The CFO Middle East | April 2015 by CFO Middle East

Technology Talks

secondary funding

crysTal ball?

But are you listening?

Better late than never

Predictive accounting and how it works

HOW BIG IS YOUR APPETITE FOR

RISK? Why the CFO can make the business a safe haven or a home for the brave

Vol. 1 ISSUE 5

Leading from the front in a cooler climate MANAGEMENT Dominic De Sousa Chairman Nadeem Hood Group CEO Georgina O’Hara Group COO EDITORIAL Group Director of Editorial Paul Godfrey paul.godfrey@cpimediagroup.com +971 4 440 9105 Assistant Editor Steven Pradia steven.pradia@cpimediagroup.com +971 4 440 9114 Editorial Assistant Adelle Louise Geronimo adelle.geronimo@cpimediagroup.com +971 4 440 9160 ADVERTISING Publishing Director Rajashree Rammohan raj.ram@cpimediagroup.com +971 4 440 9131 Commercial Director - Business Division Chris Stevenson chris.stevenson@cpimediagroup.com +971 4 440 9138 Media Sales Executive Emma Hughes emma.hughes@ cpimediagroup.com +971 4 440 9120

Surely it’s a truism that in a regional climate impacted by lower oil prices, it’s CFOs who must lead from the front? Yet I have seen relatively few articles dedicated to what seems to be becoming an ‘elephant in the room’ topic. There’s no doubt that the commercial framework surrounding export activity will be impacted across the Middle East - with the exception of the UAE, Qatar and Kuwait, the other states either don’t have the production reserves or their extraction costs mean they are running at a near-loss. This deflationary pressure on their markets will mean that companies who were planning to expand into the impacted territories will be perceived as less competitive, and time will be better spent building a stronger presence in home markets. Who will re-engineer and re-plan the balance sheet, and build the bridge between the Commercial and Sales Directors and the CEO? Well, that will be the CFO of course. Although we have seen some residual growth back in the oil price, most pundits agree that it’s very unlikely to get back over US$70 per barrel. What’s more, most of the ‘magic circle’ consultancies - PWC, EY, A.T. Kearney at al - have projections on what the world be like with a low oil price sustained for the next eight years. One of the key factors emerging here is that Europe, for example, would remain largely depressed and non-performing, with the eyes of the world tuned more and more to SE Asia. It’s no accident that this is also the region that now has more than five million millionaires and is increasingly attracting unprecedented levels of FDI. Now, I’m not confusing the role of the CFO with that of economist: but it will be the numbers and the forecasts that the CFO underwrites that will be the basis of any corporate commitments to the ‘new world order’. Suffice it to say that with that commitment in place, the lion’s share of activity will follow suit and we will indeed see not only fresh commitment from the MNCs, but from the enterprise-level businesses and even the aspirational SMEs. There is no escaping the fact that the right and proper role of the CFO is to lead the commercial and financial frameworks by which strategy is ordained and delivered. What will your own role be in cementing proactive change in the light of these provocative realities? Enjoy this edition of CFO magazine.

Event Sponsorship Manager Gill Fairclough gill.fairclough@ cpimediagroup.com +971 4 440 9120 DESIGN Head of Design Glenn Roxas Senior Graphic Designer Froilan Cosgafa IV Production Manager James Tharian Data Manager Rajeesh Melath

Paul Godfrey Group Director of Editorial & Senior Editor

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tHE CFO MIDDLE EAST

Advisory Panel The CFO Middle East’s Advisory Panel presents a dynamic group of experts and leaders in various aspects of the world of finance. As industry captains arriving from world-leading organisations and specialising in financial strategies, accounting and management these key personalities will play a vital role in ensuring the delivery of relevant and accurate analyses of the latest trends and issues in the business community.

Ahmad Darwish Ahmad Darwish is a Board Member and Secretary General of the UAE’s Accountants and Auditors Association (AAA), an organisation tasked with the promotion and development of the accounting profession in the country. He is also the Senior Manager for Financial Accounting at DP World UAE and oversees the management accounting, treasury and asset management divisions of the company. With his extensive financial expertise Darwish is also the first Emirati to chair the UAE Members Advisory Committee of the ACCA.

Hanady Khalife Hanady Khalife is the Director of operations, Middle East and Africa, of the Institute of Management Accountants (IMA). She is responsible for training providers, business partners, universities, governmental entities, amongst others. Khalife is also an expert consultant specialising in assisting clients develop and implement strategic business plans and build partnerships with key industry stakeholders.

Michael Armstrong Michael Armstrong, FCA is the Regional Director for the Middle East, Africa

and South Asia (MEASA) of ICAEW. He is responsible for the ICAEW’s work across the MEASA region, collaborating with key stakeholders, engaging with businesses across the region, supporting ICAEW members and working with both public and private sectors on raising awareness of the relevance of chartered accountancy catalysing economic growth. Armstrong has extensive experience advising financial institutions and energy and natural resources companies in addition to having held several leadership and advisory positions in business and government.

David Thomasson David Thomasson is the founder and Managing Director of Phoenix Financial Training. David is a fellow of CIMA and worked in the accountancy industry for many years before moving into training in the 1990s. PHOENIX offers courses leading to Professional Finance Qualifications in ACCA, CIMA and ICAEW in Dubai and India. Offering a range of bespoke financial courses in Financial Awareness Building and Corporate Treasury Phoenix’s student body ranges from independent students to practitioners of private companies and sovereign wealth funds.

Lindsay Degouve de Nuncques Lindsay Degouve de Nuncques is the UAE Head of the Association of Charted Certified Accountants (ACCA).

Her role entails spearheading discussions with regulators, business leaders and important stakeholders to strengthen the ACCA’s network and profile in the region. Degouve de Nuncques has spent more than eight years with ACCA in various senior roles.

Geetu Ajuha Geetu Ahuja is the Head of GCC for the Chartered Institute of Management Accountants (CIMA). Responsible for developing the growth of operations and positioning the global brand of CIMA across the GCC region, Ajuha establishes strategic partnerships with global and regional entities. She is also responsible for overseeing the launch of various region specific CIMA nationalisation programmes in the GCC.

Paul Gyles Paul Gyles is the Regional CFO and Board member for all ISG Group companies – an international construction services company delivering fit out, construction, engineering services and a range of specialist solutions. He is responsible for the finance, HR, IT, admin and legal functions for ISG’s Middle Eastern outfit. A key aspect of the role is project funding and raising external financing by working with both Arab and international banks. Gyles is also the Chairman of the Steering Committee of the MECA CFO Alliance, the largest CFO networking group in the Middle East.

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CONTENTS 3

Editor’s note Senior Editor Paul Godfrey on the CFO’s role in a time of low oil prices.

Advisory Panel Leading finance personalities share their world-class expertise to ensure we give you accurate analyses of the latest trends.

The power of Private Banking Senior Editor Paul Godfrey investigates this elite subset of wealth management.

CFO Roundtable The CFO Middle East together with Coface hosts a dynamic discussion on customer debt management.

Risky business Are you game for risk? Are you equipped with the right risk management know-how?

“There is a

One of a kind Salman Hassan Al Thani the CFO and Director of Tax – Qatar Financial Centre Authority, explains QFC’s objectives and role in the Qatar National Vision 2030.

common conception that successful CFOs aren’t averse to a modicum of risk.”

CONTENTS 28

The need for speed How CFOs are leveraging technology. for smart results.

Rising above the oil spill

Associate Editor Zenifer Khaleel evaluates the opportunities and pitfalls in the climate of lower oil prices.

Obtaining secondary funds Taking the next step for finance

Predictive accounting

Millennials in the workplace

Trend or powerful change?

Savio Tovar of Avaya Global Growth Markets, comments on the changing landscape and shares key insights.

50 Opinion Zenifer Khaleel on nature vs. nurture – whether there really is such a being as the ‘self-made’ CFO.

Tech Talk Top apps to supercharge your business.

EVENT FOCUS

Coface Roundtable

Trading safely The CFO Middle East in partnership with Coface, a leading global credit insurer, underlined the importance of dealing with the risks in the global trade scene through a very engaging and insightful round table discussion. Held at The Oberoi Hotel, Dubai, the event featured a high-level roster of CFOs, finance directors and other finance experts discussing â&#x20AC;&#x2DC;How to reconcile export sales and debt managementâ&#x20AC;&#x2122;.

Perhaps, the most evident factor that could show the growth of a business is when it starts exporting to new markets. This does not only signal an increase in sales but also the diversification of the companyâ&#x20AC;&#x2122;s customer base. However, it is undeniable that international trade presents a wide spectrum of risks for exporters. Probably the most prominent problem that concerns most exporters, aside from the stiff competition, are financial ones, namely the risk of nonpayment for goods or services provided. So it is imperative that the

One of the right steps to take when it comes to export market development is to invest in a proper system for leveraging customer debt management.

financial decision-maker of an organisation is well-rounded when it comes to the right solutions to mitigate this risk. To succeed in the global trade scene and to top local and foreign competitors, exporters must be able to formulate the most attractive sales terms and support it with the optimal payment solution. This was echoed by, Paul Godfrey the Group Director of Editorial of CPI Media Group and event moderator, through his opening remarks where he mentioned that, one of the right steps to take when it comes to export market

development is to invest in a proper system for leveraging customer debt management. Noting that this is the ideal way to ensure that all important cash flows and proper market intelligence are at the fingertips of the exporter. Further into the event, the lively discussion explored different ways how financial professionals ensure that risks of nonpayment are dealt with while securing their growth in new export markets. According to Ali Amjad Mehboob, Head of Finance and Business Management, Odfjell Well Services, every country

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EVENT FOCUS

Coface Roundtable

definitely has its own set of risks and exporters must do their due diligence before entering a contract with a particular client in a certain market. “In our business we usually deal with challenging markets like CES countries including Turkmenistan and Tajikistan. For current clients that we have, what we have done to mitigate the risks in our receivables, is we put a cap on the operations that we do on a particular oil well. However before that what we usually do is utilise companies like D&B to provide us with the research that we need like

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the figures, market trends and so on. But even then, we still cannot be 100 per cent sure that every figure that they provide is accurate. So what we did, is come up with a strategy that could more so give us the details that we want. This include asking our clients about previous and current companies that they have dealt with, and we do some sort of background research of our own about their operations with them.” “We also have a corporate risk committee (CRC) where we evaluate the growth potential of certain market

before approaching any companies in that particular country. That team is comprised of professionals specialising in finance, operations, contracts, legal, EVP and so on. They assess the kinds of risks that exist in that market and through their findings we formulate the best strategy we can,” he added. The need for data or market intelligence has also been a highlight of the discussions. A majority of the panelists say that although research firms are a big help to exporting companies, there is still no assurance of their accuracy. Gideon Merkel, Director of Finance, Simba Toys, “Risks of course vary from one market to another. Hence, our strategies here in the UAE may not work in KSA. So having the right market data is really essential to identify your target customers and in formulating your business plan in a certain market for years to come. However, in some cases, there are markets where there are no data available and if there are they’re not entirely reliable. So the best thing we can do is gather our own data and build up our own database.” While having the right market data is among the keys in ensuring the alleviation of risks in a certain export market another element that can really help is having a trade credit insurance (TCI) from a reliable credit insurer. Underlining its importance Kshitij Mendiratta, Finance Manager, Petrochem said, “Risks are a day-to-day concern for us. Primarily because our company deals with a lot of chemical products which are

EVENT FOCUS

Coface Roundtable

Expert panellists Gregory Le Henand, Country Manager GCC Region, Coface Bahaadeen Merhi, Risk Underwriter, Coface Hetal Popat, Finance Controlle, Kemsol Limited Jamal Sarwar Sabri, Group Director & CFO, Almoe Group Nimesh Lokhandwala, Executive Member, The Institutue of Chartered Accountants of India UAE Chapter T. Govinda Kumar, Finance Manager, United Metal Coating Srinivasan Rajagopal, Financial controller, United Iron and Steel Ali Amjad Mehboob, Head of Finance, Business Management, Odfjell Well Services Sameer Mohamed, Regional Finance Controller, Odfjell Drilling Kshitij Mendiratta, Finance Manager, Petrochem Gideon Merkel, Director of Finance, Simba Toys Fazly Muhammed, Finance Manager, MEE

very precarious. Then we had several problems with some small partners that we have and had some issues with their payments. Although these are just small cases, we realised that there is a threat of this happening with our big players as well. So we did the optimal thing to do, which is get a TCI and we did that with Coface. Upon doing so, we found that we do not only feel secure about our receivables, but also our cash flow has improved.” Bahaadeen Merhi, Risk Underwriter, Coface, supported this by saying, “One of the main purposes of a credit insurance emphasises on the importance

of saving money and improving cash flow. As credit insurers, another top priority of ours is of course letting our policyholders know of the high-risk clients and look for an alternative for those. There is a mutual relationship between us and the policyholders. It is a two-way street because as their business grows, so do we.” Furthermore, Gregory Le Henand, Country Manager GCC region, Coface, highlighted that when it comes to their role in collecting payment or debts, the major concerns of both insurers and policyholders is not just the cost but also the relationship with the client.

The major concern of both insurers and policyholders is not just the cost but also the relationship with the client.

“When it comes to collecting payment, the policyholders and insurers like us should always be in sync. What we always recommend is we should come up with the collection strategy together. Because we, as insurers can of course deal with it in a more straightforward manner – lay-out the legal intricacies of their nonpayment and so on. However, that could negatively impact the relationship of the policyholder with their client. So it is ideal that we both come up with a reasonable approach in collecting the payment while protecting that relationship,” said Gregory. Kim Tran, Head of Global Transaction Banking Sales - Commercial Banking Gulf, NBAD, highlighted that for companies looking expand their business being a TCI holder could be also a good leverage to get funding from a bank like NBAD. “Aside from having the right customer data and market intelligence, having a TCI can really do help them get approval for financing. This aspects assures that they have done their due diligence and they know the potential export market really well. There are some cases wherein a current customer will ask us to increase their credit limits, if they have a TCI then that is definitely a viable ground for us to consider their request – but if they don’t then it is very unlikely that we will. Having a TCI definitely increases their chances of getting finance, unfortunately this is not a norm yet here in the UAE,” added Kim.

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PRIVATE BANKING

Banking

The power of Private Banking For both professionals and entrepreneurs, there comes a tipping point when all the work thatâ&#x20AC;&#x2122;s done on behalf of the business has to translate into private success - wealth, for want of a better word. One of the benefits of material success is that it merits a more personalised and focused service from financial providers; indeed, for centuries, Private Banking and the raft of wealth management services have figured large in the list of rewards awaiting high net worth individuals. Senior Editor Paul Godfrey investigates this elite worldâ&#x20AC;Ś

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PRIVATE BANKING

Banking

The role of the dedicated account manager is fundamental here.

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One of the factors characterising the world of wealth management is that it’s full of technical terms all (perhaps!) carefully designed to exclude the financially unworthy. For example, the term ‘private banking;’ doesn’t refer to a privately-owned bank, which would be a non-incorporated banking institution, but rather to a generic class of services – eg, banking, investment and other financial services provided by banks to private individuals who enjoy high levels of income or investment capital. The term ‘private’ refers to customer service that’s on a much more tailored and personal basis than in typical retail banking. In this world, customers (or should that be ‘clients’?) don’t have such items as ‘cheque books’; they have ‘folders’. They don’t have accounts; they have ‘portfolios’. The range of banking services provided include not only the more classic banking activities - deposit taking and payments but activities such as discretionary asset management, brokerage, limited tax advisory services and a collection of foreign exchange and fiduciary activities. The role of the dedicated account manager is fundamental here: he or she will work with the client very closely and get to know the general style of service that’s required - often acting in a proactive way and guiding the client in wealth-creation techniques. A typical activity will be suggesting core investment strategies known to be to the client’s liking. Indeed, in classic discretionary asset management, the portfolio manager will make buy and sell decisions on behalf of the client’s account - and the term ‘discretionary’ refers to the

fact that investment decisions are made at the portfolio manager’s discretion. This means that the client must have full and total trust in the investment manager’s capabilities. Needless to say, discretionary asset management can only be offered by individuals with extensive experience in the investment industry and many investment managers will in fact have the professional qualification, Chartered Financial Analyst (CFA). It’s important not to confuse private banking with the wealth management services offered to retail banking clients, which are generally far less dependent on tailored knowledge of the individual, family commitments and performance expectations in particular market sectors. Wealth management of this more general kind can be provided by large corporate entities or independent financial advisers, who may not necessarily require the CFA qualification, depending on jurisdiction.

Reversing the dynamic: changing the customer from debt to asset It’s often forgotten that when banking first started - in Paris and Venice in the 12th century AD - the model it followed was that of private banking. This was because working with the big aristocratic merchant families meant that there was the best possible chance of providing a wide range of banking products and services, over and above pure retail banking. Why not retail banking? Because when the bank takes your money on deposit, it appears on the balance sheet as a debt, not an asset - because it’s money owed to you. The quest is

PRIVATE BANKING

Banking

always to reverse that dynamic: and products such as loans and diversified asset portfolios are building the customer’s obligations to the bank. The word ‘private’ continued to designate the style of banking services offered to the rich, in contrast to the retail and savings banks aimed towards the needs of the new emerging middle class.

What’s my entry level to enjoy private banking? The traditional entry level to qualify for ‘full-on’ private banking has required a personal liquidity level of at least US$3 million. Notwithstanding, today, we see many banks customising the private banking concept and offering a range of services for liquidity levels of US$250,000 for private investors. This will generally provide access to services such as wealth management, savings, inheritance, and tax planning, but will not include a complete discretionary asset management model. One of the changes in the private banking market is that instead of an ‘all or nothing’ entry gateway, clients pay a set of fees, either based on the number of transactions, the annual portfolio performance or a ‘flat-fee’, usually calculated as a yearly percentage of the total investment amount.

Private banking and the current economic climate Technological developments such as the Internet and mobile phones, along with the increasing globalisation of the economy, have led to a ‘destabilisation’ of the banks’ traditional markets. For example, the growth of the High Net Worth sector is low in some of the more traditional private banking markets like

Europe - as compared to Asia where the number of millionaires has grown to in excess of 5 million. Moreover, these same technological developments have made sure that online banks can offer banking services without the conventional reliance on a network of offices. As a result, ‘private’ banking is increasingly defined as a private-access version of telephone banking, with 4G connectivity enabling 24/7 routes to account direction and utilisation. Currently, the United States has one of the largest private banking systems, largely because it’s home to 3.6 million high net worth individuals, accounting for 28.6 per cent of the global high net worth population as of 2012 (figures from CapGemini). Global trends show that people are increasingly opting either for US or Middle East private banks. This is because US banks are required by law to have a minimum 70 per cent US capital base, whereas European and SE Asian banks can attract up to 60 per cent of their capital from overseas, which some investors perceive as ultimately weakening the bank’s reserves. In the case of Middle Eastern private banks, while they may not be of the same scale as their international counterparts, they can typically have the highest liquidity levels in the world.

When do I know that private banking will be the best option for me? Even if you have the requisite amounts of capital, private banking is not for everyone, since it requires a level of relationshipbuilding that may superfluous to your needs. It’s a good solution for you if -

Global trends show that people are increasingly opting either for US or Middle East private banks.

• You have a number of quite complex overseas investments that require frequent monitoring and management • You are interested in medium and long-term wealth accrual, building security for future family generations • You have a need for inheritance planning that can deal with a variety of estates and timings • You have exposure in overseas tax regimes and need advice on offshore residency and financial transfer • You are building a new investment strategy and require hands-on portfolio management on a daily basis • You are creating Trust funds and Trust contracts for dependents • You want regular access to highly skilled financial advisors, who are equally fluent in areas such as insurance, arbitrage arrangements and tax liability structuring • You want to build solid firewalls between business dealings and family assets • You are planning to live overseas for an extended period and need advice on the financial advantages of renting versus buying a property - as well as guidance on overseas tax-efficiency requirements and obligations Keep in mind too that for many entrepreneurs, accruing wealth is in the ‘thrill of the chase’ - they are not preoccupied with the subject of money as such and may not therefore be interested in an arrangement that encourages bespoke discussion about assets, earnings and shortfalls. If you are, then there is still no better solution than private banking.

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data & trends

ADVERTORIAL

Qatar Financial Centre

One of a kind Since its establishment, the Qatar Financial Centre (QFC) has helped create a dynamic, robust and businessfriendly environment for international and local entities to setup and conduct business in one of the fastest growing regions in the world. Salman Hassan Al Thani, Chief Financial Officer and Director of Tax, Qatar Financial Centre Authority, explains QFCâ&#x20AC;&#x2122;s objectives and its role in the Qatar National Vision 2030

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ADVERTORIAL

Qatar Financial Centre How is QFC adapting to the falling oil prices? What is the impact on the Qatari economy as a whole? Qatar is the world’s largest LNG exporter and one of the fastest growing economies of the MENA region. It has endeavoured to develop strategic longterm economic vision that aims to achieve economic diversity and sustainability that gradually reduces the country’s dependence on the hydrocarbon industry. Qatar is widely expected to be one of only two GCC nations to maintain budget surpluses in the coming year. The Ministry of Development Planning and Statistics Economic Outlook for 2014 and 2015 shows that the non-hydrocarbon sector accounted for most of Qatar’s economic expansion in recent years. Last year, QFC broadened our business scope to welcome more Professional and Business Services firms. Our focus is increasingly on supporting the State of Qatar’s goal for economic diversification by attracting a wide range of firms which provide added value and essential support to different sectors and industries in Qatar. Qatar has scored against regional peers to become an important financial centre in the Middle East. How is QFC heralding this change? The latest Global Financial Centres Index, GFCI 17 (which covers 82 financial centres from around the world and published by the London based Z/Yen Group) ranks Qatar in

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as underlined by a 30 per cent increase in non-regulated firms over the course of 2014. Overall we have witnessed a 129 per cent increase in the number of new licensed firms as compared to 2013.

the top 20 leading financial centres from across the globe. In 2014, we introduced the QFC’s amended tax regulations. The new regulations allow Qatari-owned entities investing in Qatar to opt for the zero-tax rate on their operations conducted from the QFC. These amendments provide beneficial changes to the taxation of structures like Holding Companies and Special Purpose Companies established in the QFC. Earlier this year, we introduced a new credit for tax losses scheme, which entitles QFC-licensed firms to receive cash payments for tax losses incurred in the first two accounting periods of operation. These changes have been positively welcomed by the business community and resulted in an increasing number of firms choosing QFC. Our new approach has yielded considerable success

Salman Hassan Al Thani, CFO and Director of Tax, QFCA

Qatar is widely expected to be one of only two GCC nations to maintain budget surpluses in the coming year.

What are the areas of diversification QFC is hoping to achieve? We are welcoming more Professional and Business Services firms; Corporate Headquarters; Management Offices as well as Treasury Functions; Single Family Offices; Trusts and Trust Administration Services; Support Service Providers; Special Purpose Companies and Holding Companies into our foray. The QFC Authority has approximately doubled the number of licences compared to the previous year. This is in response to the needs of the country, in particular the demand for supporting services generated by the large infrastructure and economic diversification projects. There are now an increasing number of active licensees that are essential to Qatar’s diverse development plans. Firms include all types of consulting services companies, legal services, IT services, marketing and brand management services, PR firms, advertising agencies, recruitment firms, accounting/ audit firms and many others. What are the challenges QFC is anticipating to face in the midst of rapid development of the country? In the Tax department we have

ADVERTORIAL

Qatar Financial Centre

Kawader’s development programmes and internship placements are supportive to the Qatar National Vision 2030 by encouraging the growth of a nucleus of highly able and skilled Qataris.

regular dialogue with clients and peers, and ensure proper involvement with all firms and the business community. Additionally, we recently published our internal “QFC Tax Manual”, which is intended to help clarify the rules and regulations, and provide our business community with greater certainty and clarity in all taxrelated matters. We also reduced our licensing turnaround times, while increasing efficiencies across the QFC platform by implementing an E-Service channel for all our application processes to provide a more efficient and personalised service to our clients. What are the main objectives of QFC in relation to the Qatar National Vision 2030? At present we are seeing substantial public infrastructure investment in diverse projects such as Lusail city, the Qatar Rail project, the new Hamad International Airport, the

STAT FACTS

7.7% Expected growth in Qatar’s economy this 2015 despite low oil prices

new Doha Port and Qatar Foundation’s Education City. We have partnered with the Qatar Finance and Business Academy, a QFC entity, to introduce the highly successful Kawader programme. This innovative learning initiative continues to provide young Qataris with the required skills to lead a successful career in the financial and business sectors. Kawader’s development programmes and internship placements are supportive to the Qatar National Vision 2030 by encouraging the growth of a nucleus of highly able and skilled Qataris with the ability to sustain the country’s rapidly progressing private sector. At the QFC we are contributing to the realisation of the Qatar National Vision 2030 through our role as a provider of legal, regulatory and structural support to local and international firms that are necessary to Qatar’s journey towards economic diversity.

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DATA & TRENDS

Risky Business

How riskaverse are you? It’s fundamental to the CFO’s role that he or she will give numerical shape to the Risk Officer’s understanding of current and potential risks. These risks can not only represent potential threats to the business but in effect be the lifeline it needs for growth and fresh opportunities. Deciding what risk is and how much of it you want the business to entertain is a core part of the CFO’s remit - but are you equipped to take the necessary steps? Zenifer Khaleel explores risk appetite and goes in quest of some key risk fundamentals

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DATA & TRENDS

Risky Business

As far as a company is concerned, the term ‘risk’ is largely taken to refer to financial exposures. However, in reality, anything that poses a threat to the achievement of the company’s goals or an event which adversely affects your company; is perceived as a risk. There is a common conception that successful CFOs aren’t averse to a modicum of risk. On the contrary, rather than facing risks as they come, a successful CFO is who one identifies and anticipates potential risks and manages them appropriately.

Risk management

There is a common conception that successful CFOs aren’t averse to a modicum of risk. www.thecfome.com

So the first questions we should ask are: what is risk and how much of it do you want? Risk, in simple words, is the potential to lose something of value. It can be measured by the impact an event has on the financials, reputation, health and safety of you or your employees and the community. Most companies evaluate one risk at a time. The amount of risk to be retained by the company is most often weighed against the premium or other savings for assuming each risk. It is less common to find companies that make risk transfer-risk retention decisions based on their entire portfolio of activities. Doing so however, could help companies derive the greatest value from their available riskbearing capacity: its financial capacity and tolerance for taking risk. This approach is known as intrinsic risk valuation (IRV).

DATA & TRENDS

Risky Business Risks with rating as A are of critical importance. They are High impact/high probability.

impact criteria, the next step is to define the probability criteria. This is a much simpler exercise. You are required to jot down the potential risk facing the objectives that your organisation wants to achieve and evaluate the impact and probability of each risk. Then you compare each risk against its position in the following matrix and plan the risk mitigation method accordingly.”

Risk ratings and calculation Mohamed Poonawala, Business Process Officer (SOP Projects) of Lulu International Exchange

The intrinsic value of each risk, or layer of risk, is defined as the company’s internal cost to retain, or self-insure, the risk at the break-even point over time. The intrinsic value is the sum of the expected (average) cost of a loss or losses to be retained, a risk charge based on the difference between the expected value of losses and a highconfidence interval outcome (the equivalent of 95 percent), a charge for the ‘surplus’ capital needed to support taking the risk, and any other expenses associated with retaining it. Remember that all activities involve risk in some shape or form, and without risktaking, nothing is possible. In quantifying risk and communicating the acceptable financial thresholds of risk to the Board, the CFO can actually define the organisation’s appetite for risk.

Assessing risk Among the many methods to assess risk, perhaps the best way is through its impact and probability. Mohamed Poonawala, Business Process Officer (SOP Projects) of Lulu International Exchange, comments: “Every organisation should identify the importance they attach to each value (reputation, financials, health, etc.) and what level of impact or effect that event would have. The impact ranges from trivial to catastrophic. A loss of AED 5000/- may be trivial for some organisations, but might be a major risk for others. In the same way, if an organisation attaches immense importance to its reputation, a local complaint might also be categorised as a major risk event. Once you have defined the risk

Let’s assume a company wishes to open an outlet in a particular area during the first quarter of the year and ensure that it breaks-even by the end of the year. The financial team should work out each risk element based on impact and probability. The next step would be to compare each risk against its position in the following matrix and plan the risk mitigation method accordingly. Risks with rating as A are of critical importance. They are high impact/high probability. These are your top priorities, and are risks that you must pay close attention to. The plan should be to closely monitor them and bring them to a lower risk rating if possible. Risks with rating as B are of high importance if they do occur. For these, you should do what you can to reduce the impact they’ll have if they do occur, and you should have contingency plans in place just in case they do. Risks with rating as C are of moderate importance. If these

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DATA & TRENDS

Risky Business

Impact

Risk Matrix Catastrophic

Severe

Major

Moderate

Minor

Trivial

Rare

Unlikely

Possible

Likely

Almost certain

Probability

things happen, you can cope with them and move on. However, you should try to reduce the likelihood that theyâ&#x20AC;&#x2122;ll occur. Risks with rating as D are low and you can often ignore them. However, it is important to note these risks - they may have the potential to grow into something more serious.

Understanding risk Once a CFO has a clear picture of the nature and impact of the risks, he or she can review the business plan with the help of the rest of the finance team. Brainstorming with the accountant, financial adviser, staff, suppliers and other interested parties, will help to get many different perspectives on the level and range of risks to your business.

The potential risks in the above scenario of opening an outlet would be: S No. Risk Impact Probability Risk Rating 1 Changes in law Moderate Possible C 2

Legal case against any management team member

Catastrophic

Rare

Grant not acquired to open the outlet

Severe

Unlikely

4 High employee turnover Major Almost certain A 5 Incorrect estimates of revenue Major Unlikely C 6

Health concerns for the employees

Minor

Possible

Bad publicity in the community

Catastrophic

Possible

8 Recession Moderate Possible C 9 Increase in competition Moderate Unlikely C 10 Introduction of new technology Trivial Unlikely D

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DATA & TRENDS

Risky Business

The worst case scenario could be the result of several risks happening at once.

The main questions to be addressed are: • When, where, why and how are risks likely to happen in your business? • Are the risks internal or external? • Who might be involved or affected if an incident happens? Use flow charts, checklists and inspections to assess your work processes. Identify each step in your processes and think about the associated risks. Ask yourself what could prevent each step from happening and how that would affect the rest of the process. The only thing constant in business is uncertainty. Thinking about the worst things that could happen to your business can help you deal with smaller risks. The worst case scenario could be the result of several risks happening at once. Depending on the nature of the business the CFO and the CFO’s team should be well-equipped to determine which events may adversely impact project teams and prevent them from achieving their strategic objectives. Employees should be trained to recognise and handle these events. A few steps in effective risk management include • Examining different scenarios that may occur in your business. Identify any events that could trigger undesirable occurrences. Once you identify your business risk, establish a contingency plan that defines the scope of the

STAT FACTS

$200b The value of business lost in the GCC by companies not taking enough risk

43% The scale of repeat driven type risks impacting a business

problem, when the plan should be put into action, the sequence of activities to take and who will accomplish each task. • Break down possible risk sources to reveal why they may occur to establish the likelihood of each risk happening and the cost or impact if the issue did arise. Qualify risks in terms that apply to your business, such as a low, medium or high loss of production time. • List common risks associated with conducting business in your industry. Be prepared to identify preventative measures you can take to reduce risk from occurring or lessen the impact to acceptable level. Examine sample contingency plans and disaster recovery plan templates available from resources that include the Small Business Administration website. “Risk identification and assessment is only the first part of the process, albeit an important one. If a CFO doesn’t know a risk exists or understands its seriosusness, he will never be able to manage it well. Most organisations are paying a lot of attention in assessing risks correctly as is a key element in business planning. However, it is equally important to devise plans to control the risks and monitor them. Sometimes many risks may occur at once. Risk management (as they say in business), is a never ending process,” explains Mohamed.

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CONNECTIVITY

Finance & Technology

The need for speed? The CFO and the technology imperative In a region where 85 per cent of finance departments still use Excel, what’s the role of leading edge developments like in-memory treasury analysis and e-banking architecture? Are regional CFOs leveraging the full benefits of contemporary technology? CFO magazine investigates…

Finance and technology are two game-changing entities for any business. Optimum competency in these two fields will provide a CFO with immense advantage in his or her skill set. As the need for visibility and transparency in volatile business markets increases, CFOs have resorted to technologies such as the cloud, mobile technology and social media to ensure financial proficiency. They have adopted applications that have analytical, mobile and social capabilities embedded into the workflow. With this immense body of data at their fingertips, CFOs are empowered by exciting new technological advancements in the Finance arena of modern accountancy management. Organisations are no longer content to focus on containing costs and keeping score. Modern finance seeks to change the game, leveraging its operational knowledge and analytical expertise to provide

Finance and technology are two gamechanging entities for any business.

management with data-driven insight and forward-looking guidance on where to invest to drive innovation and growth. The realities of this are underwritten in the following comment from Rima H Ahmed, Director of Finance & Shared Services – Middle East Region of Manpower Group Middle East: “CFOs as collaborative partners and transformation leaders of a business help drive strategy and innovation. The right technology forms an important aspect of effective management of that transformation. Technology helps accelerate transformation to drive efficiency & effectiveness across the business. Using

technology, CFOs are able to be more innovative and creative in their approach, ultimately delivering results and meeting strategic goals.”

The benefits of speed-driven technology As they hold the reins of the modern finance function, CFOs have begun to recognise the value of digital technologies for finance and the business at large. They are committed to upgrading the skills of finance professionals with next-generation applications that are analytical, mobile and social. A large number of CFOs are sponsoring enterprise-wide

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CONNECTIVITY

Finance & Technology

provides CFOs wth the right level of information, speed and transparency on a real time basis, in order to verify the transactions and help in quick decision making.”

Effective treasury and cash flow management forms a critical part of a CFO’s role.

Automation is the key

Rima H Ahmed, Director of Finance & Shared Services – Middle East Region of Manpower Group Middle East

transformation projects where finance can bring its operational knowledge, analytical insights, and budgetary discipline to bear on behalf of the business. They are empowering their finance teams with sophisticated analytical tools and modern applications with embedded business intelligence to enable this real-time, forward-looking planning and decision-making. Rima continues: “Effective treasury and cash flow management forms a critical part of a CFO’s role and helps ensure funds are available as and when required to facilitate growth plans and maintain a sustainable successful business. Having the

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right technology that has a fully integrated online transparent treasury management portal helps drive speed and efficiency of transactions, especially if working on a multi-currency agreement - wherein both the speed of the FX platform and time taken are critical elements affecting the outcome of business decision. An integrated and effective fiduciary management system helps CFOs in providing the information and advice required to set up appropriate investment and well-diversified strategies in addition to continuous monitoring and oversight of risk. In short, technology

Accounting processes of today comprise cloud technology, cashless payments, digital currencies, social media apps, mobile banking, FX robots and much more. Many companies have already implemented financial close automation to completely transform back office finance from a tedious, timeconsuming set of tasks to an efficient process that provides transparency and insight for better control with less effort. These changes have delivered rapid and measurable results quickly and effectively. Cloud computing software has begun to take over the financial realm with its ease and agility. It allows companies to break down organisational barriers and address the changing behaviour of customers, competitors, markets and economic conditions. Technologies like dashboards and real-time information access are changing the nature and structure of the accounting department and the role of the CFO. Data and efinancial reports can be securely entered from anywhere in real time through smartphones and tablets. Online Treasury Management enables teams to efficiently monitor account activity and access the information they need. Account information, balance sheet figures and other data reports are available 24/7 for perusal.

CONNECTIVITY

Finance & Technology CFOs have begun to realise that improving connectivity is the main priority while managing the functions of banks and corporate treasury departments. The need for complete visibility of their operations, accountability, and risk and fraud control continue, as do the efforts of the banks and other third-party cash and treasury management systems and service suppliers to develop the solutions required. One of the most recent and exciting developments in the treasury management space is the introduction of mobile corporate banking. Banks and financial software vendors are launching a number of mobile corporate banking applications that enable treasurers to remotely authorise payments, view trade documentation such as letters of credit and conduct electronic invoice presentment and payment on a mobile device. Many banks are automating labour-intensive processes to cut personnel costs. Business intelligence gained from data analytics is helping banks grow their relationships with corporate customers. Regulatory compliance is another area where technology is helping banks. For one, it enables consistency in data reporting and real-time storage and retrieval, helping banks evaluate risks better. Secondly, it helps banks gain new insights by layering external information on internal data. Technology also allows increased transparency of bank operations, helping with both regulatory compliance and offering customers real-time information on accounts. If there is a dispute over online

STAT FACTS

400x The increase in speed in banking transactions since 1965

85% The volume of companies still driven by Excel spreadsheets

transactions, a bank could offer updates to customers on the status of their cases, thereby avoiding calls to customer support centers or branch visits. Also, analysis of customers’ transaction patterns could help the bank identify potentially fraudulent activity and reduce risk. Enterprise-wide cash management systems and services, incorporating not only the traditional FX and other instruments but also elements relating to the physical production of goods and services, such as energy costs and commodity forecasts, are now becoming essential. The cash and treasury management system is fast becoming the working capital engine of the corporate treasury department and core to the company’s success. Eventually, corporate treasurers will simply need to decide the best combination of the everincreasing range of internetbased services to create a solution to fit their particular needs.

The power of the net The Internet now seems to be driving the future of cash and treasury management systems: cloud computing and downloadable apps have made the finance function easy and accessible. Many of the banks are reviewing the possibility of implementing an app-based approach to the provision of their electronic banking services. Several corporate treasury management systems suppliers are also building their own versions of app markets. Although networking has always played an important part in cash and treasury management conferences and other events where companies,

bankers and suppliers meet and socialise, web-based business networks will make interaction between cash and treasury management professionals so much easier. The Internet is omnipresent and free. Business networks are not only beginning to transform the way cash and treasury products and standards are developed and supported, they are also offering treasury professionals a new opportunity for sharing their expertise and experiences. For any organisation, security and data privacy are always at the forefront. The practical risk for most companies is their ability, willingness and commitment to the change management processes and education of their employees when rolling out a new cloud application or ERP system. The enforcement of proper technology into the operational system will accelerate business intelligence and analytical skills which will in turn aid the overall growth of a company. CFOs have to recognise the need for proper technology and implement it in a way that suits the best interests of their company. Most technology evolutions follow a consistent path: costs reduce over time as adoption of technology increases. It stabilises the system as solutions become robust and feature-rich. “Technology is being used to break down barriers whilst still maintaining controls and governance and enabling the businesses to operate in a more robust matter. By increasing the flow of information, and understanding it from different angles, it supports more effective decision making processes for the modern CFO,” says Rima.

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FEATURE

Oil Prices

Rising above the oil spill Always the biggest economics and trade news story, it’s a truism that the fall in oil price has considerable implications for CFOs in their calculations of foreseeable operating costs, margins and resource availability. What are the factors now confronting practitioners in the UAE? Associate Editor Zenifer Khaleel looks at the issues and opportunities that this largely unforeseen climate has introduced

Last June, the world - and many of the oil-producing nations of the Middle East - reeled under the shock of falling oil prices driven by over-supply and a more powerful US dollar. This ‘oily’ predicament has posed significant challenges to GCC markets, where for the first time in more than a decade, revenues are endangered by the new fact of life that the wholesale price may be dangerously close to the base production cost. With the historic dependence on commodity exports, the new realities reflect how vital it is to foster economies away from total dependence on commodities. The UAE, for example, has always been quick to realise that focusing on diversifying

economies will help to ensure sustainable economic growth and stability - but while many near-neighbours may share the vision, in practical terms the diversification is far from realised and they are now ‘feeling the pinch’. Notwithstanding, in many cases the challenge is that government spending plans were planned for a longer-term view, and they are not necessarily

unsustainable. Ambitious plans for investment and infrastructure building across the region aims to stimulate growth in the medium term, and could also raise long-term productivity.

UAE not affected much… It’s easy to pay lip-service to the views of trade pundits and industry experts who state that the impact of the price drop

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FEATURE

Oil Prices

on Gulf countries will not be monumental due to the massive fiscal reserves in the region. Yet in reality this tends to be more of a comment about the UAE and KSA than it does about the fossil fuel producers as a whole. Let’s take the UAE, for example: a recent analysis by EY showed that domestic mergers and acquisitions deals in the UAE account for 45.7 per cent of the total number of M&A deals in

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the Middle East, making it the leading country in the region. According to the analysis, as many as 50 acquisitions targeting UAE based companies were announced last year. As an acquirer, the UAE accounted for 53 deals or 23 per cent of announced deals in the region, while in value terms the country led the region with 46.4 per cent of deals worth US$7.19bn. The UAE dominated as the target country with the largest number and value of inbound mergers and acquisitions deals in MENA which points to the strong confidence of international investors in the UAE. The UAE’s Purchasing Manager’s Index (PMI) for January showed strong improvement in business, indicating that the non-oil private sector continued to grow despite sharp decline in oil prices. Last year the economy of the UAE grew by more than 4 per cent. While this year it may be slowed by lower oil prices, economists say the part of the country’s GDP that is not heavily dependent on hydrocarbons to make money will still flourish, including transport and tourism. Dubai’s economy is much more diversified than others in the Arabian Gulf. Lower oil prices are expected have a multidirectional effect - while they will lead to contraction in the oil-related sector, they will have a positive boost in retail, tourism and the transportation sectors.

The ambivalent economy The oil crisis has resulted in increased debt defaults, rising interest rates, rising unemployment, increased recession, defaults on

Dubai’s economy is much more diversified than others in the Arabian Gulf.

derivatives, drop in stock market prices and many more economic tragedies. The tumultuous second half of 2014 has left CFOs concerned about their company’s ability to remain profitable amidst such huge challenges. But CFOs, in general, view these conditions as temporary. Economic confidence is prompting organisations to focus on growth and many are turning to their finance departments to not only crunch the numbers but also devise strategy on finding new sources of revenue generation. Commerciallysavvy accountants who can provide financial principles to operations, IT, sales and marketing departments are well positioned to help steer their organisations towards greater economic prosperity. Fast growth is easier to achieve in sectors driven by innovation, and launching new products or services can drive considerable growth quickly. But under such precarious market conditions, businesses should opt for gradual, organic growth that is more manageable and involves less risk. Rigourous cost management and a disciplined drive for operational efficiencies help fuel that profitability. But even as CFOs continue to drive the next iteration of cost take-out, to maximise revenue growth they also need to keep strategic reinvestment in the business on the table. That may require a shift in cash-allocation strategies. For example, strategic capital spending and market expansion may be needed in lieu of returning cash to shareholders or dipping into cash reserves to pay down debt.

FEATURE

Oil Prices

Expanding in troubled times Before thinking about expanding the business, a CFO must first have a stable platform from which to take off. He or she has to iron out the creases in initial operation, including making it profitable. Becoming personally involved in all the functions of your business is the first prerogative. Then you can detect weaknesses that can be remedied and changes can be made rapidly and at less exposure to loss. A key to successful transformation will be finding the right balance between global and local operations that support the growth agenda. Companies should consider a globally integrated operating model that pulls back- and middle-office functions into a single organisation agile enough to react swiftly in

Despite cost pressures, CFOs may want to boost their investment in digital technologies.

today’s volatile markets. Some are progressing rapidly toward such an integrated structure. Their efforts show that changing the operating model to balance local and global requires close collaboration between the CFO and an expanded ecosystem of peers, customers and suppliers. New markets can mean new compliance requirements. CFOs may need to ensure that their organisations are agile enough to respond to more complex government regulations, including management of the evolving International Financial Reporting Standards as well as mounting pressure to fulfill environmental and labour obligations across multiple geographies. CFOs may need to understand supply-and-demand forces more

accurately if they are to drive the best possible business outcomes. Analytics can help them keep pace with the increasing volume and velocity of data as business goes digital. Analytics can also give them real-time, in-quarter insights into customer trends and preferences. Expanding your business means you will be taking on more risk. Once you have made it and are ready for growth, you will become exposed to new dimensions of risk. And the only way to avoid risk is not to make mistakes. This is where a Board of Advisors becomes an important participant in the growth programme, and this means enticing the best brains both in the business and outside it - to form an advisory panel that will become a cost-free insurance policy against making mistakes. Despite cost pressures, CFOs may want to boost their investment in digital technologies - or risk of being left behind. Retail and consumer electronics are leading the way in leveraging cloud computing, mobile technologies and social media to deliver the personalisation that their digitally empowered customers now demand.

The ‘Golden Rule’ still applies… The golden rule of running a business is get up and get going come hell or high water. CFOs of the day cannot afford to withdraw from any crisis and resign to fate. With strong survival instincts, they can steer their company to rise above the current oil spill and float on stable waters.

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FEATURE

Getting Finance

Obtaining secondary funds However volatile or indecisive market conditions may be, CFOs are always displaying a pervasive belief in near-term growth. A CFOâ&#x20AC;&#x2122;s sole focus is to seek access to liquidity and maintaining sustainability. The purpose of securing funding is to enable your business to grow and to enable shareholder value to increase.

Funding is the catalyst for taking business to the next level. However, finding the sources to get the appropriate form of funding can be a painful process. CFOs should use their experience to understand the pitfalls and advantages of funding so that he can help lift the cloud of uncertainty associated with it. If the right partners can be found; it can make a profound difference to the business. External investors bring much more to the business than just money, in terms of experience, insight, expertise, infrastructure, channels to market and so on.

Obtaining funds There are no short cuts to

obtaining funds. Getting a brilliant idea to expand your business is the first step. Providing adequate and informative data that supports a good business idea and ultimately sell the idea to potential investors is the harder step. In order to attract secondary investment a company will have to demonstrate a solid understanding of their core customers as well as size of the potential market and what share the company could hold in it. Proving this will require a well established sales record with accurate data. There are many ways a company can obtain secondary

funds depending on the stage your business is in. 1) Crowdfunding Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the Internet. Crowd funding allows for a wider pool of small investors with fewer restrictions and is ideal in the early stages of a business. Though a relatively new concept in the UAE, more companies are attracting a broader array of funders, who typically earn rewards or, sometimes, equity for the money they put in to back new products, services or ventures.

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FEATURE

Getting Finance

Over time, the bank will become familiar with the company and the entrepreneur will be in a better position to seek additional banking products – including loans – when needed.

The number of online platforms that link project creators and their pitches to individuals has grown in recent years and now includes Yomken.com, Aflamnah.com and Eureeca.com, among others. 2) Angel Investors Angel investors are affluent individual/group of individuals who pool their research and resources to provide capital for a business startup usually in exchange for convertible debt or ownership equity. After doing their due diligence, these groups will determine if your business meets their requirements, and if so, will schedule a meeting to

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gather more data. Investments can range from AED 50,000 to AED 500,000 or more. Angel investors usually have high expectations and are looking for solid results. In the UAE, you have startup accelerators like SeedStartup, angel networks like Envestors, and early stage VC funds like Wamda, twofour54, G Capital, Y+ Ventures. The Republic UAE is a Youth Network which puts young entrepreneurs in touch with wannabe angel funders. Companies like Virtuzone and Turn8.com (from Innovation 360) are helping companies in the angel investment/startup incubation segments.

3) Bank Loans /Venture Capital In the later stages of a growing business, the nowincorporated business might need a bank loan for various needs, including operating capital and long-term growth. To secure this loan, financial institutions will require several years of financial information on both the business and the entrepreneur. They will want collateral to secure and guarantee a loan. To facilitate the process, the CFO has to engage with the financial institution at the earliest stages of the enterprise–not necessarily for a loan at first, of course, but for a merchant account, credit cards and a checking account. Over time, the bank will become familiar with the company and the entrepreneur will be in a better position to seek additional banking products – including loans – when needed. For some very fast growing companies, the organisation reaches a point in its life cycle when venture capital funds are required for hyper growth. In this case, the company may need huge amounts to enter new markets, expand sales or add new products. Once again,

FEATURE

Getting Finance

CFOs should clearly evaluate the critical numbers in the business. There is always one number that is more indicative and predictive of your success than any other and you must decide what it is.

these investors, who have money to deploy, conduct their due diligence to ascertain the viability of the enterprise. 4) Purchase order funding Purchase order funding is transaction-based financing that can be tailored to specific orders and/or seasonality in sales. Access to purchase order funding can enable a CFO to not worry about having to figure out how the company is going to manage the seasonality of the companyâ&#x20AC;&#x2122;s sales since it provides enhancement and a guaranteed form of repayment to a supplier. It is incremental in nature to a traditional line of credit in terms of security interests and rights of repayment. This type of funding is not necessarily tied to the companyâ&#x20AC;&#x2122;s balance sheet or income statement. Purchase order funding is a perfect solution when supplier credit has been maxed out or completely gone away. International suppliers demand guaranteed forms of repayment such as cash payments and/or letters of credit prior to goods being produced and shipped. It is an excellent tool to implement a safe and mutually acceptable form of repayment to overseas suppliers of presold goods. Additionally, it can enable todayâ&#x20AC;&#x2122;s CFO to demand increased supplier credit in the future by showing good faith and securing payment to keep a valued supplier happy.

Maximising profitability Maximising profits in the times of expansion, increased borrowing and high interest rates is a next to impossible, if

STAT FACTS

50-70% Rejection rate for SME bank lending in the UAE

a CFO does not have a proper strategy in hand. The process of developing a business plan forces the CFO to think through every critical element that will determine the success of the business. This includes selecting your products and services, developing your marketing, selecting the right people, getting the money you need, designing your sales process, arranging for distribution, service and collection of payments, and many other factors. CFOs should clearly evaluate the critical numbers in the business. There is always one number that is more indicative and predictive of your success than any other and you must decide what it is. It may be number of sales, size of sales, profitability of sales, number of repeat purchases per customer, or rate of growth. CFOs should be able to provide valuable insight into the decisions that create or protect marginal contribution across the value chain, armed with a detailed understanding of how and where growth in sales leads to growth in profits. They should offer an objective assessment of fixed and variable costs, and then identify how a reduction in costs can maintain revenues while improving profit contribution. The CFO and finance function must be positioned appropriately within the organisation to be able to influence decisionmaking and action. Additionally, finance professionals must improve communication and influencing skills to ensure that their voice is heard and their advice is valued and acted upon.

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MARKET WATCH

Business Analytics

Predictive accounting trend or powerful force for change?

Even world-class CFOs tend to forget that traditional forecasts and projections are actually a snapshot of current conditions pushed illogically into the future as a platform for future scenarios. Yet todayâ&#x20AC;&#x2122;s CFO has new and dynamic tools for mapping trends, potential risks and likely performance. Welcome to the world of predictive analytics. Zenifer Khaleel tells us moreâ&#x20AC;Ś

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MARKET WATCH

Business Analytics Cause and effect scenarios of daily business operations widely differ from what financial models project.

Contrary to the notion that the only purpose of managerial accounting is to collect, transform, and report data, accounting systems are preening themselves to influence behaviour at all levels of the enterprise. From the desk of the CEO down to each employee, accounting analysis is supporting decision-making, stimulating investigation and discovering relevant information. In the last few decades, management accountants have made significant strides with activity-based costing (ABC), in improving the utility and accuracy of the costs they calculate and report. This brings us to the concept of predictive accounting. It projects future financial performance using a statistical understanding of an organisation’s processes. It seeks to understand the future. based on the observation that much of an organisation’s work is repeatable.. The value, utility, and usefulness of this information increases at an exponential rate from cost accounting to cost analysis to decision-based costing.

Predictive Business Analytics Cause and effect scenarios of daily business operations widely differ from what financial models project. Hence, a company has to know how non-financial factors impact financial results. Sensing this urgency, CFOs are now using Big Data and Predictive Business Analytics (PBA) to process large and complex data sets. Many organisations have developed specific

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applications or practices such as forecasting, modelling, and contingent planning to answer their analytical needs. However, these tools can vary in terms of their usefulness, relevance, and responsiveness. What’s truly needed is PBA that is rooted in a structured, continuous, and data-driven process that enables an organisation to select actions. PBA’s purpose is to identify how the future might look and what subsequent actions are needed. PBA is oriented to an organisation’s enterprise level and based on analysis of relevant business data and drivers (both internal and external) that have strong and traceable links to financial results and operational performance Since decisions only affect the future, the predictive view is the basis for analysis and evaluation. The predictive view applies techniques like whatif analysis and simulations. The projections are based on forecasts and consumption rates ideally derived as calibrated rates from the historical, descriptive view where the rate of operational work typically remains constant until productivity and process improvements affect them.

Closing the Accounting Gap The majority of value derived from cost information for decision-making is a descriptive view. It’s primary value is in planning the future (such as product and customer rationalisation), marginal cost analysis for one-off decisions, or trade-off analysis between two or more alternatives. There is a gap between what

MARKET WATCH

Business Analytics

managers want and what accountants provide. Closing this gap should be a high priority for every CFO. Typically, the CFO function creates the planning information for the line managers. But these days, increased volatility is perceived as the new normal. Fluctuating components include consumer preferences, exchange rates, and commodity prices etc. Trends can change overnight and unanticipated shocks can come from global repercussions in the market. This means that traditional practices like detailed annual budgets and five-year plans can quickly become obsolete. The shift is toward more agility, speed, frequency, and visibility in reporting of all information, not just managerial accounting information. More importantly, the reporting must more quickly help users gain insights

and inferences. Rather than the accounting department annually producing detailed line-item expense budgets, the shift is toward rolling financial forecasts with less detail and more summarised information as the planning horizon stretches into the future. The sources that are needed to calculate the level of resource capacity and spending come from a variety of other forecasts, such as demographics and sales plans. Predictive analytics are needed for each source, and they are all eventually aggregated in the financial projections.

The drawbacks Predictive analytical modelling can have many pitfalls that might seriously and wrongfully skew the results. For example, wrong or out-of-date data going in can result in an incorrect prediction coming out. So can using irrelevant data points or

Predictive analytical modelling can have many pitfalls that might seriously and wrongfully skew the results.

giving them too much weight in the overall consideration. Mistaking correlation for causation is yet another common folly. A related misjudgement is investing too heavily in analytic tools. Companies often buy expensive and complex software that is just too sophisticated for their needs. The majority of predictive project failures come from data errors or data weighting mistakes wherein the wrong data elements are inappropriately deemed important. One simply cannot arrive at a correct answer if the beginning dataset is flawed. Most companies donâ&#x20AC;&#x2122;t have a system designed for this type of economic analysis. Their accounting systems are designed for reporting, not analysis. This is why various departments, such as engineering, create their own system to accommodate modeling fixed, semi-fixed, and variable expense behaviour. Most managerial accounting and budgeting systems will need to be upgraded to reflect widely varying demand behavior, not just for forecast customer orders, but arguably for any type of economic analysis. Predictive analysis is a broad umbrella term that encompasses data mining and predictive modelling, experimental design, time series forecasting, operations research and text analytics. It can help a CFO make an educated guess about the future of financials - but it neednâ&#x20AC;&#x2122;t necessarily provide a sure fire guarantee to ringing in the business profits.

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1994 - 2014

We have moved to our new Middle East Head Quarters in Business Bay. To facilitate and support our expansion drive for the coming years and to serve our esteemed clients better we have moved to a fully-owned state-of-the-art office facility. We stay committed to our vision to provide the best and most professional Accounting, Audit, Business & Management Consulting services to all our valued clients.

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Evolving Workplace

Millennials in the workplace is your business ready? Millennials, as the youngest professional generation, form an integral part of our business workforce today. Yet, many business owners fail to fully understand their aspirations, working styles and career expectations – often at their own peril. In the following feature, Savio Tovar, Director of Technical Operations, Avaya Global Growth Markets, assesses the changing landscape and shares key insights…

Take a look at your desk. At first glance it may not seem too different to what it looked like 15 or even 20 years ago. You probably have a computer of some sort, a desk phone and a notepad and pen – all items you would have had in the midnineties. But look more closely: somewhere on your desk is probably your mobile phone, and the chances are it’s a smartphone. The ubiquity of the smartphone is almost symbolic of the revolutionary change we are going through. Communications are everywhere. We are constantly inundated with messages, tweets and status updates pretty much wherever we go – something that was only just beginning 15 or even 10 years ago. Before then, people didn’t ‘google’ everything, nor did they arrange their social lives

on Facebook. In fact ‘google’ didn’t officially become a verb until 2006; just seven years ago. That’s how fast things have been moving. The point is the millennials – the single largest demographic ever (1980 to 2000) – will soon be marching on the business world in even greater quantities. In fact, they’ll make up 75 per cent of the workforce in less than 10 years. And this is a 75 per cent that is wired differently – not only have they never known a world without the internet, they also don’t remember a world that isn’t instant and collaborative. Owing to their alwaysconnected lifestyle, they expect immediate answers and constant engagement. These millennials will have a profound impact on the way businesses operate. While young, connected,

Quick fact!

Savio Tovar, Director of Technical Operations, Avaya Global Growth Markets

tech-savvy types bring many benefits to the workplace and are expected to revolutionise the way we work, it’s worth considering whether we are ready for this wave of change? Constant bombardment from a range of media, for example, is entertaining, but it’s not always productive. Today, employees have to wade through gigabytes of information day in, day out, just to get their jobs done – from e-mails, RSS feeds, twitter, Facebook and other sources. In fact, many people I speak to feel that they are losing control of information they themselves have subscribed to. Sadly, much of this is down to the fact that typical working environments weren’t built to cater for this mass influx of information: they aren’t set up to deliver instant answers; they don’t encourage or enable

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MARKET WATCH

Evolving Workplace

Working with millennials - top tips! BE PREPARED TO PROVIDE CONSTANT COACHING AND FEEDBACK. Millennials have spent a lifetime getting regular, near-instantaneous feedback. Whether it’s a lightning-quick response to a text message or school tests that are computer-graded and posted to an Internet gradebook within an hour or two, this is how this generation has been conditioned to live, work and play. The good news is that while feedback needs to be continual, it doesn’t have to be involved or formal: the aforementioned text, e-mail, or two-minute conversation can do the trick.

APPRECIATE THAT MILLENNIALS SEE WORK AS A MEANS TO AN END — BUT NOT THE END. Millennials largely are children of boomers and have witnessed, up close and personal, the devastation of layoffs, underemployment and eroding pay and benefits for their parents. They can be motivated to work hard, but are more likely to reject the 60-hour weeks their parents put in.

ILLUSTRATE THE POWER OF SPENDING MORE TIME WITH PEOPLE THAN WITH ELECTRONIC DEVICES. Millennials are technologically savvy — and proud of it. But numerous studies have found them wanting in the “soft skills” necessary for long-term career success: integrity, professionalism and the ability to interact effectively with superiors, colleagues, clients and customers. None of those skills can be learned with eyes glued to a smartphone.

Source: http://www.huffingtonpost.com/ - by Stephanie Nora White and Tom Tischhauser

collaboration and the technology isn’t capable of delivering the experience we’re used to getting at home. As time marches on, businesses that continue to rely on their current systems will find they are swimming against the tide and sooner or later they will go under.

Preparing for change Organisations need to help their

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employees find a way to make this range of media work for them. There are several ways. For example, I am part of several virtual teams and, using tools like communications groups and favourites, I can define and organise them within my social media outlets. This means that messages pop up differently for each team or group and indeed for subgroups within the group,

and I’m able to handle each of them differently depending on how involved I am. As a result, I’ve been able to reduce the time I spend reading the flood of e-mail communications each day. Another good example is the way people use Instant Messaging (IM) to ask and answer shorter questions, cutting the daily e-mail flood considerably. The point is, if we’re going to give people the tools to collaborate, we have to give them the power to be able to use them productively. Organisations need to create effective and engaging working environments for employees, and technology can really help here. For example, I use a tool that allows me to decide how – i.e. via which media – people are able to contact me, yet every message, regardless of the format it comes in, ends up in a single, centralised inbox. I can also choose how I want to access those messages – as text or speech. When I say messages, I mean video, speech, IM and chat, e-mails, Twitter and SMS. These sorts of tools are opening up huge communication channels to timepressured employees.

Are you in control? In the end, what it all boils down to is business control of social and other media. For many employees the word ‘control’ makes them very wary and I can understand why. But in this case ‘control’ is about allowing employees to get a better handle on the deluge of information they are confronted with, giving power back to the people if you will. And for a generation of independent, connected, young millenials, my guess is this should go down well!

MARKET WATCH

Evolving Workplace

Understanding millennials

THE WORLD OF MILLENNIALS - DATA CRUNCH 75%

75%

Millennials in the global workforce by year 2025

73%

of millennials believe that businesses are focused on their own agenda rather than the society

6/10

millennials said a sense of purpose is part of the reason they choose to work for their current employer

of millennials believe that businesses are having a positive impact

84%

of millennials put greater emphasis on making a positive difference in the world over workplace recognition

Working with millennials

65%

41%

believe that rigid hierarchies and outdated management styles failed to get the most out of younger recruits

of those questioned said they would rather communicate electronically than face-to-face or over the telephone

77%

believe that flexible working hours would make them more productive at work

52%

millenials have top priority for career progression, followed by 44% for competitive salaries

71%

expect and want to do an overseas assignment during their career

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MARKET WATCH

Evolving Workplace

The role of technology

59%

say that an employer’s provision of state-of-the art technology is important to them when considering a job

46%

think their manager don’t always understand the way they use technology in their work

78%

89%

said that access to the technology they like to use makes them more effective at work

regularly check work e-mail after work hours

Innovation – a key driver

78%

62%

of millennials believe that innovation is essential for business growth

95%

say it is acceptable for business to make a profit from an innovation that ‘benefits society’

60%

believe that they work for an innovative business

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of millennials would describe themselves as innovative

66%

2/3

of millennials say innovation is a key ingredient in making an organisation an employer of choice

work in organisations that actively encourage/reward its people for innovative ideas

26%

believe that their own organisation’s leadership encourages idea generation and sharing regardless of seniority

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OPINION

Self-made CFO

Rugged or refined? While accountancy is the home ‘par excellence’ of professional qualifications, to what extent can a CFO also encapsulate the role of rugged entrepreneur, or self-made numbers guru? Is it possible - or desirable - to be an ‘outsider’ and subvert the traditional route of coming up through the ranks of graded qualifications? Zenifer Khaleel asks whether there really is such a beast as the ‘self-made’ CFO?

Mark Zuckerberg, CEO and co-founder of Facebook, categorically stated in an interview that, “I will only hire someone to work directly for me if I would work for that person.” The key to wooing top talent, according to Zuckerberg, is “just being upfront about what you stand for.” Being one of the wealthiest entrepreneurs in the world, Zuckerberg knows what he’s talking about. He is the perfect example of an entrepreneur with a vision who has used strategy and professionalism to materialise his seed idea. The popular notion about rugged entrepreneurs is that they are people who create their own success stories and revolutionise their business into unparalleled success.

Entrepreneurship is a social rather than an individual activity. Building a company entails hiring, organizing, and inspiring people… and ultimately flourishing or failing together as a result of the ability to sell your product or idea. The emphasis on rugged individualism however, barely reflects that running a company entails constant interaction with others.

The need for professionalism in accounting Economic globalisation is a reality for all businesses and so it’s critical that there is a universally accepted standard of excellence for management accounting. Accounting bodies combine the commitment to excellence with ethics and integrity and help produce and

The popular notion about rugged entrepreneurs is that they are people who create their own success stories. recognise top management accounting professionals worldwide. Many people are involved in the accountancy profession, such as, clerks and bookkeepers, accounting technicians, and experts in information technology. They possess many different skills and function in many different capacities. They work in

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Opinion

Self-made CFO

addresses a range of situations, including some short-, medium-, and longerterm goals and projects. It is, however, for each group and organisation to determine their own priorities and actions, depending on their unique needs and circumstances. A professional qualification is an established route to professional status to cater to the global demand for your finance and accounting knowledge and skills. In todayâ&#x20AC;&#x2122;s marketplace professional qualifications are extremely important as a benchmark of competency, showing your commitment to the industry and your professional development and performance. A professional body provides the widest scope of qualifications for those working in treasury, risk and corporate finance. It defines standards, promotes best practice and supports continuing professional development.

Rugged individualism vs refined knowledge

public practice, industry and commerce, education and government. Each group has distinct capabilities and competencies. However, sustained development of the accountancy profession is best achieved by the help of professional accountancy bodies that will have as their key objectives protecting the public interest in all matters that pertain to the profession.

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This includes establishing professional standards and representing the true value of professional accountants and accounting staff. A professional accountancy body is a membership organisation of individuals and firms who perform roles in the accounting and/or auditing fields, and which adheres to standards of practice. Its guidance

Sustained development of the accountancy profession is best achieved by the help of professional accountancy bodies.

Rugged entrepreneurs come from all walks of life - they are individuals determined to shape their own future and that of those around them by making money through risk and initiative. They are people that see the world not as it is, but as it should be taking life by the horns and shaping their own destiny. As an owner or manager of a business enterprise, entrepreneurs navigate the rough and rugged road

OPINION

Self-made CFO

More often than not, today’s CFOs are not just leaders of their companies, but directors of a team of ambitious top executives.

with determination, talent, and the ability to recover from bad situations. Rugged Individualism, as far as a CFO is concerned, is the tendency to do all strategy development and financial control personally. It is a distinct trait which will help get the business up and running in the early stages. From the brilliant idea, to feasibility studies, to proof of concept, successful new ventures are driven by visionaries with the ability to dream and the fortitude to execute. Making it happen doesn’t occur in a vacuum and it can’t be done alone. Seasoned CFOs know when they need help and aren’t afraid to ask for it. After the initial excitement of ‘doing things your own way’ CFOs realise that ultimately, success in business comes from profitability and cash flow. To maintain a steady flow of cash, you need to transition your focus into those areas where you have unique abilities. Then delegate it to those who have strengths in the fields of accounting and financial reporting function.

Success is a team effort More often than not, today’s CFOs are not just leaders of their companies, but directors of a team of ambitious top executives. As executive teams emerge to cope with the increasing complexities of running a major enterprise, the CFO will need to be an effective team leader without giving up his effectiveness as an individual leader. A CFO should make it

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transparently clear to his team members when he wants decisions reached by consensus and when he wants to make them alone. This way, everyone knows where they stand in the organisation, the CFO included. Successful entrepreneurs are those who can develop the right kinds of relationships with others inside and outside their firm. Once a CFO has determined which relationships are crucial to the success of his or her new venture, much of the working day is spent building, negotiating, and maintaining these relationships. This implies that successful entrepreneurs are able to persuade others to enter relationships and to take actions that will help the company as a whole. A key part of any leader’s role is persuading people to do things that they are unsure about or don’t want to do at all. The reality is that a CFO doesn’t have the luxury of being ‘one thing or another’. No matter how rugged and individual the beginnings, being part of a professional accountancy body will help the CFO rely on an established guideline and network, if and when he or she falters at any stage of running the ship. The larger resources then available at the CFO’s disposal bring on board the support of a bigger and magnanimous authority which advocates the best practices of accountancy from across the world. Ideas are integral to developing a business: but refined knowledge and strategy is imperative for its sustained growth.

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APPS

APPS TO SUPERCHARGE YOUR BUSINESS

TripIt Travel Organiser For business owners who are frequently on-the-go, TripIt proves to be quite useful. The app links to your Gmail or Google Apps account and automatically picks up every confirmation number that comes into your inbox. Alternatively, you can forward all confirmation e-mails to plans@tripit.com and the app does it for you. The confirmation code could be of any flight, hotel, car rental or dinner reservations you’ve made. The app organises all this information into a detailed itinerary. It also syncs all the details in your itinerary to your device’s calendar which will enable you to easily share it with your friends, family and colleagues. TripIt takes things one step further by also providing users with maps, directions and weather conditions of destinations on your itinerary – helping you stay fully prepared for your travels!

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APPS

BillMinder BillMinder lets you organise all your bills in one place. It offers a handy bill reminder alert every time a bill is due so that you never miss a deadline! Whatâ&#x20AC;&#x2122;s particularly interesting about this app is that it allows you to create reports of your expenses, in the forms of charts and graphs. It also offers tips on how to cut down expenses and increase quick savings. For business owners, the appâ&#x20AC;&#x2122;s multi-user feature is quite attractive. This means that all business partners can be synced to the app and get regular notifications on business-related expenses. Other noteworthy features of the app include: AutoPay Bills, Automatic Backup and Export to PDF.

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SignEasy If your business requires you to be out and about, but you still need to frequently stop by at your office to sign documents, SignEasy can help you. This fantastic app allows you to sign and complete documents using your smartphone or tablet. You can import a document very easily from Dropbox, Evernote, or from your e-mail account and then make the necessary signatures, adding a timestamp, date, or any other information needed to finalise the document. Once done, you can e-mail the signed document or save it to your sharing service. As simple as that!

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TECH TALK

APPS

Pocket Analytics For those business owners that are often working remotely or are constantly on-the-go, Pocket Analytics is a brilliant app which gives you a consolidated view of all your analytics data on your handheld device. This data is a culmination of numbers from Google Analytics, YouTube Analytics, Facebook, Flurry and a raft of other platforms. No matter where you are, you can keep track of your online activity and the kind of response you are generating. This is especially useful for Web-based businesses that need to continually monitor performance. Whatâ&#x20AC;&#x2122;s really attractive about this app is that it allows you to customize data the way you would like to view it. You can create dashboards suitable to your preferences, with the option to select formats such as graphs and charts, as you deem necessary.

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RTA Smart Parking This app allows for parking payment through mPay, the motorist will be charged an additional fee of AED 0.30 for paying for parking through SMS. The app is under continual development. RTA officials have bigger plans for this app, adding features such as the vacant spot identification, leading the motorist directly to the nearest empty spot on in any paid parking area in the Emirate.

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