Economic environment changes have an impact on business operations and consequently the changes in strategies and priorities and how the departments need to adapt. In the short to medium term, the economy is driven my uncertain determinants; surging demand and supply, large currency fluctuations, the rise in commodity prices, cost-cutting and inflationary shocks from other markets. These macro-economics trends have a great impact on how businesses operate, their opportunity costs and the strategies the financial managers develop in their businesses in competing with the global economies.
Therefore, it is necessary to understand how the finance function adapted to these uncertainties and how companies' board and financial managers have approached these challenges by adapting the structures of finance departments. The uncertainties brought about by the global markets have exerted fresh demands on the finance roles, hence, they must support scalability and receptiveness to economic shocks, global prospects, and encounters. Moreover, the emergence of these challenges has forced businesses to intensify efficiency, cut operation costs, investing in innovation and technology and venturing into new markets (Ilie, 2006). Despite the economic uncertainties in new markets, taking risks, investing in new skills sets for the finance functions is essential for the businesses to thrive in global markets.
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Challenges Faced by the Finance Function
The finance managers through the finance function face various challenges in the uncertain macroeconomic environment changes as highlighted below.
Globalization
As the businesses venture new markets, the financial managers need to have a global perspective and experience. The main building block being awareness through solving the problem of information asymmetry regarding different regions together with different strategic challenges and opportunities faced. There is a need for CFOs to understand how the businesses can integrate and operate in different cultures, regions with different regulatory frameworks and requirements to provide viable solutions for the finance roles while venturing new markets.
Regulation
This is a major facet of business operations, hence affects the role of CFO. Regulations aim to enhance accountability and transparency across the finance departments, with the regulatory environment across the global economy encouraging the adoption of International Financial Reporting Standards (IFRS) through to country-specific regulatory developments. The complexity and uncertainty arising in the economic environment due to cross border business growth results to changes in regulations within and across borders. This has given more roles to CFOs to conform to all guidelines and involves professional personnel in the finance divisions that can adapt with the regulatory fluctuations and be able to influence the policy and regulatory process on behalf of the business. However, with the change in the macroeconomic environment, the CFOs will need to play a critical role in the onerous and burdensome regulation, and influence relevant policy development. They will also need to ensure that the finance function has enough expertise to resolve regulatory challenges that may continually arise. Technology
The finance function has faced a great challenge in restructuring the business and changes brought by data revolution through innovation of software used to gather, organize, process and interpret data to useful information for decision making in businesses. Availability of information through the technology channels help in reducing the time spent in looking for data, thus, accords extra time in linking information, giving significant input in the decision-making practice of the business. As a result, it helps greatly in interpreting the implications on the business. The changing macroeconomic environment through technology provides an opportunity through the use of big data and the software tools to give economic and consumer insight in local and global markets hence providing a baseline for business development. Therefore, finance managers face the challenge to leverage business intelligence in making data connections and interpreting the implications to the business by applying finance concepts on decision making. With the economic turbulence in which business operates business analytics enables finance managers to regress, correlate, forecast and predict future business scenarios and that of other markets through data visualization.
Risk
One of the challenges financial managers face is the effective risk management processes and expectations on the viability of business strategies for delivering long term financial plans from the business stakeholders. The risks and prospects experienced by the firm should be regarded as a portfolio of connected investments that require cautious estimations, financial projections, and management. Financial managers and their finance function have a comparative advantage to calibrate the risks faced by the business and advise on appropriate actions to be taken by the business. They also face the challenge of safeguarding corporate ethos since the CFO is the guardian of the company’s assets. With the volatile macroeconomic environment, CFOs have no option but be proactive and prepared to take risks by ensuring appropriate policies related to capital investments, cash availability and shareholder return; balancing risk and rewarding effectively (Wagner & Disparte, 2016). Therefore, it is essential to adopt a broader view of risk that emphasizes on having specialists in an organization to address critical issues and ensuring policy consistency, prioritizing risks, transparency and making standard best practices to effectively nagging risk.
Transformation
There are two levels of the transformation of the finance function. First is outsourcing and shared services, aimed at cutting costs, skills diversification and improving efficiency. The finance managers have adopted remote delivery models tapping into human resource gap in offshore locations to drive down cost and central finance processes to cut costs and centralized transactional finance processes to boost efficiencies, operational agility, and automation. The second level is the retained finance function that concentrates more on effective analysis. However, this is risky and has to be carefully managed through making the whole finance model work together effectively from shared services and articulation of the retained function to facilitate effective analysis through embedded teams in partnering roles.
Reporting
Financial management involves achieving financial goals within specific sustainability parameters which include social and environmental objectives. This has significantly affected corporate decision making and how performance should be measured, leading to the emergence of triple bottom line reporting; the measurement and reporting of performances on relevant social and environmental metrics. Another challenge facing the finance function is the increased importance of corporate social responsibility (CSR), hence, CFOs need to evaluate the trade-offs in pursuing CSR to secure business growth and profitability.
Stakeholder Management
CFOs need to act as a perfect partner to the CEO and support the management in strategic decision making while also demonstrating leadership, controllership, and good communication skills. The financial managers need to also balance priorities concerning collaboration and independence in brokering external relationships that matter for the reputation of the business.
Strategy
The finance function needs a CFO who connects the finance specific activities and risk processes, such as budgeting, forecasting and risk assessment to help in strategy formulation, validation, and execution. There is also a need for CFOs to integrate and align the financial processes of the business with the strategy of the business by focusing on long term strategies.
Talent and Capacity
CFOs face a challenge in meeting the global demand of a new set of human resource that would compete effectively with the growing complexity in the finance function. There need for diverse and expert skills to meet this pool of demand. The changing role of finance managers in talent development has made it difficult to hire the right finance leaders, hence developing talent through a global finance function through geographical, language and cultural difference (ACCA, 2012). With the growing complexities in recruitment, finance leaders increasingly have to strike the balance between specialist resource and broader finance capabilities.
Conclusion and Recommendations
In the fast-changing economic environment, companies need reliable access to information in order to adapt and make viable decisions. Therefore, the finance function has to catch up with the critical role of providing quality analysis regarding the volatile economic environment to help departments work more efficiently. In order to play a more strategic role in businesses, financial managers need more technical capabilities for them to make a difference in the CEO's team and understand the how the company works for them to provide viable information to other stakeholders. Moreover, in order to make better decisions, the management should put in place better processes designed to reduce biases in the decision-making process. To achieve this the CFO has to be a member of the CEO's team hence efficiency and transparency in the formulation and execution of strategic goals.
There is a need for financial managers to be able to absorb global shocks through the integration of resources and information in order to produce the best planning tools to counter the turbulent economic environment. Therefore, creating a pool of human resource that can be able to analyze and forecast the behavior of markets would help the business manage the risks that accompany macroeconomic changes. It is also important for finance managers to develop global risk agility. The CFO should be the finance leaders of the business who understands both the qualitative and quantitative risk, knows the past, present and can predict the future prospects of the business and understands the long-term impacts of actions taken today.
Challenges faced by the finance function are in human resource, infrastructure, and technology. Human resource needs to have additional skills to achieve its role with the incorporation of technology in businesses processes in order to analyze and report financial data necessary for decision making (Vollmer, 2016). Therefore, in order to counter the challenges in the finance function, there is a need to adopt new technology and recruit personnel with the necessary skills and knowledge.
References
Ilie, L. (2006, April 5). Risk management challenges in a changing financial environment. Retrieved from https://www.newyorkfed.org/newsevents/speeches/2006/gei060405
The Association of Chartered Certified Accountants (ACCA). (2012, November 2). Accountants for business: The Changing role of the CFO . Retrieved from https://www.accaglobal.com/content/dam/acca/global/PDF-technical/finance-transformation/pol-afb-croc.pdf
Vollmer, S. (2016, 11 23). What Makes a CFO great. Retrieved from https://www.fm-magazine.com/news/2016/nov/what-makes-a-cfo-great-201615578.html
Wagner, D., & Disparte, D. (2016, April 12). The Global Risk Agility Imperative. Retrieved from http://www.cfo.com/risk-management/2016/04/global-risk-agility-imperative/
