A few weeks ago I wrote a post about the total cost of ownership of your accounting software. As I pointed out, there are many more hidden costs of owning and operating your own enterprise accounting software than many people realize. If you haven't read that post, you might want to read it first, as this post builds on the concepts already introduced there. This post discusses the total cost of ownership of the entire finance and accounting function, including the enterprise accounting software and all the other costs.
Components of TCO of the Finance and Accounting Function
The cost of owning and operating your own accounting software is only part of the total cost of ownership (TCO) of your finance and accounting function. Just like many people make the mistake of equating the initial software license purchase to the TCO of the accounting software, many people only look at the base salaries of their accounting personnel and believe that is the TCO of their accounting department.
The true TCO of the finance and accounting function includes the TCO of the accounting software, the base salaries of the accounting personnel, and quite a bit more. Here is a more complete list of the major components of TCO of the finance and accounting function, including the aforementioned costs:
- TCO of the accounting software
- Base salaries of the personnel in the finance, accounting and back office departments.
- Payroll and benefits "burden" of those employees. This includes additional costs of the employees above and beyond their salaries, such as payroll taxes, health insurance benefits, etc.
- Cost of any temporary employees brought in during seasonal peaks in workload, or due to staff shortages
- Lease space for the employees
- Furniture and equipment for the employees
- IT end user support for the employees
- Training and continuing education for the employees
- Headhunter placement fees for new employees, or replacement of employees when turnover occurs
These are not controversial or made-up costs; they are real for every business with an internal accounting department, and they can be measured fairly easily.
TCO of the Accounting Software
As I discussed in my previous post about the TCO of accounting software, the total cost of ownership can range anywhere from 5X to 16X the initial perpetual license cost, with an average of 9X in my experience. If you already own and operate your own accounting software, you can quantify the TCO with the help of my previous post. If you are trying to do some planning and don't know how much to budget for this, if you can estimate the per seat license cost of the accounting software, you can still use my post to come up with an estimate of the TCO.
If you are using or plan to use a version of Quickbooks, your software TCO will be minimal and is probably not worth spending any time on. But your capabilities will be limited. If you are planning to use more sophisticated enterprise accounting software, you can plan to spend anywhere between $2,000 to $8,000 per seat in the form of one-time perpetual license costs. Using my previous post as a rough guide, you should budget between $5,000 to $10,000 per employee per year for the TCO of the enterprise accounting software.
Determining the base salary cost is obviously straightforward if you have an existing accounting staff. If not and you are evaluating the cost of an in-house accounting department versus outsourcing, you can check salary surveys for relevant positions in your market, or ask a recruiter.
Payroll and Benefits Burden
The payroll and benefits burden includes the employer portion of federal and state payroll taxes, health insurance, employee benefits such as dental and vision, 401k or other benefit plan expense, and other related costs. The cost of this burden depends on your tax jurisdiction as well as which types of benefits you offer your employees. For planning purposes most people use a percentage of employee base salaries. I use 25%.
The cost of any temporary employees needed throughout the year is also not hard to add up, but is often overlooked, especially if you are not using them at the time you are doing your cost analysis. Out of site, out of mind. Make sure you include them in your total cost.
If you have an office, you know what your lease space costs you. If you are trying to do an analysis for planning purposes, you need to make three assumptions: 1) how much space does each employee need for their own work space; 2) how much common area space will you need (hallways, break areas, floor and building common areas, etc.); and 3) what is your annual cost per square foot.
Space Allowance Per Employee
Space required for employees' own work space depends on the nature and seniority of the position, and how nice a work environment you want to give your employees. A good rule of thumb for smaller businesses is around 100-150 sq. ft. for a controller or accounting manager, and 50-75 sq. ft. for accounting clerks and data entry personnel.
Common Area Space
Common areas include two types of areas: 1) hallways and circulation areas within your own space; and 2) floor and building common area allocations from the landlord. For hallways and circulation areas in your suite, 25%-35% of the room/cubicle area can be used for early planning purposes.
The floor and building common area allocation usually is the difference between your Usable Square Footage (USF) and your Rentable Square Footage (RSF). USF is the amount of space you actually occupy in your suite, while RSF is the amount of space that your lease rate will be based on, and includes a load factor for your pro-rated share of the Common Area in the building that you share with other tenants (i.e. building lobbies, corridors, restrooms etc.). This additional load factor is usually 12%-20% of your USF.
Applying the allowances for internal hallways and circulation areas as well as building common areas results in a 40%-60% uplift from your square footage allowance per employee. That means low level accounting clerks and data entry personnel will need a minimum of 70-120 sq. ft. in total. Higher-level accounting personnel, such as AP or AR supervisors and Accounting Managers might need 175-200 sq. ft. A Controller will probably require 200-240 sq. ft.
Price Per Square Foot
Lease rates are usually quoted on a per square foot / per year basis. Lease rates vary depending on the quality of the building (usually classified as Type A, Type B, Type C, etc.) as well as the location. Class C space in a less-desirable area could be less than $10/sq ft., whereas Class A space in prime areas such as downtown in major market cities could be as high as $50/sq. ft. or more. Talk with your commercial real estate broker to determine how much lease space will cost in your area for the type of space you are looking for.
Furniture and Equipment
Employees will need desks, chairs, computers, and other equipment to do their job. Most accounting employees will work in cubicles, while higher-level employees such as accounting managers and controllers will need a furnished office. Most cubicles fall in the range of $1,000 to $2,000, not including tax, delivery or installation. To furnish a manager or controller office, you should plan to spend somewhere in the $2,000 to $4,000 range.
Computers will range from around $1,000 per desktop (including Microsoft Office software) to $2,000 per laptop.
So for each employee plan to spend $2,000 on the low end to $6,000 on the high end to furnish their workspace with a desk, chair, computer, and other related equipment to do their job.
IT End-User Support
Accounting employees will need IT end-user support for their desktops or laptops. This can be provided by internal IT personnel, or outsourced to third-party IT support firms. It's difficult to know how much it costs per employee if the support is provided internally, because it takes some judgment to figure out how to allocate a portion of the IT resources' time to end user support. Third party IT support firms charge around $50-$100 per workstation per month.
Training and Continuing Education
Accounting personnel will need to be trained and provided continuing education throughout their tenure. CPAs usually require an average of 40 hours of continuing education per year. To quantify this cost, you can make an assumption about how much training and continuing education costs on average per hour. Costs for this training varies widely, and can be anywhere from free (many accounting firms offer free training as a marketing tool) to $100-$125 an hour for conferences that provide cutting-edge training like technical accounting and SEC updates. Online courses are usually a much more cost-effective option. For a small or medium-sized company, a good rule of thumb for lower-level employees is $15/hour. For higher-level employees such as controllers or accounting managers, you may need to budget closer to $75/hour.
Headhunter or Placement Fees
Headhunter or placement fees are usually based on a percentage of the guaranteed first-year compensation of the employee, and generally range from 20%-35%. In order to quantify this cost, you need to multiply the average salary of an accounting employee by the placement fee percentage, and divide this amount by the average tenure of your accounting staff. This gives you the average cost per employee, on an annual basis, of placement fees due to turnover. If your company is in rapid growth mode, this cost will be quite a bit higher, as you may be paying headhunter fees every time you hire new employees to meet the growth.
So What is the Total Cost of Ownership of My Finance and Accounting Function?
Taking all of the above cost information into account, it would be useful to develop a rule of thumb for the TCO of your finance and accounting function, similar to the information in my previous post about the TCO of your accounting software. The easiest and most readily available cost information is the total base salary cost of your finance and acccounting employees, which is often used as an inadequate proxy for the TCO. What would be a good factor of base salary cost to use as a rule of thumb for the total TCO? I've made some assumptions to arrive at an estimate for an annual cost:
- Average base salary of an accounting person is $40,000
- TCO of enterprise accounting software is $7,500 per employee per year
- Payroll and benefits burden rate is 25% of the base salary
- No temporary employees are used
- Average total lease space needed per employee (including common areas) is 100 sq. ft. Price per square foot is $15/sq. ft. per year.
- Cost to furnish the average employee's cubicle or office space is $3,000, including furniture and a computer with Microsoft Office. The useful life of a computer is 3 years, while the useful life of furniture is 7 years.
- End user support costs $75 per employee per month, or $900 per year.
- Training cost per employee is $800 per year (40 hours at $20/hour).
- Headhunter fees are 20% of employee base salary for the first year, and average employee tenure is 5 years.
Using these rough estimates, the TCO of the accounting function works out to be 1.6 times the employee base salary cost per year. The estimates I've used above are relatively conservative, and your actual costs could be quite a bit higher. You may want to allocate more space per employee, you might be in a more costly real estate market, your cost to furnish employee offices could be quite a bit higher, or you could be in high growth mode where headhunter fees are incurred at a much faster rate. Your TCO could approach 2 times the employee base cost per year.
Hopefully this post has opened your eyes to the fact that only looking at employee base salaries results in grossly underestimating the TCO of your finance and accounting function. You could be underestimating your costs by as much as 38%-50%.
If you would a free assessment of your finance and accounting function, including the TCO of your current or prospective finance and accounting function, click the link below.