Write an essay on the following: Challenges faced by Financial Managers in a Changing Economic EnvironmentYour essay should critically asses the challenges faced by financial managers due to changes i

Procedia Economics and Finance 27 ( 2015 ) 726 – 730

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Peer-review under responsibility of Faculty of Economic Sciences, “Lucian Blaga” University of Sibiu”doi: 10.1016/S2212-5671(15)01054-0

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22nd Interna tional Ec ono mic C onfere nce – IE CS 2015 “Econo mic Prospects in the C ontext of

Growing Gl obal and Regi onal Interdepe ndencies”, IECS 2015

Challenges for Fi nancial Managers in a Cha nging Econo mic

E nvir onm ent

Livia Ilie a,*

aLucian Blaga Uni versity of Sibiu , Faculty of Economic Scien ces, 17 Dumbr vii Street , Sibiu, 55 0324, Romani a

Abstract

The fast chang es and challeng es that took place in the economic env ironment in the last y ears broadened the role of financia l

managers. If the ir basic r esponsib ilities were linked mainly to financial re porting, financial planning, capital budge ting, capital

s tructure, nowadays a s tronger s trategic di mension defin es the role of financial managers. In addition, an im portant role is given to

the financial manager in comm unicating prof essiona lly not only to the inv estors but also to the board.

The aim of this paper is to give an overview of the cha llenges that the cu rrent economic c ontext is bringing to the finan ce functi on

a nd to pr esent how the role of the financial managers is changing alongside with a transforma tion of the finan ce function.

P eer-review under responsib ility of Faculty of Economic Sciences, "Lucian Blaga" University of Sibiu".

Keywords: financial manageme nt, financ ial manager , CFO, econom ic environme nt, crisi s

1. Intro duction

Changes in the m acroeconomic e nvironment have an impact on how businesses operate and in consequen ce there

are changes in str ategies and priorities and in the way the departments have to adapt. The m ore complex the economic

system, the m ore complex the businesses, the m ore complex the interaction between econom ic players in a gl obal

ec onomy, and the m ore uncertainties one has to f ace in thes e turbulent times, the m ore complex the role of manager s

b ecome, includi ng the role of financial managers. There is an in terest in understanding how the finan ce function

adap ted to these complex ities and un certain ties and how compan ies’ boards and CFOs have a pproached thes e

ch all enges by adap ting the structures of finance departments and the mix of sk ills they chose for their te ams.

* Co rrespo nding au thor.

E-mail addre ss: liv ia.ili [email protected] (L. Ilie )

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-review under responsibility of Faculty of Economic Sciences, “Lucian Blaga” University of Sibiu” 727

Livia Ilie / Procedia Economics and Finance 27 ( 2015 ) 726 – 730

The uncertai n gl obal markets put new demands on the finan ce function. “Finan ce must su pport flexibility,

s cala bili ty, and responsiveness to a mul tiplici ty of gl obal opportunitie s and challenges” (Axson , 2012).

The downturn f orced companies to incr ease efficiency, to make cuts wherever it was possible, learn to be mor e

produ ctive, but by now the only al ternative for prof itabili ty is growth: en tering new markets in an un certain economi c

environment. To face this cha nging times, there is a tremen dous need to have a ppropriate skills, new sk ills, especially

f or those who manage the finan ce function in companies. It is v ital for compan ies to have a st rong guidan ce from th e

finan ce fun ction to naviga te in turbulent times.

2. Cha llenges for the fin ance functio n

Many studies were made, most of them b eing based on in terviews with im portant CFOs th at shared th eir experience

in transforming the finan ce departments in order to better res pond to the compan ies needs in a ddressing the chal lenges.

ACCA (The A ssociati on of Chartered Certif ied Accountants) and IMA (Institute of Management A ccounti ng)

in itiate d a ser ies of discu ssions about the future of the finan ce fun ction and the future role of C FOs. In th eir 2012

re port on The changing role of the C FO it was synthes ized the ch allenges th at the finan ce function has to f ace in th e

future :

 Reg

u lations: the m ore complex and uncertain the economic e nvironment is, the higher the sp eed of regulatory

changes, the higher the n eed to harmonize regu lation acro ss borders. This gives a dditional roles to the C FOs in

order to comply with all regulations and to have in the finan ce departments the professionals that can c ope with

the regu latory changes. They also have to have the capability to influence the policy and the re gulatory process on

beh alf of th eir businesses.

 Globalizati on: as busine sses become gl obal, CFOs have to have a gl obal persp ective and exper ience. They have t o

understand how th eir business can oper ate in di fferent cultures, regions, in different re gulatory context in order to

provide a v aluable input of the finan ce function into the over all business whi le expanding in new markets .

 Techn ology: the finan ce function has to be in the centre of a data revolu tion. On one hand there is far m ore

inform ation av ailable th at should be co llected and process ed, on the othe r hand more comp lex software to process

the d ata is av ailable. More eff ective business can be in p lace once the finan ce function is using properly the

av aila ble tec hnology in order to g ather, organize and standa rdize data . Techn ology w ill redu ce the time spent on

looking f or data and will give m ore time in connecting inform ation, providing v aluable input in the d ecision maki ng

proc

ess and exp laining the imp act on the business. There is a gr eat opportunity in these tu rbulent times in using

the huge d ata and the t ools to give insight f or the furthe r development of the business.

 Ris

k: the role of the C FO is no m ore only about cost savings. One of the cha llenges for the C FO becomes ris k

management. In a highly vo latile environment, CFOs have to be ab le to approach in a proacti ve way the divers e

risks in order to safe guard the business ass ets, to prevent poor behaviour that can erode value, to ensure the righ t

olicie s in what con cerns investments, cash av ailabili ty and shareholder r eturn. The classical balance risk-return i s

cr itical in this fast cha nging environment .

 Tr

ansform ation: the transform ation of the finan ce function is at two levels. First is related to outsourcing and share d

serv ices taki ng into acc ount the m ore complex envi ronment and the n eed for diversif ied skills. This brings more

risk to the busine ss that has to be carefully managed. Second is related to the remaining finan ce fun ction th at shoul d

m ore concentr ate on m ore effe ctive analysis .

 Stakeholde r managemen t: the financial manage r has not only to prove finance leadership and cont rollership but t o

be a str ategic partner to the CEO. The seni or finance executives are part of the t op management team and they hav e

to bring th eir input in order to h elp for better strate gic decisi ons. The C FOs have to have g ood communication

skills wh ile they have to commun icate not only to invest ors, banks or financ ial experts, but in an accessibl e

language to clients, med ia and the board members .

 Str ategy: the finan cial manager has to c onnect the finan ce specific act iviti es and analysis outputs to the r ealities of

the busine ss helping in the str ategy for mulation and implemen tation process . The finan cial managers have t o

equ ally b alance numbers and str ategy. The finan cial manager has to make a s tep forward from analysi ng the past

perf orman ce and f orecasting on the sh ort term to a l ong term view on the dev elopment of the busine ss.

 Re porting : financial management is no m ore only about achieving finan cial goals outside sus tainability param eters.

This in cludes so cial and e nvironmen tal obj ecti ves in a ddition to the trad ition al econom ic ones. This is changin g 728 Livia Ilie / Procedia Economics and Finance 27 ( 2015 ) 726 – 730

consequently the way decisions are made and performance is m easured. There is a triple bott om line re porting:

m easurement and reporting of performance on so cial, environmen tal and finan cial metr ics .

 Tale nt and capabilit y: many challenges f or the C FO in a glob al context – diverse sk ills needed in order to respond

to a m ore complex finan ce function, oper ations th at are dev eloped abroad im posing working with talents fro m

di fferent cultures , incorporating virtual teams in the con text of advanced technol ogy. In these cond itions , even th e

prof ile of a C FO is cha nged from a sp ecialist to a person with much broader view and skills .

A 2011 KPMG In ternational r eport on Transforming Finance s tates that the last decade wasn’t easy for CFOs du e

to “e rratic markets, disrup tive technolog ies and a complex web of new regulations and comp liance issues” tha t

im posed a redefinition of the role of the finan ce function in the organ ization. It is no more a bout “collecting, payi ng

and re porting ”, but about “d eliver fas ter, more accurate and m ore insightful analysis and re porting while appropriately

managing risk and reducing cos t”.

B eing flooded with information, the finan ce departments face an imperative cha nge in order to na rrow the

inform ation gap, the gap bet ween the information they can a ccess and analy ze and the one they n eed in order to make

d eci sions. The need f or more in tensive i nformation can be solved th rough the av ailable tec hnology and s ophisticated

analysis software. T echnology is nece ssary for improving analysis and re porting but it is not suff icient. There is a

st rong need f or tale nts with analy tical skills, highly trained, th at have a general business view, and in many case s

MBAs gradua tes or profe ssionals th at worked in banks and financial serv ices firms and th at were dismi ssed during th e

finan cial crisis re present the solu tion for the finan ce department. But im proving technol ogy and IT software that can

o ffer m ore accurate and d eep informa tion for strategic analysis requires a lot of i nvestment from the part of th e

company. This brings also transform ation within the finance f unction, by creating a stronger link with the IT, and i n

some compan ies, even by including the IT function within the finan ce department.

C FO Res earch Services and KPMG In ternational made sever al studies on the transform ation of the finan ce function .

They in terviewed seni or finance executives from gl obal compan ies to unders tand how finance function s wer e

transformed and wh at will ha ppen furthe r. The role of the C FO changed from d ealing with the past to give finan cial

adv ice to l ook to the future for shapi ng a sound business in a ch allenging envi ronment: more complex businesses, a

n eed f or more and b etter inform ation on mark et conditions, n eed for more cont rol of risks, fast changi ng rules an d

re gula tions. Finan ce department should b ecome a contributor of value, not only an observer of the manager ial

d eci sions impact. A ccording to the C FOs interviewed by CFO Res earch Services and KPMG In ternational the financ e

profe ssionals have to provide useful demographic, mark et or other data alo ngside with co nventional p lanning an d

finan cial reporting in order to o ffer strategic adv ice to the companies’ boards.

The C FO Res earch Services and KPMG In ternational re port (2012) con tains also some keys to a su ccessful finance

transform ation th at includ e:

 obtai ning a st rong commitment f or transform ation from the CEO and the board;

 tran

s lating d ata and analy tics in a business lang uage to be easy to be used by the d ecision makers;

 reco gniz ing th at there is always comp etition for resour ces, esp ecially IT resources, and the finance department ha s

to be prepared to make a case why it needs these resources

But the most difficu lt change the finance fun ction has to f ace is in co mmunicati on, both within the finan ce

department and with the businesses. Senior finance executives consider th at it is the finance role to convince business

lea ders th at the finan ce department should not only evalu ate past financial performan ce but g et involved in an active

way in str ategic investment de cision, allocate more effic ient and eff ective resour ces and drive value cr eation.

3. T he com plex role of the CFO

The finan ce fun ction has to make a larger contribution to how the company’s departments perform. In fast changi ng

environment, companies n eed fast and reliable inform ation in order to adapt and make b etter deci sion. P roviding hi gh-

qu ality analysis , more qu ickly and in m ore detail pred ictions in a cons tantly changing, vo latile econom ic environmen t

is the new role for the finan ce function in its active par ticipati on in the d ecision making process. Successfu l

organizati ons require th eir CFO “to have vision to l ook beyond the core function s of financ e” and “to use th eir financial

acumen and insights to drive new value and higher levels of business transformation and perf ormance” (Boy le et al. ,

2009) . 729

Livia Ilie / Procedia Economics and Finance 27 ( 2015 ) 726 – 730

In this context the human resource of the finan ce department has to have an a ppropriate mix of knowledge, sk ills

and comp etences, w ith a highe r component of capabilitie s in strategy, operati ons , and sophist icated analy tics.

A 2009 M cKinsey Global Survey Resu lts on How finan ce departments are cha nging find that the compan ies were

slowly adapti ng their organiza tional structures to comply with the pressures of the economic crisis. Still C FOs spen d

mu ch m ore time on cr itical areas th at arise during economic crisis: finan cial planning and cont rol, risk management ,

str ate gic p lanning . Many compan ies are increasing the role CFOs play in str ategy, risk management and performanc e

management .

A ccording to Axson (2012), to p lay its str ategic role CFOs must excel on sever al areas: b alance cost cont rol and

growth, implement robust pe rforman ce management, unlock the latent pote ntial of finan ce talent.

The evolu tions in the econom ic environment and the m ore complex role of the finan ce functi on, f orced a

transform ation o f the finan ce department by sp litting it into two distin ct groups o f activities : one routine, transac tion-

ori

e n ted and the other one high-value analy tic and str ategic. This makes it more diff icult for p rofessionals aiming t o

dev elop a car eer in finance. If un til now pe ople could en ter the department and learn to mas ter from trans actional

acti viti es to m ore sophis ticated ones, nowadays seni or finance executives look for talent w ith more comp lex skills:

acc ounting and aud iting is no m ore enough, more MBA gradu ates are preferab le in order to have a str ategic overvie w

over the dev elopment of the industry and the growth opportunities of the company, co mmunication and proj ect

management skills, IT ski lls to use sophisticated software, mas tering a couple of languages and having an in ternationa l

persp ective, bo th Wes tern and As ian.

In order to make a di fference in a very comp etitive env ironment, the C FO needs m ore than technical capabilitie s .

He n eeds to make a differenc e in the CEO’s team - the team that is runni ng the busine ss. The CFO has to understan d

how the company w orks and to provide to the other d ecision makers the informa tion they need in a way the y

understand. Many pe ople have access to a lot of information. But one should be ab le to select, to make ju dgments

based on exper ience and str ategic prioritie s of the company . Once data process ed the C FO has to be ab le to express in

simp le words wh at is behind the comp lex data analysis the finan ce department is making av ailable. They have t o

bridge the language ba rrier, the technical vocabula ry the finan ce profe ssionals use , in order to be able to contribu te to

v alue cr eation in the company. Co llecting data , analysing a nd interpreting the data is impor tant but not en ough. CFOs

have to be ab le to well exp lain to othe r departments and board members wh at is behind the numbers.

L eading the finan ce department on one hand and bei ng part of the senior management team on the other hand, a

C FO sh ould be ab le to cope w ith these challenges: in one team they lead in the othe r they are a membe r.

The C FO should be ab le to select a team with mu ltiple ski lls. The w ork is much m ore comp lex, huge d ata shoul d

be process ed so th at no one si ngle person can have the know ledge and skills to do it. CFOs have to rely on th eir team .

W ith the input provided by the finance team, the C FO should w ork on the str ategic dev elopment o f the company wit h

the CEO and othe r board members. Making th eir teams work is not easy. Putting different comp etent people togethe r

in an eff ective way is not possible with out establishi ng rules in how to co mmunicate, how to make d ecision, how t o

ev alua te performan ce and how to manage c onflicts.

In order to make b etter deci sions, one has to put in place bette r process es. The b etter the process is designed th e

less biases wi ll be in the d ecision making process. The strateg ic role of a C FO is to ensure th at what weigh more in

the fin al decision are f acts and not individu al biases (Huy ett and Ko ller, 2011). High quality d ecision maki ng process es

are those in wh ich debates take place , where ideas are cha llenged by some body else perspective. And the role of th e

C FO is to f acilitate and to imp rove the quality of such deb ates.

But the C FO has to be a me mber in the CEOs team. Often the seni or managers comp ete for resour ces, the CEO’ s

fav or or f or other targets and this eviden ce is hindering the over all performan ce of the company. Instead seni or

managers should co llaborate and this can ha ppen only if there are g roup goals, company str ategic go als, as opposed t o

individu al or department goals . The managers’ performan ce should be measured ag ainst these overall go als.

A ccording to the studies made by KPMG (2011) the CFO is contributing to the over all performan ce of th e

organizati on based on thr ee core attribu tes:

Ab ility to build relati onships with s takeholders based on t rust: capabili ty to invest, capability to r aise fun ds, ab ility

to manage risk, governan ce integrity , invest or credib ility

Ab ility to simplify finan cial inform ation rega rdless its complexity: r eliable informa tion, accurate re porti ng,

s tanda rdize and autom ate process es, el imin ate dup licati on, cost eff icient 730 Livia Ilie / Procedia Economics and Finance 27 ( 2015 ) 726 – 730

Ability to provide r elevant insights f or decision making: r eal-time and insightful information, accurate foreca sts,

quan titative and qu alitative analysis , integrated planni ng, execu te str ategy

Consideri ng the current challe nges, the prof ile of the C FO that best suits the n eeds of companies can be described

based on backgrou nds and experiences they n eed to have. In 2013, a M cKinsey report, Agraw al, et al. (2013 ), base d

on a survey o f backgrou nds and exper iences o f the C FOs of top 1 00 gl obal companies based on market capitalizati on,

con cluded that there are four di fferent profiles of CFOs (see Tab le 1). C FOs char acteristics should be coherent wit h

the industry context and the str ategic p lan of the company. As Agraw al et al.(2013) s tate in their re port, the selection

of the C FO should be align ed to ”the current corporat e strategy, the sk ills and te mperament of the CEO, th e

com position of the seni or-management team, the current capabilities of the finan ce function, and organ izational an d

re porting structures” .

4. Co nclusio ns

Busine sses operate in a d ynamic, global and uncertain economic envi ronment. This situ ation puts pressure on the

finan ce fun ction and its execu tive to better all ocat e resources and b alance sh ort term versus l ong term str ategies, t o

co unterbala nce cost redu ctions with identifyi ng long term growth opportuniti es. There are imp lication s on the sk ills

n eeded to f ace the ch allenges and this makes the career pat h in acc ounti ng and finan ce to evolve in new dir ections. It

is both a ch allenge and an opportunity f or the professionals looking f or an enr iching experien ce.

Chal lenges f or the finan ce department are both in the human resource and in its infrastru cture and technology.

Human resour ce need to have a dditional sk ills in order to fulfill its role . Organ izational stru cture becomes m ore

complex with im proved processes that inc orporate techn ology in order to co llect, analyze and re port important

finan cial d ata needed in the de cision making process.

S ynthes izing there are two main conclusions :

1. In wh at concerns the finance f unction transform ation we can identify two key enab lers: technol ogy and pe ople.

The transform ation of the finan ce function can be made more eff icient and eff ective using the new technolog ies. But

in order to use this technol ogy at its value , a finance department has to have the right talents, with an a ppropriate mix

of sk ills and know ledge.

2. In wh at concerns the role of the C FO there is an im portant shift and an upgrade from the trad ition al trans actional

role (repor ting on the past) to a transforma tional, str ategic role . The C FO has to under take more value a dded and

str ate gic act ivit ies.

The res earch on how financial managers and finan ce departments adapt to the changes in the environment wi ll

con tinue w ith a survey on CFOs in companies th at oper ated in Roman ia, in order to test if the findings are app licable

al so to the Romanian mark et, or if we can identify some speci fici ties in companies’ a pproaches .

Ref erences

ACCA & IMA , September 2012 , The chan ging role of the CFO , www.acc aglobal .com

Agrawal , A., Go ldie , J., Huye tt, B., 2013, Today’s CFO: Which profi le best suits your company? , McKinsey on F inance, no.45

Axson , D., 2012, The world is not flat: the chan ging role of f inance in today’s global economy , Acce ntur e

B oyle , M., Gaynor , P., Klee, J., Pittman, D., 2009, Financial leadership in cha llenging times : challenges and opportuni ties for today’s CFOs, Price

W aterhouse Coopers LLP

From k eeping score to adding value - G lobal CFOs on the art of construc tive change , Report by CFO Research Serv ices and KPMG I nternationa l,

CFO P ublishing LL C, 2012

How f inance departments are changing, McKinsey G lobal Survey Results, McK insey & Company , 2009

Huye tt, B., Koller , T., 2011, How CFO s can k eep strateg ic decisions on track, McK insey on Finance, no.38

Transform ing Finance - Cha llenges and breakthrough s olutions for CFOs, KPMG I nternational, 20 11

Wh at makes a CFO great?, CFO Han dbook, CFO P ublishing LLC, 2013, ISBN 978-1-938742-21- 7.