Finance Is Morphing In Its Roles, Its Functions, and Its Personnel
by Michael Burdick, on Jan 24, 2019
The demands placed upon the financial division of a company are multifaceted and rapidly changing. A wave of automation is swiftly redefining roles; crowdfunding and ICOs have emerged as major, unconventional forces in raising capital; and Big Data is providing more profound insight into the past, current, and future financial state of companies. The finance team of the first half of the 21st century is likely to look very different from the finance team of the second half of the 20th century.
The roles of the finance department
The activities of a finance department can be categorized into five separate functions: recording, controlling, reporting, planning, and managing. None of these functions exists in a vacuum, and not only will they need to communicate with each other, but many businesses may blend more than one function into a single role and there may be some overlap—especially in smaller businesses.
The finance department must be capable of handling receipts and payments of cash, both transactionally and in records. This particular function, sometimes termed Treasury and Cash Management, is essential in ensuring the liquidity and solvency of the business. If these cash flows are mismatched, a company may be unable to meet creditor and supplier demands, causing production to seize up or even to force the company into bankruptcy.
In order to accurately perform cash management duties, the finance department must dutifully record all transactions in the accounting process. That includes non-cash transactions. This backwards-looking function is closely connected to reporting, in which the past performance is reported to both investors and the appropriate government bodies. Reporting informs those outside the finance division how the company is performing.
The controlling function is concerned with compliance regarding legal requirements and the general oversight of the department. The controlling function must identify and prevent fraud, identify and rectify gaps in reporting, and generally oversee the entire finance and accounting process to ensure policies are followed. When gaps are identified early, companies can avoid financial and regulatory pitfalls during expansion.
Forecasting and planning are forward-looking functions. They rely heavily on the past-oriented function of bookkeeping to be accurate, and these functions identify the most profitable projects (capital budgeting), assess and manage risk, compare real and forecasted performance, and develop strategies regarding future financing methods (whether to raise debt or equity). As the C-suite integrates and finance becomes more strategist in nature, this function will become ever more relevant.
In small businesses, the financial planner may also be recording transactions, reporting the performance to top management, and even ensuring forward-looking proposals comply with the relevant laws. As the volume of work grows, however, this jack-of-all-trades position is delegated to more than one individual.
The Changing Role of Finance
The terms “finance” and “accounting” conjure images of meticulous recordkeeping and stringent adherence to cost cutting – in essence, the bean counter. But companies have relied on the finance department to offer insight into mergers, acquisitions, and project management for decades, and that role has grown in importance. By 2009, a McKinsey report found that finance fulfilled the role of value management far more often than other roles (Exhibit 1).
Technology has undoubtedly been a driver of change in the first two decades of the 21st century, and it seems poised to continue as one of the preeminent forces of change. The finance division of tomorrow will be built upon technology.
Automation has relieved finance teams of repetitive, manual tasks, like transaction recording. There is no reason to employ several individuals – or several hundred individuals in an office tower – to track transactions when it can all be automated. Ideally the automation occurs in a server farm on cheap, rural real estate. Automation may assuredly aided in cutting costs, but its true potential lies in eliminating the mundane so finance employees can focus on adding value to the organization.
Big Data and the widespread availability of cheap computing have massively improved the planning and forecasting function; and due to automated recording, it seems the mountains of data will continue to grow. This newfound ability to analyze and forecast has thrust finance into a leadership role that produces value rather than simply consumes resources for recordkeeping.
The Traditional Finance Team and its Metamorphosis
The traditional finance team consisted of a few key players: the director or CFO, accountant, bookkeeper, analyst, controller, and various clerks. Contemporary businesses should understand how the roles will function in the future as well as how they are necessary for business now.
The bookkeepers and clerks tend to administrative and transactional tasks, such as entering data and following up with customers on whether invoices have been paid. As optical character recognition (OCR) technology improves, human sight will become less valuable to a company.
But bookkeepers also follow up with customers who haven’t paid yet – speech AI is improving, but it is not yet at the level of handling delicate situations with diplomatic tact, which describes many late-payment situations. Moreover, these technologies are expensive (and proprietary). For small businesses, it is more affordable and more accessible to employ a part-time, human bookkeeper a few days a month to perform these tasks. When owners don’t have time for all the record-keeping, they should consider finding a bookkeeper.
The accountant verifies the entered data as well as identifying issues. They may also perform calculations and compile financial statements. This is effectively transforming the raw data entered by bookkeepers into condensed and useful formats.
Human accountants can perform customized analyses. The analysis programs do not write themselves, so they are only useful for standard analysis – unless the firm hires a programmer to modify them. A part-time human accountant will be able to find and interpret financial information left otherwise unidentified by software. The idea is to have accountant responsibilities augmented by software rather than replaced by it.
The controller, CFO, and analyst positions will not be eliminated, but they will all be affected by technology. The controller, responsible for general oversight of the finance team, will be able to utilize tools to recognize possible issues through pattern recognition. Rather than manually comb through thousands or even millions of transactions, controllers will rely on software to recognize common patterns that signal problems. If there are enough transactions to warrant automated recognition of fraud, the company needs a controller. The volume of transactions and the complexity of laws surrounding finance can quickly overwhelm a business owner who has little formal training in the area.
Analysts make projections, determine probabilities and expected payouts of projects, and play a vital strategic role in the direction of the company. This role will benefit immensely from new tools and the ocean of data that will be generated and stored. The role will not be eliminated, but it will be profoundly affected.
The 21st century financial analyst will need more than mastery of financial concepts; they will also need computer and data science skills as well as the ability to translate complex technical topics and analyses into plain English for stakeholders, both inside and outside the company. Analysts in the future are likely to be just as much programmers and algorithm designers as financial experts. After all, most financial concepts are fundamentally numerical problems, and computers can solve those for monkeys capable of clicking a button. Designing the systems with nuances specific to a particular company – and understanding the results – are the responsibilities of the future.
When a business reaches the point of needing forecasts for buying, raising capital, or making employment decisions, it needs an analyst. If it controls enough capital to start investing in major projects, it will want an analyst to determine the expected returns – and the analyst can help visualize and understand the results. The software will augment their positions, but the human will still find the obscured pieces, develop the results, and assist leadership in understanding the decision.
The CFO or director position will also benefit. Instead of being involved in the technical level, CFOs will be able to make better-informed decisions thanks to large amounts of data and improved analysis capabilities. New members of their teams might include psychologists who analyze and detect fraudulent behavior for the controller, mathematicians who assist the analysts with pattern recognition, and interdepartmental computational linguists who analyze social media response to a competitor’s product launch. If the launch fails, the marketing and finance teams can work in tandem to avoid those problems in future launches, creating synergistic strategic value for the company.
Automation is likely to marginalize and eventually eliminate positions like accounts receivable clerk and bookkeeper. Responsibilities for finance professionals will shift away from managing cash flows and transactions to analyzing those numbers and determining what the results imply. The finance team of the future will not be made up of transaction-recording positions and budgeting positions; it will be comprised of data scientists, mathematicians, and sociologists (see page 5 of this Accenture report).
Already CFOs are becoming dual CFO-CIOs. The connection between finance and technology is natural in the context that numbers are the native language of computers, and the recording and forecasting functions of finance are almost entirely based on numerical foundations.
The Changing Organization
Finance is becoming ever more integrated to management. Indeed, the entire C-suite is increasingly integrated across the entire organization. Deep but narrowly-defined specialization unfortunately limits understanding across divisions in an organization, and promoting interdepartmental understanding is essential to build a solid, well-functioning organization.
As finance becomes more instrumental in planning and decision-making, in part due to increasing technological capabilities, it will converge with other departments: CFOs will work with HR to develop organization-wide financial cultures, legal compliance will be heavily reliant on IT systems maintained by finance staff, and customer service and sales will be able to discern likely potential clients from unlikely ones using behavioral metrics.
Cross-functional teams and the general integration of departments are possible with technology. The finance division is no exception, and it seems the effects of automation and the improved forecasting capabilities provided by Big Data and AI will launch finance into the forefront of managerial roles, tied to other departments in the business.
The future finance team is likely to be made up of a mixture of business people and tech people, and ideally that mixture manifests within the individuals themselves. The landscape is constantly shifting, and it is critical that organizations remain open to change and new ideas.
A Caveat to Automation
Automation and software has made many jobs seem obsolete. Purely mechanical tasks are easy to automate, and it is true that software has created the possibility for small business owners to manage many aspects of business on their own. However, relying purely on automation and software has its pitfalls. As the size of the business grows, so too does the complexity of the financial concepts and the appropriate software. Many small business owners have a natural do-it-yourself mentality, but no one single-handedly runs a Fortune 500 company (or a Fortune 5000, if that index existed).
The importance of accountant, controller, analyst, and CFO cannot be overshadowed by improvements in technology, as cost-effective and alluring as they might seem. The simplest example is that of the analyst armed with powerful visualization software – a small business owner will not have the time to learn the software, tweak or modify the tools, generate the results, then analyze and explain the results to multiple parties. To do that, the owner should seek a qualified analyst.
Accenture Report: Finance of the Future
KPMG Report: Finance of the future
PWC Report: Finance Functions to Drive Results
World Payments Report demonstrates how many payment transactions the world makes every day, with all of it recorded in some form or another