The Evolution of Finance Function

Introduction

The continually rising globalization, emerging markets, competition as well as legislation and compliance requirements make businesses more complex, resulting in greater pressure on finance function.

Amidst the rising complexity of the business environment, it is expected to deliver quality information. The contribution to organizational performance gains more prominence as the organization continues its expansion activities.

So, what makes this so indispensable to a business entity? How to enhance traditional processes and methods to use technology for strategic growth? What is the impact of the digital era on finance?

To gain insights into the above questions, we need to track the evolution of finance from the traditional accounting and fund procurement to the much evolved and widespread role it encompasses in the modern day.

Evolution

The word finance originates from the French and is subsequently adopted by English-speaking regions to refer to the ‘management of money’. ‘Finance’, today, is more than just a word; it has emerged into a highly significant professional and academic discipline.

Traditional Approach

Traditionally, finance itself in any organization aimed to achieve optimal use of the limited financial resources. The scope of finance is mostly confined to the procurement of funds by business houses to address financial needs.

Earlier, finance as a function remained focused on funding activities and involved extensive decision making around financial instruments, investment houses and practices. This period (the mid-1950s) is referred to as corporation finance.

As the demand for funds continued to increase rapidly, episodic events including liquidation, merger, acquisition and consolidation have become an integral part of the finance function. The scope, however, does not concern with aspects relating to the allocation of funds. The emphasis is on three C’s – compliance, cost and control.

Traditional finance ignored the significance of working capital management and the need for an internal financial system. The focus of finance is by and large on matters relating to suppliers of funds, including investment bankers, investors and financial institutions, that is to say, outsiders.

Modern Approach

Going further, a number of factors such as the rapid technological advancements, intense competition, growing population, industrialization and government interference have contributed to the increased focus on the effective and efficient use of financial resources.

Essential matters such as the cost of capital, valuation of the firm, optimum allocation of resources have become the core of finance in a modern approach. The shift from episodic financing to managerial financing is a visible pointer to the emergence of finance as a function.

Modern finance leverages technology across main accounting and finance processes for enhanced performance. The finance as a function takes a broader view on various business aspects, including profitability planning, determining the asset mix, risk analysis, optimal capital structure, financing, investment and dividend decisions as well as the direction of business growth.

Under this approach, finance as a function emphasizes more on managerial aspects of business and stretches the responsibilities of a finance manager to include all decision-making associated with the efficient use of resources.

A modern day finance manager should possess a balanced blend of management skills, financial expertise, administrative ability, technological knowledge, communication skills and decision-making skills.

Finance in the Digital Era

The field of finance, among many other fields, continue to experience the explosive penetration of digitalization. Few marked developments include generation of information of all types, which demands finance professionals to demonstrate their analytical skills to quickly respond to the changing business environment.

Finance as a function equips itself with advanced information tools to address the emerging financial demands in the highly complex, data-driven environment. Today, finance professionals no more confine their skills to managerial business decisions. They seek to engage in most influential and insightful performance-driven processes.

Finance function leverages the digital developments to optimize the evolving business intelligence to more profitable ventures and improve efficiency amidst the mounting regulatory requirements.

The digital era finance as a function further features higher transparency and accountability, greater risk management and increased focus on revenue-generating areas.

The emergence of new industries and markets creates demand for AD&D (application development and delivery) professionals to add profitability to revenue streams and handle customer imperatives.

Challenges

Alongside a multitude of opportunities, the digital age poses the considerable challenge to stay relevant on the balance sheet. Other challenges include developing new revenue models (subscriptions), supporting innovation, improving customer satisfaction and profitability.

Finance in the digital age faces a shortage of skilled analytical professionals, who are data-literate and show interest in deploying the latest technology to manage uncertainty and deliver insightful analytics.

Conclusion

The role of finance function continues to extend beyond budgeting, reporting and control to a more strategic level. Finance professionals might be required to integrate modern methods with traditional processes to manage existing and potential risks. Businesses need finance experts to track and monitor novel digital initiatives and conduct standard ROI calculations.

Finance professionals are further expected to adapt to non-financial, social media metrics integrated with financial processes such as cash and fund flow to gain a comprehensive view of the effectiveness of new digital innovations.

For centuries, finance professionals remained the trusted advisors of businesses with the power to influence the boardroom decisions. Dynamic finance professionals continue to transform and reinvent organizations to solve business issues and propel growth.

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