Lessons learnt from COVID-19: Building a resilient finance function
Vaida Lapinskiene of EY discusses how circumstances are forcing businesses to transform their finance function to manage the challenges brought by the coronavirus pandemic.
Prior to the COVID-19 outbreak, many finance functions across a range of organisations and sectors were already undergoing transformation or evaluating their operating models. This was largely in response to a broad and well-documented set of challenges and drivers, which included managing costs, delivering value, attracting and retaining talent, making efficient use of technology and automation, and complying with new regulations.
In many cases, the recent pandemic has accelerated the need to transform the finance function. Businesses have been forced to run operations remotely with a large number of people working from home. They have had to move swiftly to deal with sudden, pressing challenges, such as those around client payment delays, which have become problematic as cash flows dry up and the global supply chain comes under pressure.
How individual businesses have reacted to the COVID-19 crisis has given clear insight into exactly how resilient their finance function is (along with the business as a whole). Some functions have had to rethink processes and large parts of their operations, plugging gaps as they arose and discovering they did not have the relevant expertise in certain areas. Others, however, found that they were able to implement changes more effectively and fluidly.
So how do these organisations differ?
In some measure, it comes down to whether finance functions are reactive or proactive. Reactive functions generally only consider transformation when it is absolutely required. This can be driven by external forces, such as changes to legislation or 'black swan' events such as COVID-19, or internal forces such as launching new ventures, acquiring businesses or moving into new territories, for instance.
Proactive, progressive functions, on the other hand, not only react to events, but tend to be in a state of continuous development. They transform their businesses on an ongoing basis in order to be optimal and effective, responsive and adaptive.
Ensuring the financial health of the company is the key priority, as well as meeting the needs of unsettled stakeholders, such as its own employees, suppliers, customers and shareholders. Companies are focused on securing entrepreneurial liquidity and maintaining essential business processes to keep operations running as smoothly as possible.
The focus of the finance function has clearly shifted from historical transaction recording and reporting towards forward-thinking planning and forecasting, modelling scenarios, future cash flow management and alternative funding options. The finance function can no longer afford to spend the majority of its time on routine activities because the business requires more time, insights, and support on making decisions.
If there had been a 'regular financial crisis', if any financial crisis can be called regular, finance management could have allowed routine functions to run with minimum process changes and minimum management attention to the regular activities. However, COVID-19 made sure that none of the routine finance functions could be run as business as usual. Companies must reconsider how they exchange information and documents with their third-party stakeholders, for example, physical document exchanges have become either very complex or close to impossible. Further questions also remain, such as:
Whether there are sufficient digital channels to sign agreements, or issue and receive invoices, etc.
With almost all employees working from home, is there an electronic workflow process in an audit-proof document management system to review and approve invoices and other business transactions, or is the reliance on e-mail communication?
Is there a clear electronic workflow and filing systems for all financial documents floating around the company?
Do employees within the finance function and outside it know how to access all documents to record and approve all business transactions?
More than ever, the finance function needs to ensure that they have a reliable financial records database that is kept accurate and up to date. Some essential activities include:
Recording business transactions in real time or close to real time to have full visibility and transparency around working capital items;
Applying realistic judgment around the open items that directly impact cash inflows;
Providing more detailed, faster and more frequent reporting and insights on the most critical items;
Considering real-time reporting possibilities for working capital positions and rolling forward cash forecasts;
Shifting focus from historical reporting to future financial forecasting and modelling;
Applying for bridging measures, such as loans, grants, government stimulus funds, insurance claims, etc.; and
Considering other government-supported measures such as tax credits, payment deferrals, reporting extensions, etc.
Like any business function, finance and accounting is facing unprecedented challenges as a result of COVID-19. There are a range of new variables including working from home arrangements (hardware and software capabilities), staff sickness and absence, home-schooling and other family responsibilities, lack of options to arrange for childcare to focus on work, and such an impact on personal wellbeing brings general exhaustion on finance and accounting employees. These are in addition to the uncertainty about their job and salary stability. These challenges are placing additional strain on the finance function to run matters as usual when nothing is 'usual'.
Creating end-to-end processes
Once companies have come through the worst of the impact, having ensured liquidity, the focus may now turn to analysing the structural and procedural consequences of COVID-19. Naturally, no company could have fully predicted or prepared for the pandemic of this scale. However, in analysing the lessons learned, a path forward can emerge. Finance and accounting functions should look at this crisis as an opportunity to grow future resilience and agility.
Once the business functions were shifted from a single work location to homes, the need for clearly defined and documented end-to-end processes emerged. The option to casually meet and resolve any matter has disappeared and more formal protocols must be observed to run business and finance processes as usual. Roles and responsibilities, control check points, process inputs and outputs have suddenly become less obvious and require more formal arrangements. Not to mention that well designed and generally accepted and applied processes are easier to adjust when an emergency like COVID-19 appears.
Even for the companies who believe they have well-designed and well-documented processes, this crisis has revealed the actual amount of deviations happening in real life from the perfect processes designed and lack of adherence to processes agreed. All of these considerations would have created the need for work-around solutions as a means of ensuring that day-to-day finance and accounting could continue as uninterrupted as possible. The question is how many deviations we will allow in the future and how we will manage all 'business specifics' that emerge every day? Do we have the necessary process change management measures in place and an agile mindset to manage either small changes in business as usual or disasters like COVID-19?
Today's finance and accounting function can almost in all its entirety be digitalised. Therefore, one of the first tasks for the finance professionals after we emerge from the COVID-19 will be to scrutinise any manual action that still requires physical human interaction or manual processing and to consider digital solutions. The entire ecosystem of automation measures must be considered, including large scale enterprise resource planning (ERP) systems' functional capabilities as well as niche tools to automate very specific processes. Software as a service (SaaS) solutions have become much more attractive to accommodate rapid change in finance and accounting technology developments without heavy upfront investment into certain tools. A good balance between the capital investment into core ERP systems and operating expense nature of SaaS solutions should be considered, rather than a long-term investment into fully owned platforms, which can become outdated earlier than the business case for the capital investment is realised.
On the other hand, fully digitalised finance and accounting functions brings its own cyber security challenges: network security and stability, access rights, data exchange channels security, country regulations and limitations around data storage and exchange, etc. The more a complex ecosystem grows, the more issues arise when it comes to data integrity, system compatibility, duplication and reconciliation of data and actions in multiple systems.
The flexibility of the finance and accounting function to scale a particular operation up or down depending on changes to the environment is significant. The need to bring people in when the workload increases and to downsize a team when required. The ability and required skills is set to shift focus from routine transactions' processing and reporting towards real analytics, scenario modelling and decision support. Outsourcing, co-sourcing and contingent workforce solutions can make such decisions considerably easier because there are typically no issues around onboarding or making redundancies. Aligned with this is the expertise that the people bring to a company – having the right people in place at the right time, as and when needed.
For companies operating across borders, centralisation of the finance, accounting and tax function has always been a high topic on the agenda. In the old good times, you would consider the arguments like cost savings, labour arbitrage, process alignment or compliance with local regulations to be important when making decisions to centralise.
However, COVID-19 has brought some additional arguments on the table:
If we run a single worldwide shared service centre, what is my business continuity plan if we must shut down the operations of this centre – do we have alternatives?
How quickly can we switch the delivery of certain processes from one location to another?
What business partnering and business support can be provided by finance in a remote working environment?
How close are we to the regulatory developments happening in each jurisdiction, so that we can properly comply with new regulations but also tap into the government stimulus packages available?
Have we centralised too much and who is our agent in the country – our ears and eyes – to properly address the regulatory challenges and opportunities?
While these reasons are by no means exhaustive, they are particularly pertinent when dealing with unforeseen issues or when swift changes are required.
The COVID-19 pandemic has created an unprecedented shock to global business, but it has also presented finance and accounting functions with the opportunity to learn lessons and build for the future. It is vital that finance leaders gain the insight to know what changes to implement and make sure they find whatever positives they can. This is equally true of any future external or internal change that the function undergoes.
In its simplest form, this will include an analysis of which areas of the finance function operated efficiently and those where there was friction, what worked and what did not. It is this analysis that will inform effective and continuous transformation.
More significantly, when making decisions in response to an event or change, it can be tempting to take the short-term view and simply resolve the matter at hand. However, where possible, any changes to the finance and accounting function should be made with a long-term view, so that what is implemented now does not have to be reinvented further down the line. Also, with people working remotely both at home and in terms of global mobility, the digital dimension will be central to future change.
It has always been key to flex the structure of the finance and accounting function against the ever-changing legislative, digital and talent landscape. This is going to be truer than ever going forward.
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Vaida Lapinskiene is a partner, based in Singapore, who leads the accounting compliance and reporting (ACR) practice in the Asia-Pacific region. The ACR practice delivers finance and accounting managed services with a special focus on control over clients' financial results and operations across the globe, and ensures compliance with rapidly changing regulatory requirements.
She has more than 20 years of experience working with clients in Europe and Asia-Pacific to provide companies full visibility and control over their finances, enabled through accessing an efficient and effective delivery model via global delivery centres and powered by advanced technology solutions.
Vaida holds a MBA from Vilnius University.