Can your Finance function help predict the post-Brexit future?

19 September 2016

 

That’s a hard question to answer! There are lots of opinions on whether organisations can predict the future post-Brexit or what Finance’s role in that could be. Only time will tell what the full extent of Brexit will be. However, there are already clear impacts on business as we see volatility in financial markets and potential economic slow-downs in some sectors and markets. The flip side of this is that opportunities are created in some industries as trade in or with the UK becomes more attractive, and through the impact of legislative and political changes.

So what does this all mean for your organisation and what is the role of your Finance team in navigating through these uncertain times? In short, even greater demands and expectations are being placed on the CFO and their teams. Finance teams have a responsibility to help their businesses chart a course through the short, medium and long term impacts that Brexit will have on markets and opportunities and this can only increase the strain and weight of expectations on the team.

Back to basics

As people worry about the uncertainties Brexit presents, managing business performance is key and cost management is definitely back in focus - if it ever went away!

Businesses need to plan for the impact of changes to tariffs or quotas that could be introduced under new trade deals, assess the impact of exchange rate movements on the cost of overseas labour (e.g. where cross border shared service structures are in place, or when team members move across the organisation) and changes in raw material costs and product pricing decisions.

All of these impacts are currently unpredictable and Finance (together with other business support functions) will need to assist in building flexible models to analyse a variety of scenarios which may be presented. In addition, Finance must ensure that they are managing their own costs, whilst providing real insight as the business looks to drive immediate, strategic initiatives to manage enterprise wide cost and capitalise on opportunities.

Ever since I started working in and around Finance teams, CFOs have focused on making their teams more effective and efficient as part of the journey to “world class” finance. In last year’s PwC’s Finance Benchmark Report (“Breaking Away”), we pointed out the 40% cost gap between finance functions at top quartile against those in the middle of the pack. This gap will surely increase if Finance teams are unable to respond to changes in business and operating model changes post Brexit and help the business understand the impact these changes may have in order to avoid any potentially costly and inappropriate decisions. All of this requires insight and predictive analysis which Finance is key to driving.

Looking at the Finance operating model itself, many organisations have restructured their Finance teams through transformation initiatives that implement process improvements and look to restructure the team into operational and business partnering groups. Of course, Brexit will necessitate a re-evaluation of the cost and benefits of these operating models, in particular, where organisations employ cross border SSC’s that serve a number of territories as part of that model.

Top performing finance functions, that are already efficient, are now also exploring the use of new technologies, such as Cloud Computing. Brexit will also raise issues that need to be examined around Finance technology and the use of Cloud (e.g. regulation on data safe harbour). However, these new technologies will assist Finance in provide quicker insight to the business around analytics to help assess real business issues and often at a lower cost so the issues posed around them by Brexit need to be resolved.

Bringing insight and support to the business

In these uncertain times, organisations are looking towards CFOs and their finance teams to do what is a real challenge – predict the future. This is an area where, in my experience, Finance teams have been regularly missing the mark.

There is a real pressure on Finance to support the business as it looks to understand and model the impact of key Brexit issues. For example, in the manufacturing industry, CFOs are being asked to consider:

  • Exchange rate fluctuations and hedging – Will potentially cheaper exports off-set the changes to labour and commodity price changes?
  • Overseas investment decisions - What is the appetite to create or buy new operations to ensure continued access to free markets? Will foreign direct investment (FDI) continue in the immediate future?
  • Is there a need to review and optimise the legal entity and corporate structure (e.g. shared service centre location) as a result of changing legislation?
  • An economic slow-down would put the focus on revenue, productivity and driving costs down, but how would it impact a company’s ability to invest in innovation? Is Finance able to work out the opportunities available to the business (e.g. pricing decisions, tax implications)?
  • Skills and talent – How will any changes to free movement of people across borders impact the workforce talent pool; can these changes be planned for? For Finance teams in Small and Medium Enterprises (SMEs), there is the question of whether they have the relevant experience to deal with the issues.

These aren’t easy questions to address, but one enabler people have been talking about is “Finance in a (Brave New) Digital World”. Predictive Analytics and Big Data are talked about as the big bets for delivering genuine insight. Currently, we are finding that most Finance teams struggle to pull together information and have little time (typically only 40-50% of analyst time) to really scrutinise it, and obtaining any degree of forecast accuracy is time consuming.

However, we may be on the cusp of a real turning point as some of the technological enablers start to become more mature. Finance should take advantage of tools such as cloud based forecasting, budgeting and other analytics solutions that would allow for more automated historic reporting and enable teams to turn their attention to current, and future, business issues.

There are still plenty of challenges ahead. But I believe that Brexit may be the trigger that CFOs can use to ensure that Finance stays relevant to the business, by delivering insight and be the partner that has been talked about for the last 10-15 years. Technology may be the key enabler that allows this to happen.

Right here, right now

The question is what should CFOs do now? Many will be examining their team’s cost and performance, ensuring that there is no unnecessary activity, and that there is focus on the challenges, issues and opportunities that really matter to the business. They are focusing on making Finance “fit for the challenge” of the years ahead and ensuring a strong Finance team that can operate at the heart of business decision making.

As part of this exercise, many are performing high level impact analysis exercises to provide insight into the potential effect Brexit may have on the business and how Finance may need to react. This is often supplemented by taking stock of where they are now and assessing what is and isn’t currently working, where improvements can be made, and where there are gaps which need to be addressed.

This can be done by a short Benchmarking exercise which shows how the team compares against leading practice. Comparisons can be made against what others (internal or external) are doing, and conclusions can be quickly drawn on what is needed to increase Finance’s capacity and capability. The output will enable the CFO to demonstrate that they are prepared and understand whether the finance team has the right strategy, uses the most suitable Operating Model, take advantage of the latest tools and technologies, and has the skills and talent to face the future changes posed by Brexit.

Unless Finance is perceived as meeting the business’s needs, taking the initiative and driving the business forward in these times, CFO’s may struggle in a post-Brexit UK.

Philip KamPhilip Kam
Senior Manager, Finance Consulting
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