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Article  |  03/06/2024  |  Accordion

Digital transformation and the finance function

A 4-Step Playbook for CFOs to Meet Market Mandates

The stats don’t lie: A full 98% of private equity sponsors say that their portfolio company CFOs must take a lead role driving digital transformation within the finance function. The problem is the gulf that exists between what sponsors want and what they’re getting. Only 23% believe that their CFOs have been completely effective at attempts to digitally enable the business. In a surprising finding, the CFOs themselves agree. In fact, only 20% think they’ve been fully effective digitizing the function.

The so what? PE-backed CFOs need to prioritize finance function digital transformation this year. It’s not only a sponsor mandate – the market demands it as well. Deal activity is expected to quickly rebound in response to lower borrowing rates. That means the private capital industry will finally be ready to put its record setting $1.6T of dry powder to work in new deals, three out of 4 of which are projected to be add-ons. The integration work required of add-ons is both complex and sophisticated. Synergies targets will only be met if the finance team isn’t burdened manually pulling, cleaning, and analyzing data. So not only does the CFO need to lead digital transformation this year, but they also need to do so now, before they’re awash in M&A activity.

To an under-resourced, over-burdened CFO the idea of digital transformation can be intimidating. It needn’t be. CFOs can follow a 4 step, 100-day cheat-sheet to make the intimidating more digestible:

Step 1: Kicking off your digital transformation:

It all starts with infrastructure. The function can’t digitize without the right technology foundation to enable digitization. As a result, the CFO’s very first step must be to conduct a technology audit. Think of this as IT due diligence, wherein the CFO is trying to assess whether the company has the right suite of integrated architecture to close system gaps and drive optimized financial and operational reporting. For example: Does the enterprise resource planning (ERP) system cover core business operational and financial processes? If not, the CFO should implement supplementary, scalable corporate performance management systems (CPM) and data and analytics solutions to enable streamlined monthly close, reporting, budgeting, and forecasting processes.

  • Great looks like

    An ERP and CPM system working together in harmony

  • Good looks like

    An ERP but no CPM. (Or CPM but no ERP)

  • Bad looks like

    QuickBooks, Excel

Step 2: Deep-dive into data:

Once the tech stack has been addressed, it’s time for CFOs to turn their attention to the inputs feeding that stack: the data. Far too often valuable data is locked away in disparate and outdated systems (like Excel) rendering it ineffective for driving actionable insight. To achieve the visibility necessary to evaluate enterprise-wide performance, CFOs should leverage their now optimized tech stack (ERP, CPM, in combination with BI, and/or data warehouse systems) to establish a “single source of truth” that collects and consolidates data for analysis.

Great looks like: A single source of truth that connects to their CPM and ERP system for reporting.
Good looks like: BI/Data warehouse tools not connected to CPM/ERP.
Bad looks like: Different sources, different Excel spreadsheets, siloed data.

  • Great looks like

    A single source of truth that connects to their CPM and ERP system for reporting

  • Good looks like

    BI/Data warehouse tools not connected to CPM/ERP

  • Bad looks like

    Different sources, different Excel spreadsheets, siloed data

Step 3: Revisit finance function reporting:

Now that they’ve tackled the systems that house data and the inputs that go into it, CFOs must assess the outputs by addressing what we refer to as reporting inertia. Too many finance teams measure against outdated company strategies and investment theses. As a result, the reports provided to sponsors and management don’t align with the right KPIs, and finance is fielding too many burdensome requests for ad-hoc reports. Instead, CFOs must align with sponsors on the investment thesis, value creation levers, and the right KPIs and build out a corresponding reporting structure enabled by a strong data and analytics strategy. This will ensure finance converts granular data into the actionable, high-level insights management and sponsors need to make informed decisions.

  • Great looks like

    A holistic reporting system that connects investment thesis to real-time data against KPIs

  • Good looks like

    A reporting system that needs to be manually updated

  • Bad looks like

    Manually reporting into Excel for insight creation

Step 4: Focus on forecasting:

The CFO has an optimized tech stack, clean data inputs, and insightful reporting outputs. The next step toward achieving finance function digital transformation is making sure the company can use all the real-time information now at its disposal to look forward, via forecasting. Broadly, integrated (operational and financial) forecasting is at the core of managing the business. More specifically, a digitally enabled function can not only create cash forecasts with more accuracy, but because operational and financial metrics are now both retrievable in a single source of truth, these forecasts can enable better supply and demand planning – an often-overlooked critical component to enterprise-wide success).

  • Great looks like

    Technology solutions that allow direct line-of-sight into cash-flow in real-time

  • Good looks like

    13-Week cash flow forecasts

  • Bad looks like

    Ad-hoc cash flow reporting

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