The role of the CFO: Balancing internal and external requirements

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The role of the CFO Balancing internal and external requirements

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Indice The role of the CFO

2

Balancing internal and external requirements

2

Growing need for flexible forecasting and timely reporting

3

Coping with complexity and compliance

4

The challenges for public companies

5

Growing requirements

5

How software can help

7

The levels of reporting integration

8

Organizational integration: increasing collaboration across business functions

9

The role of IT

10

Conclusions

12

The role of the CFO

Balancing internal and external requirements CFOs have always served as the patron of financial data – both inside and outside of their companies. Over the years, however, the focus of this role has shifted. As internal business requirements continue to grow, today’s CFOs are expected to focus on supporting management decisions first and then institutional ones.

Information that is targeted to external audiences, however, cannot meet the internal needs for monitoring a company’s performance. After all, these reports are merely a snapshot of the past, comparing figures from distant times. The long intervals between reports also make it difficult to identify problems and take action in a timely manner.

In addition to generating financial and regulatory reports in line with the ever-growing and increasingly complex requirements, finance also acts as an information service provider throughout the company. Especially in today’s complex business structures and turbulent markets, internal management teams demand timely information to monitor the execution of operational and strategic goals.

In light of this complexity and insecurity, today’s finance departments will need innovative sources and instruments to successfully execute these activities.

Il ruolo del CFO

Growing need for flexible forecasting and timely reporting In the past few years global financial markets have been marked by turbulence and uncertainty. In particular, organizations that have experienced significant losses in long-term value will have to consider and review their strategic planning and operational budgeting processes.

In the face of this instability, companies are facing a wide range of problems which continue to absorb significant resources as they alter their strategies and prepare counteractions. Throughout this ordeal, executives and managers are realizing how important it is to be able to effectively reschedule and review activities and, above all, communicate corrective actions throughout the organization in a prompt manner.

Some organizations have used the crisis as an opportunity to make strategic investments that could reduce costs and add value over time. Many financed them by carefully analyzing where they could remain adequate service levels with fewer resources. Overall, these companies have weathered the storm better than their competitors who simply practiced indiscriminate cost cutting.

To do this, they will need to adopt a management reporting structure that delivers current, reliable information to decisionmakers on many different levels throughout the organization.

In times of change, CFOs will continue to play a key role in responding to arising business challenges.

The results of the 14th PwC Global CEO Survey show that in 2011 more CEOs are optimistic about an economic recovery than they were in the past two years. Nevertheless, 71% of CEOs are still worried about economic uncertainty and market volatility. In times like these, companies need to be able to forecast, detect and analyze emerging trends throughout their business.

Il ruolo del CFO

Coping with complexity and compliance Today’s CFOs must provide detailed information for various internal and external audiences.

This implies that they can process the same information to suit the different requirements of different people. Given the growing demands for information, however, how can CFOs ensure that they can disclose consistent data in a timely manner? How can they provide reliable views of their current and future business?

These questions are particularly important in light of mounting organizational complexity.

The organizational structures in modern companies are undergoing a profound revolution, which is facilitated by the use of new technologies.

The first agent of change is globalization, which has increased rapidly due to the widespread use of the Internet and the growing need for shortterm cost-saving measures.

Within the past decade, the Internet has enabled companies to communicate more easily in different languages while decreasing the cost per contact.

This makes it possible to expand sales markets and purchase smaller outlets. Yet, this increasing globalization is a phenomenon that is just beginning. According to PwC's 14th Global CEO Survey, for example, 92% of CEOs in Western Europe expect to achieve revenue growth in Asia in the coming years; only 48%, in contrast, anticipate growth in Europe.

A second factor is that more and more companies belong to national or international groups.

The recent financial crisis has strengthened this Merger & Acquisition trend. According to a 2010 study conducted by the Mergermarket Group , the positive trend in the overall M&A market grew from 2005 to 2007, fell in 2008, and showed signs of recovery in 2010. For 2011, 78% of respondents expected market growth.

M&A projects often are ridden with hidden entry costs, forcing companies to invest even more resources in order to meet compliance requirements. In most cases, this organizational complexity continues to grow after the acquisition phase, for example, when the company or group decides to open new branches to increase the local presence, initiate a productive activity, or coordinate on-site supply.

Oftentimes, the increased organizational complexity derives from a combination of these factors: foreign acquisitions of Italian companies (or vice versa), opening branch offices, manufacturing plants and operations, and the growing need to communicate standardized, monolingual information to the parent company.

Those who have already dealt with a merger or acquisition process certainly understand the difficulty of integrating a new company into the existing group structures.

Il ruolo del CFO

The challenges for public companies

If the company or its parent group is embarking on an IPO, the situation described above becomes even more complex. The requirements for obtaining a public listing vary in each market. As a general rule, however, all markets require much more standardization and information as a whole than a private company processes and communicates externally.

Growing requirements Financial reporting In general, public companies, however, must ensure adequate management control throughout the disclosure process.

The information that a company must disclose depends on the stock market and, in many cases, the segment where it is listed. Companies on the Italian Stock Exchange for example, are required to: 1. Disclose the company's performance in the time and manner defined by the exchange 2. Report key performance indicators so that investors can monitor their development over time 3. Monitor risk factors and their impact on organizational performance 4. Produce timely reports on these and other factors

Listed companies, therefore, must provide timely information on all events that could affect the price of the shares if made public. Financial reporting and Corporate Disclosure Management systems, therefore, require a high level of flexibility to meet these changing information needs.

In order to meet the information needs of today’s financial markets, CFOs and CIOs must work together to structure their financial reporting and disclosure processes. Most companies that have already invested in systems to align business strategies to operations have successfully improved these processes as well . In addition to being an intangible asset for survival, these investments have increased the value of the organization’s solutions and have laid the groundwork for building their competitive advantage.

As of 2005, all companies listed on European stock exchanges must produce their financial statements in line with international accounting standards (IFRS). Many unlisted companies like banks, investment firms, asset management companies and insurance companies must also generate financial statements using tools used by their public counterparts.

Informazioni al passo con i tempi

IAS 14 (Segment Reporting) has created international standards for determining the profitability of each business sector in which the organization operates. This practice, which companies often performed internally, requires a strong integration between administrative and management control systems.

XBRL disclosures As of 2013, all companies listed on the U.S. Stock Exchange will also be required to use XBRL (eXtensible Business Reporting Language), a standard, international language for communicating financial data.

Although XBRL adoption is still voluntary in Europe, many countries have already identified the benefits of this standard language in communicating data across institutions as well as the corporate group – especially when dealing with geographical and cultural complexity.

Strategic planning and control As formal steps are being taken to create highly pervasive, integrated and collaborative processes with strong control functions, the role of strategic planning and budgeting will grow.

The recent economic crisis has revealed the need for highly structured forecasting processes to enable to short-term projections of business performance based on the status quo.

The constant instability among competitors or within the market where the future is not necessarily like the past also make it difficult, if not impossible, to create accurate longterm plans.

Risk management Some exchanges are also trying to build investor confidence by giving shareholders more insight on a company’s future trends and developments. The Italian Stock Exchange, for example, is working to create common standards for the management control systems of public companies.

Enterprise Risk Management solutions or risk reporting solutions in general are one of these control instruments. These solutions use various KPIs to identify, evaluate, prevent and protect all types of major risks, especially those that may compromise business continuity or hinder the achievement of strategic objectives. Risk reporting monitors a defined threshold defined by the company as the point in which the risk is no longer sustainable. In the future, accurate business risk monitoring within a structured risk management process will probably emerge as a mandatory regulation for listings on regulated markets.

Informazioni al passo con i tempi

How software can help Another important aspect is the increasing integration of planning, control and IT with regards to both the breadth and depth of integration. This integration should cover core business processes including the financial close, consolidation, management reporting, budgeting, forecasting, planning and risk management. Companies should gradually re-engineer these processes into systems that support all critical phases of the process – from gathering, preparing and validating data to publishing the results to various internal and external stakeholders. By supporting each of these processes with appropriate IT applications, companies can provide a greater degree of security, reliability, efficiency, and flexibility with regards to changing regulations or business requirements.

Providing a deep, broad integration, however, also requires a change in organizational structures. Companies should, therefore, leverage the functionality offered by modern software tools to develop common systems, processes and organizational structures. This type of integration also helps companies ensure a better return on investment.

To support today’s financial reporting requirements, financial reporting and disclosure systems should also support the integration of numbers and text as required, for example, by the Italian Stock Exchange. This integration of objective data and management commentary, which explains or justifies these numbers, delivers valuable information for shareholders and other stakeholders. These systems should support the decentralized process of producing report contents to minimize complexity while providing a highly secure, controlled environment for consolidating numbers and creating commentary.

This integration of numbers and commentary is just one of the new challenges facing today’s CFOs in their role of managing the production of internal and external reports.

In the coming years, the presence of integrated information systems to support internal and external reporting will most likely emerge as a requirement for obtaining a public listing on regulated markets.

Informazioni al passo con i tempi

The levels of reporting integration The level of detail that is used in reporting may vary on different levels of the company. In general, managers with more responsibilities want fewer details in the information they request. Many CEOs, for example, often only want a summary of the most important KPIs. Nevertheless, organizations must still be able to prepare detailed reports, a process which involves reconciling volumes of information from different systems. They must also ensure that their data is comparable and that their current forecasts and budgets remain aligned with the goals defined in strategic planning.

To make more effective strategic decisions, managers require powerful simulation tools so that they can test multiple scenarios at an aggregate level and select the best ones as their objectives. This makes it easier for management to translate their long-term planning models into operational goals and, ultimately, foster a tight connection between strategy and operations.

Organizational integration: increasing collaboration across business functions Any changes to existing financial structures – for example, an IPO, new accounting standards, XBRL, or consolidated balance sheet – generally cause major trauma for the finance department. During this time, companies often identify the need for a stronger integration among their current processes and systems. These challenges, however, also provide an opportunity for management to reevaluate and restructure their existing financial reporting and disclosure processes.

Traditionally, Planning and Control is responsible for collecting and reporting financial data from various parts of the company to support management decisions. This team also guarantees the integrity of this data. Oftentimes, however, different departments throughout a company filter out the information that suits their needs and combine it with data from other sources. This processed information is difficult if not impossible to reconcile with data from other functions.

Planning and Control Management accounting, therefore, must be able to interface with many different functions in order to create and maintain common report processing guidelines across the organization and ensure the disclosure of consistent information.

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In order to produce financial reports that meet the increasingly complex needs of modern organizations, financial reporting and disclosure systems should support functionality for sharing a calendar of activities, determining priorities, setting deadlines, and making the various contributors accountable for their work.

Generally, any process with delegated activities requires a high level of communication among the different stakeholders as well as the increased visibility of each individual.

Empowering the individual stakeholders in the process by increasing their participation in the organizational process can foster more meticulous working standards. This, in turn, reduces errors and the overall accuracy of published data.

A system that helps monitor deadlines and transparently shows the contributions of individual stakeholders can also be used as a performance evaluation tool for companies using a Management by Objectives (MBO) approach. The logic of monitoring and measuring activities and fostering desirable behavior through rewards has a positive effect on employee satisfaction and adds transparency to incentive programs. According to PwC's experience, in fact, measuring performance can profoundly change the way people act.

Financial reporting and disclosure solutions that use guided workflows to share and display relevant information for each person’s area of competence empowers the individual contributors to the process. This functionality is essential if the data collection process is complicated by multiple languages or large distances.

To expedite the process, these systems should be easily accessible and user friendly since the majority of contributors only work with it periodically as part of the financial reporting process. Companies can also expedite the process by ensuring that the individual contributors understand their role so that they can quickly identify their responsibilities.

To facilitate the organizational integration, companies should use tools that promote a collaborative data collection process, track individual contributions, assign responsibilities and, of course, product corporate disclosures.

La complessità delle specifiche interessanti l’area Finance richiede quasi inevitabilmente il supporto dei Sistemi Informativi. I CEO di oggi collaborano con i CIO per condividere e realizzare obiettivi comuni, supportando la logica di processo e salvaguardando la responsabilità funzionale.

Il ruolo del CIO è profondamente cambiato negli ultimi anni: con l’aumentare delle possibilità offerte dalla tecnologia, è aumentata la sua sensibilità nella gestione di tematiche finanziare per supportare la produzione dei dati per la direzione nelle modalità e nei tempi previsti dalla funzione Finance.

Contestualmente è rimasto uno dei garanti principali della protezione e del controllo dei dati sensibili e della rintracciabilità della fonte dei dati. Oggi la funzione dei Sistemi Informativi supporta la distribuzione controllata dei dati, fornendo il livello di sicurezza Informazioni al passo con i tempi necessario per ogni tipologia informativa e gestendo il corretto

The role of IT Due to the complexity of the financial disclosure process, Finance almost inevitably requires some level of IT support. In addition to traditional tasks such as data security, protection and traceability to source systems, most CIOs work closely with CFOs to optimally manage and secure financial data as well as support the timely production of internal and external reports. Today, IT departments also manage the controlled distribution of data so that each user receives access to the proper information for his or her role. Together, these tasks demand a high degree of flexibility because internal information needs as well as external market requirements have often changed over time.

In today’s business world, strong communication and collaboration between IT and finance are absolutely essential to create effective financial reporting and disclosure management processes. When investing in systems to enhance reporting processes, companies should look for solutions that reduce the time needed to produce and format data for various requirements. In addition to saving resources this makes it easier to create additional information or analyses for the best business valuation process.

As with most IT investments, companies should always assess the potential return on investment before embarking on any new projects.

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Conclusions Due to the changes and innovations of modern business, the role of CFOs has become more complex than ever before. In order to address the ongoing internal and external demands, executives and operational management must work together to create common guidelines, processes and standards to ensure a common vision of the entire process and establish a joint strategy.

These synergies combined with the supervision of a proactive management can drive benefits throughout the entire organization.

(1) PwC, 14th Annual Global CEO Survey, 2011 based on interrviews to 1,201 CEOs in 69 countries.

(2) Mergermarket Group, Global M&A Survey: An outlook on global M&A activity and future deal flow, July 2010 (3) A. Bubbio, Prefazione nella Guida al sistema di Controllo di Gestione, Borsa Italiana, 2003

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