Charles Tilley, Chair of the International Federation of Accountants’ Professional Accountants in Business Committee, on why finance teams today can no longer survive as a back-office function
The remit of chief financial officers (CFOs) now extends into strategy, enterprise risk management, performance management, and communicating the story of the organization to the outside world.
To be successful and have the confidence of their board, audit committee and management colleagues the CFO needs and effective finance function.
I have spoken to many chief executive officers (CEOs) and CFOs of large companies who share the same sentiment. While they have made strides toward greater efficiency and reduced costs in the finance function, many struggle to transform it into a business-facing function that supports and enables decision-making across the organization.
This is backed up by data. The IBM Institute for Business Value’s 19th Global C-suite Study finds that half of CFOs report their finance functions aren’t as effective as they need to be. Survey data from Deloitte shows that accounting and finance professionals spend more than half (56 percent) of their time on steward and operator roles, which are not oriented towards strategic or growth goals.
In tomorrow’s digital world, the CFO and finance function need to help navigate, measure and communicate what matters to long-term success and brand reputation, while meeting expectations from investors and boards for short-term performance.
To help bring attention to the need for change and provide advice, the International Federation of Accountants (IFAC) has published two reports: A Vision for the CFO and Finance Function: From Accounting for the Balance Sheet to Accounting for the Business and Value Creation, which sets out the future desired state for an effective finance function and Future-Fit Accountants: CFO and Finance Function Roles for the Next Decade, which looks at the roles that will enable finance and accounting professionals to remain integral to their organizations; and also produced an accompanying assessment tool.
Communicating the value creation story
Rapid developments in the digitization of finance, accounting, and the broader business world, are leading to efficiency gains. Fewer people are needed to support transactional and reporting tasks. More focus is now needed on areas of opportunity, such as leveraging data and planning a path to long-term value creation through transformed business models.
Some organizations have started to make significant progress in transforming their finance functions by investing in technology and talent management. In recent meetings of the IFAC Professional Accountants in Business Committee, we have heard from various finance function leaders who are on exciting change journeys with a common destination – at the heart of decision-making.
Future profitability and long-term cash flows are the foundation of economic value creation.
The challenge for finance and accounting professionals is that the financials only tell a part of the value creation story. Value is created and destroyed beyond the balance sheet. Strategic and operational factors, often intangible and difficult to monetize, make up much of total enterprise market value. Drivers of future cash flow that represent key areas of opportunity and risk are varied and include governance and culture, social license to operate and brand reputation, innovation and intellectual property, talent and human capital, data, operational excellence and quality business processes, and customer and supplier relationships.
We call this a multi-capital approach, helping to rethink how value is created and measured over time. Boards and investors need to be given this insight from the CFO and finance function.
Being at the heart of decision-making means the finance function will spend the majority of its time interacting and communicating with the rest of the business, including sales, operations and research and development. It will be analysing and interpreting information related to all areas of value creation. It also involves providing an objective view insignificant decisions and proposals.
There are significant opportunities for the finance function to shift from a transactional, reporting and compliance focus to one that guides and enables decisions across an organization. Seizing and enabling this opportunity requires a vision and a plan. I strongly believe that to be effective, the finance function needs to be an agile, integrated and customer-led function to enable the organization to deal with the opportunities and risks related to creating value for the long term.