Finance’s strategies to support change and growth

Kuaishou, a short-video sharing platform from China, grew at a dizzying pace from a little over 100 employees and two business streams, to 10,000 employees and 11 business streams in the past three years. McDonald’s China announced two years ago its plans to add 2,000 restaurants by 2022, opening an average of 500 restaurants a year. Haier Group, one of China’s largest producers of household appliances, expanded in recent years into healthcare and financial investments, making financial management for the company’s ecosystem of subsidiaries increasingly complex. How are the finance functions of these companies supporting evolving business models and growth?

At the CGMA Annual Awards and CFO Summit 2019 in Shanghai on 6 December, finance leaders shared their experiences supporting business units and operations teams. Here are some of their observations, paired with advice:

Finance’s role in ‘fail fast’ environment

“The biggest change in the past few years is the need for business and operations teams [to support decisions],” Aaron Huang, FCMA, CGMA, the CFO of McDonald’s China said on a panel at the CFO Summit, on the work of his finance team. He explained that commercial teams now want data insights before making decisions instead of getting data after decisions.

In the current environment, organisations are encouraging teams to be agile, make quick decisions, and scale up quickly if successful or else fail fast and learn from the experience. Huang said the flip side of that management thinking is the price of failing.

“On one hand, the market requires me to make quick decisions, but I need to know — if I fail, what’s the cost?” Huang said. “There needs to be a person to tell commercial teams that cost. And who’s that person? Someone from finance, of course.”

Huang explained that McDonald’s China — jointly owned by CITIC Limited, CITIC Capital, Carlyle Group, and McDonald’s — now sees 94% of its sales coming from digital payments, but tracking where profit comes from is a challenge for his team.

To meet customers’ demand for convenience, its food and drinks are offered on numerous online and offline channels, and with the option for delivery. Payments can come from a mobile wallet or in-store counters and kiosks. However, precisely because of its multi-channel sales, ensuring profitability for its products has become more complex due to differences in price and profit margin for each channel. Commercial and operations teams now have a greater need for advice from the finance function, Huang said.

Overall, this trend is a boon for finance business partners because there’s a greater buy-in to have a finance business partner embedded in a company’s business streams. This shift in mindset is also giving finance professionals a bigger influence on decision-making, he said.

He added that finance must help commercial teams understand that finance’s goal is to help increase efficiency, reduce costs, protect profits, and provide more resources for growth. “You won’t go wrong sticking to these goals,” he said.

His advice for management accountants is to be unafraid of delving into business operations and figuring out the numbers. “You can’t be afraid; you need to do it,” he said. “If you don’t do it, you won’t know where the profit went.”

Going beyond transactions at a shared-service centre

In 2006 when Haier Group, one of China’s largest makers of consumer electronics and household appliances, set up its shared-service centre, the vision was to have the centre go beyond processing finance transactions, Liu Gang, FCMA, CGMA, vice-president and CFO of Haier Financial Holdings said on the same panel. 

“When we did it, we made sure that the shared-service centre will represent the standardisation and integration of our company’s finance,” he said. “If you consider a shared-service centre as merely a transactional hub, then it will remain very basic in its capabilities.”

Staying true to its vision, the shared-service centre has been the testing ground of many technological innovations over the years and has enabled Haier’s finance team to take on more work as the company expanded. Liu explained that while Haier’s revenue has doubled since 2006, its finance shared-service team has stayed at about 240 employees. That is possible thanks to the use of new technologies, including automation.

Earlier this year, the shared-service centre was presented with a new challenge. The company transferred transactional finance processes of hospitals it owns to the shared-service centre, and it has been a “huge challenge” for the team because of the large volume of transactions it needs to support, Liu said. However, the centre’s standardised and integrated processes put in place years ago has enabled it to absorb more work and still provide great support to other business units and subsidiaries in the conglomerate. As the sole source of a company’s financial data, he also emphasised finance’s role in preserving high-quality data. 

A consumer-centric ‘fourth financial statement’ 

“Management accounting and a company’s strategy go hand in hand,” Liu said. Haier in the past few years had expanded from its core business in household appliances to healthcare and investment industries. A practice that he’s pioneering at Haier is to have a finance person in every team or business unit in the conglomerate to provide finance support and to feed clear and accurate financial reports. 

One initiative was removing the physical finance “department” in the office. The area where management accountants used to sit was cleared a few years ago, and the finance team spread out to sit with other teams in the organisation.

Another initiative the finance team introduced a few years ago is what’s called a “fourth financial statement” internally. At 8am every day, data from three traditional financial reports — profit and loss statement, balance sheet, and statement of cash flow — and the fourth financial statement is shown to managers and teams across the whole company. While it’s called a financial statement, it provides nonfinancial metrics on the company’s customers and stakeholders.

In a report by a Chinese news outlet, Liu is quoted saying that customers’ data that can best indicate future value generation to the company’s ecosystem of products and services is the focus of the fourth financial statement.

A major reason for tracking customer-related data is the evolution of the household appliance industry. The internet of things and the concept of smart homes enable household items, such as a television or a refrigerator, to be interconnected and part of an ecosystem. 

In this evolution of singular products to an ecosystem of products, “the biggest challenge [for our finance team] is valuing this ecosystem using management accounting tools”, he said. 

Integration of finance and business teams to support growth

Kuaishou is one of China’s largest platforms for sharing short videos and has catapulted many ordinary Chinese citizens to social media fame. Its growth at breakneck speed presents a different challenge to its finance department. “To some extent, I’m not sure what new businesses our company will introduce in January 2020,” said panellist Ray Wang, vice-president of finance at Kuaishou.

This test of resilience for the finance department has taught Wang the importance of the integration of finance and business operation teams.

He pointed to the example of budgeting. In mature organisations, the cost of raw materials or the annual sales and marketing budgets can have high levels of certainty. In high-growth technology companies, these costs are highly uncertain, he said.

“So our job is to find out the best possible options [amidst those uncertainties],” he added.

One solution is placing finance business partners at every new business stream on the first day the business is created, regardless of the size of the business. This results in better support for the head of the new businesses.

Structurally, Wang said the “value creation of finance” at the company is interconnected. For example, procurement, accounting, credit control, and investments are placed under the finance department’s umbrella.

“This means our finance team has a deep understanding of the business and an end-to-end view,” he said. “They can be placed in any business stream and can have an impact in those teams, and when the organisation experiences high growth, we’re able to support that growth.”

Huang of McDonald’s China concluded by advising finance leaders to think about how they can help their teams be embedded in other teams in the company as finance business partners. To do that successfully requires continuous learning and influence, he said.

“This is a knowledge era,” he said. “If you don’t keep up, you really will be disqualified.”

— Alexis See Tho (Alexis.SeeTho@aicpa-cima.com) is an FM magazine associate editor.