As the pace of change in business accelerates through technology and digitalization, the evolution of the finance function is rapid. Whereas in the past, the finance function focused mainly on bookkeeping, regulatory compliance and preparing financial statements, today it is moving towards becoming one of the most important drivers of success for an organization. Rapid advances in technology, increased demand for timely data-driven decision-making, and changing business models are influencing how we view finance professions today. In this new environment, finance professionals are expected to be not only custodians of the organization's financial resources, but also influential participants in the financial planning and decision-making processes that will lead to growth, direction of the organization and ultimately success.
This eBook will explore the reasons for the evolution of finance roles and what will be driving this evolution; the skill set that will be essential in the future for finance professionals; and how organizations can prepare for this shift to finance being a more strategic partner in organizational success. As the pace of change in business accelerates through technology and digitalization, the evolution of the finance function is rapid. Whereas in the past, the finance function focused mainly on bookkeeping, regulatory compliance and preparing financial statements, today it is moving towards becoming one of the most important drivers of success for an organization. Rapid advances in technology, increased demand for timely data-driven decision-making, and changing business models are influencing how we view finance professions today. In this new environment, finance professionals are expected to be not only custodians of the organization's financial resources, but also influential participants in the financial planning and decision-making processes that will lead to growth, direction of the organization and ultimately success.
This eBook will explore the reasons for the evolution of finance roles and what will be driving this evolution; the skill set that will be essential in the future for finance professionals; and how organizations can prepare for this shift to finance being a more strategic partner in organizational success.
1.The Conventional Part of the Finance Function: Foundation of Finance
Historically, traditional finance functions have typically served the following limited functions:
· Accounting & Bookkeeping - Recording of Financial Transactions & Accurate Ledger Maintenance.
· Financial Reporting - Preparation of Financial Statements for outside regulation and communication for outside stake holders.
· Budgeting & Forecasting - Development of Budgets & Future Financial Performance Estimates.
· Cash Management - Liquidity Maintenance & Working Capital Management.
· Risk & Compliance - Management of Financial Risk & Compliance with Regulatory Standards.
While these sections are still critical pieces of the Finance Function, they only represent the Foundation of Finance. Over time, we expect that the Finance Function will encompass more extensive functions and is likely to impact Corporate Results through Strategic Functions.
2.Why is Finance Required to be More Strategic
A number of trends are driving the evolution of Finance from a historical Back Office Function to an evolving Strategic Function:
2.1 Technological advancement and automation have resulted in an increasing use of digital technologies (for example, robotic process automation (RPA), artificial intelligence (AI) and machine learning) to automate a wide variety of routine financial processes such as data entry, reconciling ledgers and performing basic forecasting. This shift to automation has three primary benefits.
2.2 Fewer Hours Spent on Manual Activities:
Staff have fewer hours dedicated to repetitive tasks.
Increased Precision and Efficiency: Automated systems provide less opportunity for errors due to their design and provide more throughput.
More Opportunities for Higher Quality Work: With a significant portion of their work no longer occupied by mundane activities, financial professionals can dedicate time towards providing strategic analysis and support for decisions.
While technology will not replace human judgment, technology will continue to alter the types of tasks performed in finance. Going forward, finance professionals will spend more time interpreting the numbers produced by automated processes rather than processing them.
2.3 Data Explosion and the Need for Insight
The use of digital technologies has increased because of advancements and the automation of various repetitive financial activities like data entry, ledger reconciliation, and basic forecasting through means such as Artificial Intelligence (AI), Robotic Process Automation (RPA), and Machine Learning.
There are three main advantages to automating the processes of finance:
· Reduced Manual Processing Time: Automating processes allows staff members less time to spend on repetitive tasks.
· Increased Accuracy & Efficiency: Automated systems provide fewer chances to make errors due to the way they are built and allow for more work to be completed in a shorter amount of time.
· More Opportunities for Producing Higher Quality Work: Since much of their work is no longer taken up by monotonous tasks, Financial Professionals can now devote their time to providing more strategic analysis and insights to management.
Technology will not completely eliminate the need for human judgement within Finance as it will ultimately change the types of work performed within the Finance Function. In the future, Financial Professionals will focus on interpreting what was produced through automated processes rather than performing the financial processing of data themselves.
2.4 The Rise of Strategic Business Models
As businesses gain global competition and shifting customer expectations, with developments like subscription services now forming new business models driven by innovation; examples are as follows:
• Subscription revenue models
• Platform ecosystems
• Digital marketplaces
• The globalization of operations with complex international taxes & regulations
These New Business Models creating; Finance Leaders Must; understand not only the financial numbers associated with their respective fields but also the Strategic Impacts of Pricing, Customer Lifetime Value, and Long-Term Growth Projections.
3. The Evolving Strategic Functions of Finance
The finance profession is evolving as the expectations of finance roles continue to grow beyond traditional functions. The following are examples of some of the primary changes that will occur as part of the evolution of finance roles from the traditional model to the new strategic finance model:
3.1 Strategic Planning and Analysis
Historically, Financial Planning and Analysis (FP&A) has focused on Budgeting, Variance Analysis and Forecasting. Moving into the future, the Finance department will evolve from what is termed FP&A 2.0 to becoming a more strategic partner across the company.
The future state of FP&A will include the following:
· Utilization of Predictive Analytics and Real Time Data to formulate strategy.
· Collaboration with Sales to develop Pricing Strategies and Market expansion plans.
· Coordination with Operations to create Cost Structures and Corporate Efficiencies.
· Evaluate Strategic Investments and mergers/acquisitions through rigorous financial modeling.
To that end, FP&A Professionals will become Strategic Advisors, aiding the decision-making process rather than merely reporting on the company’s past performance.
3.2 Enterprise Risk Management (ERM)
Risk Management is now a function that extends beyond Traditional Financial Risks such as Credit Risk, Liquidity Risk or Compliance Risk, to include a broader range of Operational, Strategic, Cyber Risk, Environmental Risk and Geopolitical Risks.
Strategic finance functions will:
· Incorporate Risk Analysis into the Strategic Planning Process.
· Conduct Scenario Analysis regarding Emerging Threats (i.e., Supply Chain Disruptions, Cyber Attacks).
· Develop Resilience Strategies to balance Risk with Growth.
This transition represents an enormous change for Finance Professionals, who will need to think like Business Leaders, who are accountable for driving the business forward.
Financial metrics traditionally used, such as revenue growth, gross margin and earnings per share (EPS) are still important; however they are not adequate on their own. Rather, in addition to these traditional metrics, strategic finance will also include more value-oriented performance metrics to measure longer term organizational performance, such as:
· Customer Lifetime Value (CLTV)
· Economic Value Added (EVA)
· Indicators of Sustainable Growth
· Environmental, Social and Governance (ESG) Metrics
The inclusion of value-based performance metrics provides a greater context for financial results within the overall organizational objectives through the alignment of performance with stakeholder expectations.
3.3 Organizations will begin to utilize their Finance Departments more as champions in the move toward Digital Transformation. Understanding how to allocate capital, optimize a process and measure performance will allow Finance Leaders to:
· Be champions for the Cloud-Based Financial System, which improves the quality of data and provides better access to it.
· Provide Direction Regarding Capital Investment in Artificial Intelligence (AI), Analytics and Automation
· Ensure alignment between Digital Initiatives and Financial Goals/Risk Profiles.
Moving forward, Finance Teams will no longer remain passive users of technology, but instead will take an active role in developing digital strategy.
4. Skills for the Strategic Finance Professional
As financial professionals expand their responsibilities, they will need to acquire additional skill sets that go beyond their current technical accounting training. These include:
4.1. Data and Analytical Skills Finance professionals who are focused on strategy need to have the following analytical skill set:
· Ability to analyze large amounts of data through analytical tools
· Create predictive and prescriptive models based on data
· Share the information derived from the analysis with stakeholders
To develop these skills, finance professionals should be comfortable working with analytical platforms, using SQL, utilizing data visualization tools, and applying statistical reasoning.
4.2. Strategic Thinking and Business Acumen
For finance professionals, becoming knowledgeable about their organization's strategic vision is vital to their ability to provide strategic input from the perspective of finance. In order for finance professionals to add value strategically:
· Finance Professionals need to understand how other departments contribute to value creation, including but not limited to marketing, production, and research and development
· Finance Professionals need to be able to foresee changes in the market and in competitive approaches
· Finance Professionals need to join financial outcomes with specific business strategies
This will lead to the shifting of the role of finance from a backward-looking reactive role, and instead being forward-looking partners in business operations as an integral part of the organization's overall business strategy.
4.3. Working Across Departments
In order to fulfill the responsibilities of strategic finance, finance departments must work with others within the organization. Effective finance professionals can:
· Resolve issues of influence rather than authority
· Convert finance terminology to business vernacular
· Build strong relationships with non-financial leaders
Therefore, finance professionals must possess a high level of emotional intelligence and communication skills in addition to their technical expertise.
4.4. Technical Capability
It has become an absolute necessity for a finance professional to understand how to use digital technology or a digital toolset. Finance professionals should now feel comfortable using:
· Automated accounting software
· Cloud-based enterprise resource planning (ERP) solutions
· Artificial Intelligence-based data analysis
· Blockchain Technology and Digital Asset Classifications
Financial accounting and analysis can utilize innovations from Adopting Technology. Thus Finance teams with Technical Literacy can fully benefit from, rather than be disrupted, by innovations.
5. Organizational Transformation: Building Strategic Finance Functions
It is necessary for the organization to work with the Finance profession in order to support this transformation to Strategic Finance. Key enablers for success are:
5.1. Investment in Talent and Training
Organizations need to invest in:
- Career growth through analytics, Leadership Development and Strategic Thinking training;
- Rotational assignments to enable Finance professionals to work across various functional areas of the organization; and
- Partnerships with universities and professional organizations to develop new curriculum for future Finance professionals.
The investment in training is critical for developing the competencies of Finance professionals so they can add strategic value to their organization.
5.2. Redesigning of Finance Roles and Structures
To support the development of strategic capability, Finance organizations will likely adopt new structures. Examples of these structures include:
- Business Partnering Models: Finance professionals are embedded within business units (BU).
- Centers of Excellence: Finance Centers of Excellence focused on Analytics, Risk Management and Digital Transformation.
- Agile Teams: Cross functional teams working on Strategic Projects.
Structuring Finance as a part of a collaborative team approach rather than in traditional hierarchies will promote a strategy of creating value through collaboration.
5.3. Aligning Key Performance Indicators (KPIs) with Strategic Objectives
Finance organizations are changing the way they measure performance by including Strategic Impact. Therefore:
- Finance organizations must incorporate qualitative measures (for example, the degree of influence on business outcomes);
- Incentive programs must be set up to reward collaborating, innovating and problem solving;
- Finance KPIs must link to broader organizational objectives such as Customer Growth and Sustainability.
When Finance professionals are evaluated based on their strategic impact, they will be more likely to create Strategic outcomes for the organization.
6. Challenges in the Strategic Shift
The transition from traditional accounting practices to more strategic financial operations is an exciting opportunity, but it is also fraught with potential difficulties and challenges. Some of these challenges include:
6.1 Cultural Resistance to Change
Many finance departments have been in operation under a traditional accounting model for so long that they resist any form of change. To prevent stagnation and promote growth, leaders of finance teams must:
- Encourage the development of a growth mindset within the team.
- Foster an environment where experimentation is encouraged as well as learning through failure by providing opportunities for employees to take risks within the company and to be rewarded based on the results of their efforts.
- Promote success at a strategic level by celebrating milestones achieved by finance teams and the company as a whole.
7. Real-World Examples of Strategic Finance in Action
Finance teams are already responding strategically to many of the challenges facing different industries today. Specific examples are as follows:
- Retail: Finance utilizes analytics to enhance pricing and inventory optimization, and as a result improves the overall profitability.
- Technology: Chief Financial Officers partner with product/engineering teams to help determine whether investing in new features/platforms is worth it.
- Healthcare: As Strategic Finance, the objective of finance teams is to support decision-making processes in regards to Resource Allocation, Patient Outcomes, and Regulatory Compliance.
- Manufacturing: Finance teams assist in creating and evaluating Supply Chain models, and therefore provide support for Operational Resilience Planning.
Thus, the above examples indicate that the role of finance has evolved from Back Office Reporting to Strategic Development, which proves that finance continues to evolve beyond traditional means of providing financial statements.
Conclusion: The Strategic Finance Imperative
In the future, the role of finance will no longer solely revolve around the reconciliation of financial books; rather, finance will become an integral part of shaping the business’ overall vision. As technology continues to automate transactional work and create loads of data, the finance function will migrate into the area of influence: finance will drive business performance, create strategic business opportunities, and work in partnership with other departments within the organization.
Embracing this evolution will require new skill sets for finance professionals, as well as an organizational framework that allows finance to create value versus simply meet legal requirements. An organization that fully embraces the future of finance will have stronger decisions making capabilities, adapt to change at a much quicker pace, and have a more integrated finance function that supports the organization’s long-term success.
For finance professionals, this evolution presents themselves with a great opportunity: to be a trusted advisor that will guide the organization through uncertain waters and towards continuous growth and success. Finance professionals in the future will need to have more than just a mastery of numbers--they will need to have the ability to interpret those numbers for the purpose, performance, and competitive advantage of the business.
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