Managing future finances

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Managing future finances

Wednesday, 16 January 2019 | Hima Bindu Kota

Managing future finances

It is the ability to find a balance between man and machine, integration between different functional silos, systems and processes that can help create a more connected organization

Some decades back, senior executives in large companies had a simple goal for themselves and their organisations: Stability. Shareholders wanted little more than predictable earnings growth. Because so many markets were either closed or undeveloped, leaders could deliver on those expectations through annual exercises that offered only modest modifications to their strategic plan. Prices stayed in check, people held on to their jobs and life was good. However, market transparency, labour mobility, global capital flows and instantaneous communications have blown this comfortable scenario into pieces. In most industries, and in almost all companies, heightened global competition has concentrated the management’s collective mind on something that was happily avoided in the past: Change. Successful companies have developed a culture that keeps moving all the time and although the traditional line and the way staff functions has changed to keep pace with emerging times, we are yet to see more changes.

Finance function is one such staff task that is going to witness tremendous change and may not remain the same as we know of it today. A situation may arise where finance skill-sets and principles will be driven into other areas of the organisation that, in turn, may become responsible for budgeting, performance reporting and strategic decision-making. If this happens, where will it leave finance in the organisation? Financial skills and disciplines that we know today are likely to survive but the finance function in itself and the chief financial officers (CFOs), in particular, may need to adapt to a future where organisations increasingly focus on connectivity, interaction across business units and transactional synergies to derive value from all parts of the business  and not just those that are customer-facing.

As businesses increasingly look for an analysis and data to support strategic decisions, the CFO’s role is likely to embrace the principles of performance and risk management more than we see today. But reporting activities will also need to evolve as new stakeholder groups seek to understand not only the current profitability of organisations but the sustainability of such profits as also the organisation’s impact on the economy and society more widely.

There is a much greater opportunity for finance to contribute, given the accelerating transformation in economies worldwide, digital revolution, increasing market interdependence, shifting of customer expectations and increasing volatility of the global market place. This is coupled with a shift in focus from shareholders to broader stakeholder interests, partly driven by a more networked society, social media and the near instant and global transmission of news.

Steering: Future finance functions will be required to help create conditions for effective steering of the enterprise, providing more flexible and adaptive processes with near real-time reporting, rapidly produced analytics and dynamic and integrated forecasting — all of which will meet the needs of business in its pursuit of growth strategies. Finance needs to provide a process where interaction around these accounting and reporting processes delivers the right challenge and thought processes to navigate the business. There are great opportunities but also pitfalls created by disruptive technologies. Aspects such as Big Data and predictive analytics further add to the tools and techniques finance can deploy. By 2030, it is predicted that very little time will be spent on data gathering.

Financial data will be available to all stakeholders in real time, from a robust data source. Teams will spend a part of their time on analysis but a vast majority of their time will be spent with internal and external stakeholders modelling future performance and building scenarios based on potential external events and competitor actions. In addition, forecasts or projections will be replaced in future by real-time forecasting, which will be made possible via the use of emerging technologies, and the budget or rolling forecast, as we know it, will cease. External and environmental factors such as customer behaviour, competitor activity, new market entrants and activity in other competing industries, markets or economies will be available, tracked and built into scenarios for management and shareholders to consider.

Intervention: Future finance functions will represent the organisation externally by engaging with a broader set of stakeholders who are hungry for information through increasingly diverse means. This will include facilitating an interactive environment much broader than traditional reporting in which the organisation can effectively share and discuss their performance and overall impacts on stakeholders. This will include customers, public interest groups, suppliers, Governments and society as a whole, rather than just shareholders. This mediation principle is equally applicable for internal stakeholders. According to PwC, in the current scenario, 49 per cent of companies have relevant metrics for sustainability reporting with 27 per cent reporting detailed actions on their strategic priorities and 44 per cent reporting on a segmental level about their business model.

In contrast, the future will see 100 per cent of companies reporting on relevant sustainability metrics and in some cases, this will be mandatory. Most companies will report on actions across their strategy and over 75 per cent will report on their business model at a segmental level. In addition, financial information will be available to management on a real-time basis to allow business performance and direction to be assessed any time and from anywhere through the latest available technology. Data will be audited in real-time, reducing the need for external audit.

Flexibility: Future finance functions will be driving themselves and the business towards greater flexibility and resilience, with the ability to absorb and bounce back from internal and external shocks. Finance should be at the heart of a drive towards increasing the adaptive capacity of the organisation, including qualitative planning for unforeseen shocks, use of predictive analytics and risk mitigation plans. After a few decades, all controls will be automated, embedded and consistent across end-to-end processes. The focus will shift to statistical models which will raise alerts when certain conditions arise which could indicate fraud, misstatement or other irregularities.

Dashboard reporting will also be available in real-time for management who can run ‘what if’ scenarios and model in the effects of environmental and behavioural changes on their processes, eg systems failure, staff turnover, volume and capacity peaks and so on, thus allowing them to plan their resource usage to best support the business and ensure resilience under any foreseeable change.

Integration: Future finance functions will need to use systems and pool resources more efficiently to satisfy business needs. It will be the ability to find balance between man and machine, providing integration between different functional silos, systems and processes to create a more connected organisation. There will be no spreadsheet-based reporting. Validated datasets will be produced either internally or externally by industrywide finance data providers and made available to in-house finance teams to manipulate using their own models.

The divergent fortunes of Apple and Kodak exemplify the threats and opportunities facing many industries worldwide. Apple was on a sustained decline between 1986-1997, yet managed to reverse course and has become a market leader in a diverse range of products, completely transforming how people interact with personal technology. Some years ago, Kodak was at the pinnacle of its industry until mobile phones became the preferred method of digital photography. Kodak was late to respond and was still held back by its legacy of success in non-digital products. As a result, the company was forced into bankruptcy. These contrasting fortunes show that the pace of change from disruptions to markets can have a binary impact and poses a real challenge for the role of finance.

The role of finance will be to create the effective conditions for steering the organisation for success. This requires a complex orchestration of the business and finance working together to analyse past direction, future possibilities and then to decide collectively on the correct course. In the case of Kodak, did finance support the right scenario analysis and take time to assess future strategies, and was there sufficient challenge of its long-term plans? In case of Apple, how will it continue to compete with aggressive competitors whose offerings threaten to overtake them with each new release, and how can finance support that dialogue? The role of finance is to provide a window into the future through which an organisation can best prepare itself. The future will see a totally different form of the finance function. Finance has the adaptive capacity to rally around new challenges and help the business solve them more rapidly. Finance professionals will be embedded alongside marketing professionals, operations teams, strategy and compliance teams in the business. No silos will exist and end-to-end processes will be managed across business lines and the organisation.

(The writer is Assistant Professor, Amity University)

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