Digitization for the CFO

With the advent of digitization, it becomes more and more clear that investment is required in the areas of finance which is considered overhead. How can the CFO overcome this crisis and this philosophy of overhead? Is digitization the end goal of a CFO? And how can it work in favor of the finance organization?

The role of the CFO being predominantly changed due to the process of digitization. Before we understand what constitutes digitization it is important to understand what digitization means to different CFOs and the process they are in the digitization of the organization. Digitization is a process by which the finance function is working in real-time and the digital availability of data is imperative for the business. With the current crisis that the world is tiding over that is the coronavirus crisis, it becomes all the more important for the CFO to digitize the business and devise ways for making the data available in a digital format.

The advent of digitization starts in 1999 when the XBRL format of publishing financial data was emerging as a trend and in the early 2000’s it became a norm with the Securities Exchange Commission making it mandatory in 2004. The XBRL format of reporting unified the methodology of reporting and led to the first revolution of the digitization of the financial data that was available. The form in which the advent of the digital revolution took place was more in the setting of the regulatory requirements. As the organizations embarked on a mission for digitization for the regulatory requirements it became more and more clear that the activities that the finance organization was carrying on had to be reduced and the target was to ensure that the finance organization was set in a lean form.  A lean form of the organization was necessary because the organizations went on a cost-cutting mode that had to be followed due to the dot com bust that happened in 2000 and the subsequent financial crisis which occurred in 2008 followed by the subsequent meltdowns in the next decade.

The lean organization being the norm required significant investment in the technology process and in turn resulted in the first area that had to be addressed as n overhead which was the finance function. The onus was on the finance organization to ensure that a sufficient budget was created to ensure that the technology needs were met and hence it was imperative for the CFO to make the investment essential for improving the process. The first place of target for the CFO was the closure of the month-end. In a survey by PwC conducted in 2013, 80 percent of the CFOs agreed that the month-end closure was the norm and the requirement was that they fast-track the process of the month-end closure. In the same survey, it was reported that small and medium enterprises w have a turnover of less than a million dollars but below five million dollars typically took 10 days to close their books. In contrast, the companies which reported more than five million dollars in turnover reported closure of books time of seven days. There was no data available for companies that reported a turnover of fewer than one million dollars. This being said, it could be inferred that the average closure of the books ranged from seven days to ten days. This is referred to as a T+ in many situations. The target for the CFO was to ensure that the T+ time was optimal and efforts are made in many quarters to make the number as close as possible to a T+3. The rationale for the T+3 was that accruals that typically get posted on the last day of the month need to be reconciled for the period and that would take up one working day and the second day was allotted for the collection of the data and the presentation of the data to the top executives for making the executive decisions and the third day was the final day for anyone to post the correction entries and to make the data accurate for the month. It is important to note that all these dates and days are possible only if there is adequate data available at the end of the month to make the closure decision.

The closure again is driven by the quantum of the business and the extent to which the different verticals of the business contribute to the overall reporting process. The more the number of verticals the more is the possibility of the accounts not being reconciled and the more the possibility of errors in the closure and the reporting would be delayed accordingly. To address this concern was the advent of automation in the closure process and thus gave rise to the possibility of the implementation of robots wherever it was possible now we have many companies that specifically work in the area of automation like automation anywhere and eQ. These companies deploy robots that are designed to pull the data from the database that the company has to record its accounts and the bots reconcile and compile the data on a regular basis and give snap reports and flash status for any business head. This has to do with the fact that the robots have to be designed in such a format that they call to pull the data together from the accounting system that the company maintains. It has been estimated that 50% of the world’s companies and all the companies in the Forbes 500 deploy some form of Enterprise resource planning and a majority of them still prefer the implementation of a program that has been developed by a company named SAP. This being said, if a robot speaks the same language and can pull the data together from similar systems it would vastly help the CFO to ensure the delivery of the T+ days of accounts being reconciled for the benefit of the top executives.

It is important to note that once a standard format of a robot is deployed for the reconciliation which is a manual effort, the CFO cannot target the real-time delivery of the accounts thereby leading to a wide level of accuracy and availability of information across the different verticals. This accuracy and efficiency in reporting are what is being aimed for in the current days and the one that can make the finance organization stand apart from the rest of the functions. The automation initiative does not stop with the reporting activity alone and can extend far beyond the reporting activity and can extend to the management information system and also the headcount management and present flash reports to the senior management. The following data and survey present even more crucial evidence that automation is a top priority for a majority of the CFOs and it is important to recognize the need for it, especially with the tight budgets and the imperative to improve the net profit and one of the means to do so is the investment in automation and the need to re-allocate the budget to the different areas that would be available for the expansion of the business. In a study published by McKinsey in December 2016, it became evident that the CFOs are bracing for impact on the various front including and not limited to the areas of Big Data, Digitization of the business, managing activist shareholders, cybersecurity. With these concerns or strategic areas looming large, it becomes more and more important for the CFO to consider the investment in the areas of business data transformation and the measures which can result in improvement of the net profit through the investment in technology and there are companies which are benefitting through this investment and the technology advancement and the re-aligned focus on the business goals.

Author: Srikant Parthasarathy, Student of LIGS University, under doctoral supervision of Dr. Minh Nguyen.