FP&A Innovation, Issue 13

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FP&A INNOVATION FEBRUARY 2017 | #13

Top Trends In Finance 2017 Last year saw geo-political events take a serious turn for the unpredictable. We take a look at what the year ahead holds for finance leaders

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MILLENNIALS IN THE FINANCE FUNCTION

ZERO-BASED BUDGETING IS MAKING A COMEBACK

Millennials are now a dominant force in the workforce, and CFOs need to understand how their needs differ from generations that came before them, and what they can do to exploit their unique skill sets /6

Zero-Based Budgeting first saw popularity in the 1970s before falling out of the public consciousness. The world has changed though, and it could be the forecasting method for our uncertain times /22

FP&A Innovation Summit February 14 & 15, 2017 | San Diego

Speakers Include

Elliott Jay + 1 415 800 4713 ejay@theiegroup.com

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theinnovationenterprise.com

ISSUE 13

EDITOR’S LETTER Welcome to the 13th Edition of the FP&A Innovation Magazine

Talent is critical to the success of the finance function. In EY’s fourth global private equity CFO survey, 51% of private equity (PE) firms said they believe retaining talent is the top issue required to remain competitive in the future. A number of other surveys report similar findings in other industries. A Deloitte survey of 312 CFOs and other executives in finance departments saw 39% of respondents say they were either ‘barely able’ or ‘unable’ to meet the demand for talent to run their organization, while in the CFO Alliance’s 2016 CFO Sentiment Study, 70% of finance leaders said human capital is either of concern, or of great concern.

These CFOs are right to be worried, as talent is critical to the finance function.

KPMG’s 2013 survey of senior finance executives found that 44% of all respondents and 61% of the high performers (those with revenue and EBITDA growth of more than 10% over the past three years) felt talent management to be the most important

factor for the success of their function.

Just 6% said they believe there are other factors that are more important.

We are in the midst of an evolving labor market, where Millennials are now a dominant presence, bringing with them a new attitude - one focused on different priorities and little expectation of loyalty. In a survey

by Deloitte, 44% of millennials said that they expect to leave their current employers in the next two years if given the choice. Later in this issue, Maria Maguire looks at the unique qualities millennials bring to the finance function, and what CFOs can do to entice them into a career in the field.

This change to the workforce is not limited to changing demographic, though. Automation and digitization are also rendering a number of roles redundant, with an estimated 47% of workers in the US’s jobs at high risk of potential automation. Laura Denham looks at the impact AI will have on the finance function later in this magazine.

Ultimately, we are now in a world where the idea of gainful employment is becoming an increasingly fluid concept. It is, therefore, vital that CFOs develop an effective talent strategy. This doesn’t simply mean gathering the finance team’s input in talent planning - it involves building a more comprehensive end-to-end strategy and understanding trends that could have an impact so they can take action to mitigate the effects.

Also in this issue, we look at the major trends in the finance function this year, as well as articles on strategies for CFOs in hyper-growth companies, the resurgence in interest in zero-based budgeting, and selecting the right KPIs.

James Ovenden managing editor

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academy.theinnovationenterprise.com /4

contents 6 | MILLENNIALS IN THE FINANCE FUNCTION

16 | SELECTING THE RIGHT KEY PERFORMANCE INDICATORS

Millennials are now a dominant force in the workforce, and CFOs need to understand how their needs differ from generations that came before them, and what they can do to exploit their unique skill sets

Selecting the best metrics is one of the primary tasks facing the CFO, but there are no hard and fast rules around which KPIs to look at. There are, however, severals way to get an idea of which KPIs yield the best results

8 | THE CFO IN HYPER-GROWTH COMPANIES

20 | TOP TRENDS IN FINANCE 2017

Tech companies are now reaching valuations in excess of a billion dollars in mere years.

For the CFO, managing such high growth presents a whole new challenge. We look at the strategies they can employ to help deal with it

Last year saw geo-political events take a serious turn for the unpredictable, with Trump rising to power against all the odds and the UK deciding to leave the EU. We take a look at what the year ahead holds for finance leaders

12 | AI IS GOING TO RENDER ANY SKILLS GAP IN FINANCE IRRELEVANT

22 | ZERO-BASED BUDGETING IS MAKING A COMEBACK

There has been much talk about a lack of graduates with the skills needed by the finance function, but advances in artificial intelligence mean this could soon no longer be a problem

Zero-Based Budgeting first saw popularity in the 1970s before falling out of the public consciousness. The world has changed though, and it could be the forecasting method for our uncertain times

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managing editor james ovenden

| assistant editor charlie sammonds

creative director chelsea carpenter contributors maria maguire, lauren ravary, maisy hockey elliott jay, lauren denham

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Millennials In The Finance Function Maria Maguire, Finance Commentator

Perhaps the most important motivation for Millennials cited in surveys is career growth In new Ben Affleck film, The Accountant, in which the actor plays an autistic maths prodigy with a talent for killing bad guys, he notes that he chose his own role of financial consultant because it is one of the fastest growing professions. Then he fights a load of gangsters and takes down an evil corporate conspiracy.

As a film, it’s entertaining if a little muddled. As a pitch to get more millennials into the finance function, it’s inspired.

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Millennials do not have a fantastic reputation when it comes to dealing with their own finances. They have consistently been portrayed as poor savers, unprepared for adult financial responsibilities. This is unfair, with many having entered the workforce in the shadow of the financial crisis.

They have been poorly served by economic circumstance and are, perhaps understandably, skeptical of finance. This is reflected in numerous surveys which claim a skills gap in the

finance function among graduates.

For example, a 2015 report by Competency Crisis, a coalition of finance professionals, employers, students and professors organized by the Institute of Management Accountants (IMA), revealed ‘large gaps between the competencies that organizations need to succeed and those that entry-level management accounting and finance professionals possess.’

However, they are increasingly being recognized by finance leaders for the skills that they do bring to the table. In a recent survey by Robert Half, 85% of CFOs said they are confident their millennial employees are prepared to assume leadership positions, and companies are adjusting their corporate culture to ensure that they are utilized to their full potential.

Millennials bring a variety of qualities to the finance function often lacking in baby boomers and even Gen Xers, including the tech savviness that comes from being the first generation raised in a digital world.

This same background has also led to Millennials being more open-minded and placing a greater emphasis on communication, with the internet having created an expectation around speed of information and driven intellectual curiosity. They are also analytical by nature and less respectful of authority, being more likely to question why things are being done and finding new ways of doing them.

The has been noted by Bill Juram, VP-Finance for the healthcare services

provider Kaiser Permanente, who told our sister magazine, CFO, that ‘Millennials have a less hierarchical, more trial-and-error style of work’ - qualities well suited to the finance function of today, operating as it is in the more complex, faster-moving, and far less structured world of digital, where flexibility and agility are valued above all other qualities.

While being raised in digital provides many benefits, there are also downsides. Millennials no longer feel the same sense of loyalty to their companies that they once did, having seen through the massive job losses during the financial crisis that such loyalty is often a one way street. Many will spend only one to two years in a company and then move on in search of career progression. In order to try and retain the best Millennial staff, organizations need to cater to understand what the generation is looking for and adjust their working practices. Millennials want the flexibility expected of them for themselves.

They value output as a measure of the quality of their work rather than simply hours spent at a location, and many look to work the hours they want, where they want. Equally, not only does ‘asking why’ improve their analytical abilities, it also means that they expect greater transparency from their employers, who must get used to not only telling their young employees what they want, but the reasoning.

Perhaps the most important motivation for Millennials cited in surveys is career growth. They want

training, as Paul McDonald, senior executive director for Robert Half, notes: ‘To retain these professionals and develop them into next-generation leaders, companies must show them how they can advance in the organization and provide training and stretch assignments.’

One organization particularly adept at catering to Millennials is Gen Y-bible, Vice Media. Sarah Broderick, the media giant’s CFO, spoke recently at the CFO Rising West summit in San Francisco. She described how, in her experience, Millennials were less concerned with financial compensation and more with career and personal development, and maintaining a strong work/life balance.

At Vice, they have worked hard to build a culture of trust, with an open bar in the office that she noted had been used responsibly as long as she had been at the company. Broderick also pointed to how the company embraced the best technology in line with Millennial’s expectations, ensuring that everything was mobile, while also providing a number of other benefits to help advance flexibility in the workplace.

With Millennials set to make up almost 75% of the work force by 2030, it is vital that they are respected and catered for. Finance leaders need to encourage the next generation, and adapt both their management styles and alter their workplace culture accordingly.

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lead the path to financial growth CFO Rising East Summit March 22 & 23, 2017 | Boston

Speakers Include

Elliott Jay + 1 415 800 4713 ejay@theiegroup.com theinnovationenterprise.com

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Lauren Ravary, Finance Marketing

The CFO In HyperGrowth Companies The speed at which tech companies are growing in today’s Venture Capital driven market is astounding, with some taking just a couple of years to reach unicorn status. Slack, Groupon, Akamai Technologies, and Xiaomi all gained their $1 billion valuation within two years, according to research firm Pitchbook, and many others are doing so in little longer.

For CFOs, this presents an entirely new challenge. They require a different set of skills to their counterparts at companies with less aggressive growth, combining financial acumen with a broader business knowledge and strong entrepreneurial mindset in such a way that is capable of balancing growth and profitability in an

extremely fluid business environment, often riddled with uncertainty and prone to rapid change.

Traditionally, the CFO’s primary responsibility is to manage risk.

In a hyper-growth company, this is no longer the case. While they are still expected to give risk due consideration and be the boardroom realist, so to speak, they also need to be more of an optimist than they would otherwise be in order to get behind the kind of innovative, even unproven, endeavors that need to be taken in order to achieve hyper growth, and offer strategic guidance around how to approach these. They need to look for opportunities to scale and identify when resources are /9

needed quickly before the company outgrows its capacity.

It is not just the CFO themselves who is required to offer strategic guidance, they need to ensure their team is made of people who embody the same qualities and can also contribute to the company’s overall strategy. The whole team needs for a customer-first tack should be taken, emphasising what the right thing to do is with customers to align finance with the rest of the business team in the first place, before explaining the financial imperatives. This kind of mindset can be instilled, or hired, by recruiting finance professionals with diverse employment backgrounds, or it can be achieved by rotating employees around a variety of roles, and perhaps even different departments.

One of the main pressures on CFOs in hyper-growth companies is providing strong numbers in the short term.

They need the strength of character not to bow to such pressure and instead make decisions that ensure they are investing in the long term potential of their organization. They need to be capable of persuading shareholders that the long option is the better choice, even if it means revenue may be damaged in the short term.

While finance teams need to be an integral part of the business, it is also a good idea to take up an autonomous position, acting as a business influencer rather than a centralized function. In a hyper growth company, agility is key, and you are often not sharing financial information with FP&A analysts but product owners, most of whom are not from financial backgrounds. This means education is paramount, empowering product owners to conduct FP&A for themselves. We recently spoke to Skyscanner, one of the fastest growing companies of the last decade, who place a great deal of emphasis on ensuring their product owners have a good idea of how what they’re doing is impacting the business model. For example, when making a change / 10

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One of the main pressures on CFOs in hyper-growth companies is providing strong numbers in the short term. They need the strength of character not to bow to such pressure and instead make decisions that ensure they are investing in the long term potential of their organization

to the product, they need to know whether it is driving more exits, if it’s driving more revenue, and so forth.

They aim to provide a product owner with sufficient level of commercial awareness to do this. Their FP&A team then starts to shift ownership out to them entirely, leaving them alone to monitor their information and performance. Once this is achieved and each ‘squad’, as they call their product teams, has the necessary knowledge and ownership, they can conduct 1000s of tests around everything they do, enhancing their agility and speed of processes. It also gives the FP&A team the ability to approach everything from a macro view. This drives the product, growth and performance, generates insight, and gives them visibility of what each squad could be doing to learn from one another and ensuring that they are doing it.

Not all CFOs are cut out for financial leadership at a hyper-growth organization, and it is exceptionally challenging job. It is also highly varied and often rewarded, with huge potential for career growth.

stay ahead in an ever-changing landscape FP&A for High-Tech Summit April 18 & 19, 2017 | San Francisco

Speakers Include

Sam Blundson +1 415 604 3777 sblunsdon@theiegroup.com theinnovationenterprise.com / 11

Laura Denham, FP&A Innovation Summit Organizer

AI Is Going To Render Any Skills Gap In Finance Irrelevant / 12

CFOs have long cited the skills gap among their most pressing challenges.

In a recent EY survey, 47% of CFOs said their current function lacks the right mix of capabilities to meet future priorities. This echoes research from leading recruitment specialist Robert Half UK, according to whom 74% of finance directors worry that the skills gap resulting from the mass retirement of the Baby Boomers will have a negative impact on their organizations over the next two years.

These finance leaders claim that there just aren’t enough talented employees to fill every position, with the situation only going to deteriorate as Baby Boomers retire and the labor market tightens. Many CFOs believe that their current finance function lacks the capabilities to meet future demands driven by technology, with 69% of respondents to EY’s survey saying they see the finance leader role significantly changing as traditional finance tasks become automated or outsourced, and 65% claiming that standardizing and automating processes and building agility and quality into processes will be a significant priority for tomorrow’s finance function.

In the short term, they are right. In the long term, however, the idea that there is a skills gap simply does not gel with their acknowledgement of advances in AI, or at least it drastically underestimates the likely impact.

At the moment, the majority of the finance function’s time is spent creating and updating reports instead of on analysis and impacting the business at a strategic level.

Automation can easily deal with this aspect of the finance function’s work, and as the technology gets cheaper it is hard to see how anybody will be spending time on reporting tasks in the future. In order to meet the potential of new technologies’ ability to reduce costs, manage risks and drive insights, finance leaders must indeed look at both improving their own technical knowledge and putting it at

the heart of their hiring policy - with data analytics skills a particular need.

Three-fourths of managers listed in a Robert Half survey listed ‘identifying key data trends’ as a skill important to success, although only 46% said their teams possess that skill. Another McKinsey study reinforced this finding, projecting that ‘by 2018, the US alone may face a 50% to 60% gap between supply and requisite demand of deep analytic talent.’ However, data analysis is not a field that will go untouched by automation, and it is another area that machine learning algorithms will be more than capable of dealing with in the near future. In a recent KDnuggets poll - which asked when most expertlevel Predictive Analytics/Data Science tasks currently done by human Data Scientists will be automated - 51% of respondents said that they expect many data science tasks to be automated the next decade. Only a quarter said they expect this to happen in over 50 years or never.

We are already seeing tremendous leaps forward in automated analytics, with many of academia’s sharpest minds having set their minds to the tasks. In one such project led by MIT researchers, they developed a Data Science Machine able to find patterns and design the feature set that came in the top third of teams in three data science competitions. In two of the three competitions, the predictions it made were 94% and 96% as accurate as the winning submissions from human teams, while in the third, it was 87%. Even more impressive, and even more likely to make it appeal to finance leaders, was that it was able to do it in mere hours, whereas the human teams typically spent months pouring over their prediction algorithms to produce each of its entries.

According to Ben Mulling, the CFO of Tente Casters, ‘I can go out and find a good accountant, but I’m not looking for that. I’m looking for someone who’s going to fill manager roles in three to five years, somebody who thinks the right way. Nobody’s going

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Many CFOs believe that their current finance function lacks the capabilities to meet future demands driven by technology

to come in with all the skills you want, but it can be difficult to find a person who has the frame of mind to see things from a macro level and take charge’. These are the people that are difficult to find in the current job market’. What will they be managing though? Machines? Is that not an engineer? Would the manager he requires be managing the engineer or the machines? If a mistake is made, does the engineer get fired or do they look for new technology? And where do managers come from? How can they become managers if they have no people to manage?

Many claim that robots will really act as a companion to people - a view that seems either woefully optimistic or wilfully naive, with many companies likely to automate everything they can in order to cut costs. There is a certain sadism in asking people to start down a career path while knowing that many of the jobs they are learning will soon

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be automated. And it may be partly down to this realization that many are avoiding accounting. There are a lot of questions to be answered, and if we are to start trying to encourage people to enter finance, we are going to have to get a clearer idea of the skills they need and what their roles are likely to actually be, and communicate this to universities so that they can be educated accordingly.

Selecting The Right Key Performance Indicators Maisy Hockey, Head of Finance

Peter Drucker once said, if you can’t measure it, you can’t manage it.

Which is true - not to mention catchy - but it’s also an oversimplification. The reason we measure performance is to learn and improve, to report externally and demonstrate compliance, and to control and monitor people. The importance of selecting the right Key Performance Indicators (KPIs) cannot be underestimated. It is instrumental to a company’s success. CFOs who fail to determine the right KPIs will be overwhelmed by the volume of data, and senior management’s decision making will suffer.

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Selecting the best metrics is, however, a difficult task. There are no hard and fast rules around which KPIs to look at. They vary from company to company depending on the needs of the business, and must be tailored accordingly.

The first questions you need to answer when deciding upon KPIs is where you are as a business, where you want to be, and by when. KPIs must actually drive growth - they should show you the factors you need to improve and the performance gaps that need to be closed to to get there. An effective set

of KPIs must first of all indicate where the fundamental problem is. They must provide the answers to your most important questions, empower employees, and provide them with the relevant information to learn.

The key is to limit KPIs to a small number. Everything you measure can’t be considered a key metric.

Having a surplus of KPIs with no apparent connection to a business’s overall objectives indicates a lack of strategic focus and will result in data overload. When everything is a priority, nothing is a priority. The most

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effective companies use between just 3 and 7 KPIs. They must, therefore, be focused on the root cause of performance. Ask yourself what are you actually trying to achieve by looking at the KPIs and what value you are getting? Do they really need to be embedded into your business?

A good way of doing this is by making a list of your most successful projects and the factors behind that success.

What differentiates them from the failures?

Simplicity is the key. People often waste time calculating and manipulating data, only to find that they do not reveal anything of value.

KPIs should be simple, actionable, and easy to communicate so that everybody across the organization is working towards them. It is the responsibility of finance leaders to get teams to focus on the relevant KPIs, and nurture engagement and trust with those metrics in order for them to unlock actionable insights.

It is also important to keep the same KPIs for a number of years.

There must be continuity so that comparisons can be drawn. Any new KPIs should be introduced slowly in order to ensure that your efforts are worthwhile. Equally, however, you should regularly question how relevant KPIs are for the executives looking at the data around them.

High data quality is also vital.

Standardization must be enforced across the organization to ensure there is one source of truth. If the data is not trusted, identifying the right KPI will be more difficult, and actually benefiting from it impossible.

Once you have selected your KPIs, they must translate into action and decision makers must be open to the problems that they expose. Ignoring or rejecting trends revealed by KPIs because they do not fit managerial prejudices is a clear route to failure.

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Want to Contribute to FP&A Innovation?

Contact jovenden@theiegroup.com

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Top Trends In Finance 2017 James Ovenden, Managing Editor

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This year has, with a few notable exceptions, been a difficult one, and the phrase ‘unprecedented time of uncertainty’ has almost become cliché. As a CFO, your main priority is ensuring the financial stability of your company regardless of market conditions, and the apparent inability of anyone to predict anything has made this a greater challenge than ever before.

In 2017, world events are likely to continue to confuse and panic again in equal measure. The Italian banks are at breaking point, the French elections could see one of Europe’s leading powers fall under the control of a far-right party, and article 50 is likely to be triggered, beginning the process of the UK exiting the EU.

There are, however, reasons for the CFO to be optimistic about what 2017 holds. Donald Trump, for all his flaws, will likely cut corporation tax significantly, providing a timely boost for business, while technological advancements should also mean that finance leaders are better positioned to cope and drive growth.

Rolling Forecasts

Cybersecurity

According to a new survey by consulting firm Kaufman Hall, agility is a top priority for CFOs in 2017, yet many are still struggling to achieve it.1 Less than 23% of respondents to the survey said they are very confident about their company’s ability to overcome unforeseen business obstacles, citing outdated FP&A tools and processes as the primary cause.

Cybersecurity remains a pressing concern for organizations of all sizes. In 2016 alone, 2.2 million patient records were taken from 21st Century Oncology, 1.5 million Verizon Enterprise Solutions customer records were stolen, and nearly 150 million accounts leaked from major email providers including Hotmail, Yahoo, and Gmail.

This push for agility will see continuous forecasting take on an even more important role next year. In Kaufman Hall’s survey, 38% of respondents said their company now uses rolling forecasts, up from 33% from the same period a year ago and 25% in 2014 and popularity is likely to increase exponentially next year as companies begin to realize the benefits. A recent survey by Aberdeen Group saw 71% of top-performing organizations who responded say they mitigated against risks related to volatile business conditions by continuously updating forecasts to better reflect current business conditions, and those seeking to emulate them should do the same.

Such is the threat posed by hackers, the past year has seen cyber security increasingly fall under the purview of the CFO. A recent Grant Thornton survey of 912 CFOs found that 38% of respondents identified the CFO as the position most often responsible for cybersecurity, while 44% of finance leaders said they felt the most significant concern for their organization today is cybersecurity and 57% said undetected breaches were what worried them the most.

The logic behind giving the CFO oversight of cybersecurity is clear.

They control some of the most sensitive and important data found within organizations, spanning revenues, profits, investments, and acquisitions. AICPA Vice President of CGMA External Relations, Ash Noah, notes that: ‘The finance function has a unique view into the complexities of the business, as well as an in-depth understanding of the industry, markets and risk climate, yielding important insights for a company’s strategic

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direction. As the finance function continues to evolve to become more business-centric, it’s critical for finance executives, from the CFO down, to play a driving role in preparing for and addressing potential cyber-risks for the long-term growth of the company.’

CFOs’ Skillsets Expand…

In a recent interview with us, Ian Swanson, CFO of Delicato Family Vineyards noted: ‘The greatest challenges facing leaders today are the many non-financial aspects of the job. No longer is it enough to put an annual plan together and then report out income statement and cash flow variances month-to-month. You have to understand the entire business as well as the CEO; its strategy, its capabilities, the competitive landscape, its strengths and weaknesses, as well as the impact of changing regulations and new technologies. Helping the organization manage its way through this changing landscape and keeping all of the stakeholders apprised is much more of the job than it has ever been before, and I only see the demands increasing.’

His words are reinforced by EY’s DNAof the CFO survey, which spoke to 769 finance leaders. Respondents to the survey found that number crunching is no longer the be-all and end-all of the CFO’s role,1 with skills that can help inspire and generate loyalty such as empathy, innovation and imagination becoming equally important…And They Begin To Look More At Non-Financials Not only are CFOs looking to embrace skills outside of their normal wheelhouse, they are also looking at information external to the finance function. According to Adaptive insights, 76% of CFOs report that their finance teams are tracking some nonfinancial KPIs today, and 46% of CFOs anticipate that number will rise in the next two years.

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IoT The Internet of Things (IoT) has been threatening to explode for a number of years now. Estimates for the number of connected devices on the market range from 20.8 billion by 2020 (Gartner) to 28 billion by 2021 (Ericsson).

The central challenge facing CFOs today is measuring and monitoring business performance in a timely fashion to ensure their organization can respond to events in an agile fashion and exploit every opportunity possible without too great an exposure to risk. The IoT will make it significantly easier for CFOs to do this, with data flowing into billing, enterprise resource planning, and accounting systems in real time. This will change the way that forecasting and audits are carried out, providing real-time visibility around transactions and making risks easier to pinpoint - ultimately, leading to better decision-making.

Zero-Based Budgeting The last few years have seen a dramatic resurgence in the popularity of zero-based budgeting (ZBB), a budgeting method first popularized in the 1970s under President Jimmy Carter in which budgets are prepared from scratch with a zero-base rather than based on historic data.

The number of publicly-traded US companies mentioning the term in their earnings calls increasing from 14 to 90 between 2013 and 2015, and some of the world’s largest organizations have now implemented ZBB - including Unilever, KraftHeinz, Coca-Cola and Mondelez, all of whom have reported significant cost reductions as a result.

ZBB is particularly well suited to an uncertain world, and is likely to continue to grow in popularity so long as uncertainty in the business climate continues. According to global management consulting firm McKinsey & Company, a well-implemented zero-based budget can save large corporations 10-25%, sometimes as early as six months of implementation,

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The greatest challenges facing leaders today are the many non-financial aspects of the job. No longer is it enough to put an annual plan together and then report out income statement and cash flow variances month-to-month. You have to understand the entire business as well as the CEO

and while it is time-consuming, it is likely to remain in trend for the next year at least.

AI Peter Wollmert, EY global and EMEIA Financial Accounting and Advisory Services (FAAS) leader, recently noted that: ‘CFOs worldwide are struggling to make the most of the increased volume and speed of data available to them. Many are encumbered by legacy systems that do not allow reporting teams to extract forwardlooking insight from large, fastchanging data sets. The result is an increasing expectation gap between what boards now look for from corporate reporting, and what CFOs can deliver. Until reporting catches up with technological advancements it will continue to be compromised.’

thought that ’30% of corporate audits would be performed by AI’, 75% said 2025. CFOs will have to review various aspects of their organizations and put in place a strategy to help best exploit AI to maintain their competitive edge, ensure they keep costs down, and increase their profits. They must also look at areas where AI could prove a risk, and where competitors may adopt it and outflank them.

People often talk about how AI will cause mass unemployment, but for CFOs who fail to plan, it won’t be the machines that have rendered them redundant, they’ll have done it to themselves.

Making sense of this huge amount of data is the central challenge facing CFOs, and the next year will see them employ machine learning and AI to a greater deal in order to cope. In a recent IBM report, 38% of CFOs surveyed said that AI would be one of the technologies most likely to transform their enterprises within the next few years. In another report by the World Economic Forum, ‘Technological Tipping Points’, which asked 800 executives when they / 21

Zero-Based Budgeting Is Making A Comeback Elliott Jay, Accountancy Specialist

The last few years have seen a dramatic resurgence in the popularity of zero-based budgeting (ZBB), with the number of publicly-traded US companies mentioning the term in their earnings calls increasing from 14 to 90 between 2013 and 2015. Some of the world’s largest organizations have implemented ZBB, including Unilever, KraftHeinz, Coca-Cola and Mondelez, all of whom have reported significant cost reductions.

ZBB was first introduced in the early 1970s by an accounting executive at Texas Instruments called Peter Pyhrr.

Pyhrr was brought on to help Jimmy Carter first in his role as Georgia governor, where ZBB was adopted at state level, then as the President of the United States. The idea was that, while in traditional budgeting, the previous term’s expenditures are counted up and increased by a small percentage for the following term, with ZBB, you are preparing the budget from scratch with a zero-base. In ZBB, all spending must be justified by demonstrable needs and costs, and accounted for in each new budgeting period, and every department is analyzed for its needs and costs.

The return of ZBB is down, primarily, to its suitability to an uncertain business climate. Since more

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companies have begun taking it up, it has grown quickly, as organizations have seen the success of those who have decided to adopt it. It has many advantages. According to global management consulting firm McKinsey & Company, a well-implemented zero-based budget can save large corporations 10-25%, sometimes as early as six months of implementation.

It allocates financial resources basing on planning requirements and results.

It is proven to reduce expenditure by providing a clearer picture of costs against targets and KPIs. It improves accuracy by making every department look at data at a more granular level, and to constantly re-examine each and every item of the cash flow and compute their operation costs. It also leads to increased efficiency through improvements to the allocation of resources brought about by looking at actual rather than historical numbers and motivating managers to look for alternative plans.

Ultimately, the most important thing is that it helps to give employees a sense of ownership for the company by making them accountable for every expenditure. Evaluating line items and programs from a zero baseline encourages employees to be more cost-conscious and involves them

in decision-making. It promotes competition within teams as to who can be the most efficient and encourages them to bring down costs as far as possible and trim any excess.

Instead, it puts the burden of proof on those who want to maintain or raise spending to justify their decisions.

The zero-based approach to budgeting does present several issues. The reason it went out of fashion originally was the cost and time involved, although this problem has been solved to a degree by advances in technology. It also doesn’t always take account for an organization’s long term goals.

However, this is only if you think of ZBB as an alternative to traditional planning and budgeting cycles.

Zero-based budgeting should not necessarily be used as a permanent solution, rather as and when it is demanded by circumstances dictated by the business climate. When a company needs to really keep costs in check, though, it is far and away the best process.

cfo rising summit hong kong April 26 & 27, 2017 | Hong Kong

Speakers Include

Ryan Yuan + 852 5808 1636 ryuan@theiegroup.com theinnovationenterprise.com / 23