points above can be a good place to start.