For more than 20 years, finance and accounting teams have sought to be seen as business partners or strategic advisers to management. Focusing on delivering insightful analysis to support decision-making while still assuring the integrity of all financial statements has been the goal. But what does this mean in practice?
As data availability continues to grow and technology creates ever more potent tools, and as the world moves into a post-COVID-19 era, growth is very much back on the agenda.
There are three very practical ways in which the finance function can not only be a business partner but also serve as a catalyst for growth:
- Creating the financial capacity to fund growth.
- Evaluating portfolio choices and investment opportunities.
- Maintaining ongoing financial operating discipline.
Creating the financial capacity to fund growth
Capital and cash are the fuels for growth. Strategy and innovation require investment. Finance and treasury teams are at the forefront of creating the financial capacity to fund strategy and innovation. Be it securing debt to fund working capital or issuing equity as the currency for acquisitions, the ability of a company to fund growth relies heavily on the ability to match strategic intent with financial capability.
In recent years the partnership between the CEO and CFO has become much more strategic in nature. CEOs describe vision, strategy, and competitive differentiation while CFOs tell the associated financial story: how much capital is required, what returns should be expected, and how risk will be addressed. Investor confidence is based upon the twin pillars of strategic attractiveness and financial credibility. As Wolters-Kluwer CFO Kevin Entricken commented in a January 2021 interview with EY: "Every investor will tell you they want an appropriate return on their investment. You need to deliver that return, or they will look for returns elsewhere. That should be an important KPI for every organisation; measuring successes or failures."
With interest rates at historically low levels and equity markets relatively accessible, CFOs have a number of tools at their disposal as they look to fund growth initiatives. Reinvesting profits in the business remains a core growth strategy, but for many, that no longer needs to be at the expense of returning cash to shareholders. Finance teams are continuously looking at their organisation's capacity to fund growth and reward shareholders. By careful management of cash and capital, rigorous measurement of performance, and alignment of financial capability with strategy, finance can position itself as the catalyst for growth.
Evaluating portfolio choices and investment opportunities
The business case has been a core component of the finance toolkit for decades. All finance professionals are schooled in calculating net present values and internal rates of return; over the years, more sophisticated mechanisms from Monte Carlo simulations to real options analysis have been developed and deployed. However, for many organisations, the investment evaluation process has proved unsatisfactory. Too often bureaucratic development and approval processes subjugate rigorous analysis to internal politics and management bias; overly optimistic time and value assumptions fail to fully acknowledge the risk and uncertainty inherent in any investment; evaluations are conducted on each individual investment in isolation from one another, largely ignoring any portfolio or substitution effects; and inconsistent post-investment tracking or return measurement to ensure projected returns are realised provides little insight in success or failure.
As the pace of business has quickened and the relevance of detailed annual budgeting has been questioned, leading finance teams have revamped how they evaluate investments. Perhaps the three biggest changes have been to treat the investment evaluation process as a continuous activity, not just an annual budgeting activity; view investments as a portfolio rather than as discrete projects; and, finally, take advantage of increasingly timely and rich data to rapidly understand whether investments are on track, not just from a time and budget perspective but from a likelihood to deliver expected returns.
The impact of a more continuous, connected, and return-focused process allows finance teams to move with agility to react and respond to threats and opportunities. This was very evident in the early days of the COVID-19 pandemic, when finance teams moved rapidly to conserve cash and capital. No one was waiting for the next budget review to make adjustments.
Maintaining ongoing financial operating discipline
The finance function has always been intimately involved in ensuring that operational finance processes are both efficient and effective. However, the last few years have seen a sea change in the technologies available to optimise operational finance processes. The combined impact of tools such as robotic process automation, artificial intelligence (AI), machine learning, and advanced analytics is freeing up billions of dollars in trapped revenue and uncollected cash while also identifying opportunities to reduce operating expenses. COVID-19 has accelerated both the digitisation of finance processes as well as the adoption of more agile and dynamic finance practices.
Accenture reported in February 2021 that the automation of traditional finance tasks had increased from 34% in 2018 to 60% in 2020. Automation is not only reducing operating costs but is also unlocking rich seams of data that can isolate potential issues and opportunities in real time. For example, the use of AI in the order-to-cash process can identify changes in customer behaviour that can equip sales and service teams with intelligence to develop new business opportunities.
Instead of relying on back-end controls such as reconciliations and journal vouchering, control can be exerted in real time as transactions are being processed. This reduces errors but also increases management confidence in the underlying data and hence its comfort in making attractive growth investments.
Finance is moving from a world where much of its time was spent executing core transaction processes to one where those processes are highly automated and finance and accounting's role is to ensure automated processes are operating correctly. This frees up time and talent to analyse transactions and related data to capitalise on events and trends that can sustain or accelerate growth while also mitigating downside risk. At Ascension, a St. Louis, US-based healthcare system, COVID-19 accelerated the move away from detailed annual budgets to a rolling forecast. Using data science, the finance team now prepares 18- to 24-month forecasts to determine spending plans on a quarterly basis (see "Corporate Spending Plans Tweaked as Recovery Pace Remains Uncertain", The Wall Street Journal, 15 February 2021).
Not everything is changing
Despite the unprecedented events of the last couple of years, not everything has changed. The finance function's top job is still to ensure the accuracy and integrity of the financial statements. The good news is that this can be accomplished in less time, at lower cost, and with greater confidence. Finance talent is now being deployed towards identifying, evaluating, and funding growth. It is further confirmation of finance's strategic value to the enterprise.
David A. J. Axson is a consultant and author and a retired partner from Accenture, a co-founder of The Hackett Group, and former head of corporate planning at Bank of America. To comment on this article or to suggest an idea for another article, contact Neil Amato, an FM magazine senior editor, at Neil.Amato@aicpa-cima.com.