By Declan Tyrrell, Finance Evangelist, EMEA Sales Factory at Oracle, and Former CFO
I’ve been in the world of finance for a long time. As a former CFO, I’ve seen the role evolve from one of financial steward, to corporate strategist. With the pace of business change now faster than it has ever been, the role of the CFO will be help build an engine to drive the business forward. Data will be the fuel for that engine, and sustainable profitability will be the destination.
It is not unusual for finance to spend 90% of its time getting information into relevant business systems, validating it, and getting it out again for reporting—leaving limited time to interpret the data. By the time we generate and distribute management information (which can take in excess of 10 days), all we are doing is asking management to explain our current under-performance. This, in essence, has our management driving the business by looking backwards.
Modern finance systems allow us to close our books faster. When I became CFO of a law firm, the first thing I did was to set a goal of closing the books at 5 p.m. on the last working day of the month, and generating reports by 9 a.m. on the first working day of the following month. Using automated workflows and automatic checks and balances, I reduced the month-end close from 12 days to 14 minutes.
I overlaid the reports to management with a “traffic light” system (green, yellow or red) and automated commentary; this gave the information clarity and purpose.
I continued to meet with the management teams mid-month, but instead of asking them to explain under-performance, I asked what actions they had taken since they received the information. This empowered managers to look forward, not backward, and take action. This approach led to a doubling of revenue over a three-year period and a tripling of profit per equity partner.
Everywhere I have applied this approach, it has empowered management to take action and be forward facing. I have seen significant increases in profitability—as high as 250% in one organization and 400% in another.
As modern finance systems continue to evolve, the concepts of continuous close or real-time data validation are becoming a reality for more and more businesses. This opens up a world of opportunity for finance.
Imagine not having to worry about the accuracy of your data—whether financial, internal or external. Imagine a finance “bot” that continually monitors the data, running scenarios and trend analyses to identify potential future issues or areas of opportunity. This would empower the business, and finance, to focus on the issues and opportunities rather than wasting time on ensuring data accuracy.
Profitability is critical. You have to understand your profitability, and most organizations don’t. A typical scenario is when a company prices its products and services to win, rather than to be profitable. But once you’ve empowered your organization with the ability to easily see and analyze financial data, you’re able to figure out the formulas that drive profits.
It’s not just costs. Maybe you’re losing money because processes aren’t efficient enough. Maybe it’s the discounts you offer. Maybe you’re failing to recover all the hours of work you put into servicing an account.
With cloud-based profitability and cost-management, you can run what-if scenarios that will quickly tell you things like how to grow your margin from 4 to 9 percent—just by changing your discount rate from 15 percent to 10.
Every CFO knows the key to growing profit margin is understanding the organization’s key performance indicators and how they impact profit. This sounds like a simple statement, but the complexity of multiple systems and siloed data can make this a nearly impossible task.
We have always been good at organization profit measurement, profit by line of business or region, etc. The real power comes from understanding the component parts of the profit margin and how to tweak them.
When I restructured the finance team at a law firm, they had no capabilities in place to easily analyze profitability by client. When I started to introduce profit analysis by customer, we discovered, unsurprisingly, that 80 percent of the firm’s revenue was coming from 20 percent of its customers.
That’s not unusual, but we needed to dig deeper. It’s one thing to have a client that brings in $1 million a year, but how much of that income is profit? When we looked under the hood, we found the firm’s biggest client offered high-volume, low-value, fixed-price transactional work. And over the course of the previous four years, costs associated with that client had exploded because the staff doing the work had become more qualified and were being paid more.
We knew we had to either increase the price we were getting for the work or decrease the cost of doing it—maybe both. We went to the customer to ask for more money for the work, which we received. Then, with the help of machine learning, we automated a lot of the work and pushed most of the rest to lower-cost employees. After only six months, this client became the firm’s highest value customer.
You might be able to do this kind of analysis now, but how much effort does it take? Probably a great deal. With automation, you can conduct the analysis quickly and easily.
With cloud-based finance applications, you’ll have accurate data in real time, and the ability to understand and share it. You’ll really start to understand who your customers are and how much value each one brings to the table.
Maybe you’ll see more opportunities to cross-sell your products or services to existing clients. We all know it’s cheaper to sell new business to an existing customer than to win an entirely new client. With greater access to financial data and the tools to analyze it effectively, you’ll see opportunities to serve clients across multiple departments, not just one.
You’ll also be able to roll data back two years, five years, a decade. Unlike traditional computing environments, cloud-based systems are designed to scale and accommodate all your data requirements, all the time. How many clients did you lose? Are there trends among those you’ve lost over a certain time period? Which clients grew during the same period? Which ones are entirely new? Can you identify sweet spots or hot clients? If so, can you share those hot clients with other departments and grow new lines of business with them?
If you want this kind of analysis at your fingertips in real time—if you want to be able to use predictive analytics to know what’s coming around the corner—then it’s time to become the progressive CFO of the future.
Today’s CFOs have an opportunity to be proactive contributors to innovation and growth. With access to real-time data in the cloud and machine learning-infused automation, finance leaders have more time and capabilities to drive profitable change by improving decision-making, automating non-value adding tasks, managing risks, and optimizing assets.
If you automate all the transactional functions that go into closing the books, for example, you will always know where your company stands right now financially. And with cloud capabilities, you can share that information with key stakeholders quickly and easily. Then, as a team, you can work on getting your business turned around, facing forward, and growing profits.
As Oracle CEO Mark Hurd said at the 2018 Modern Finance Experience, “CFOs are driving cloud migration because it just makes sense. It reduces expenses, increases efficiency, and creates more opportunity to truly innovate.”