The finance function is under more pressure to deliver value for organisations. But what exactly is meant by ‘value creation’ in the context of finance and how must the profession adapt?
Traditionally the focus of the finance function, and those who work within it, has been to make sure the numbers stack up, budgets are adhered to, targets are hit and financial reporting is undertaken correctly.
But in today’s uncertain climate, where growth is harder to come by, the finance function is under pressure to deliver and understand broader value, exploring how profits are created and outlining broader metrics that matter to investors, such as environmental or corporate social responsibility initiatives.
“When we talk about value creation in finance, we’re ultimately talking about the activities that make a business more successful, whether that’s financially, operationally or strategically,” says Josh May, Partner Enablement Director EMEA at finance and accounting software company BlackLine. “It’s about turning numbers into actionable guidance to grow the organisation, manage risk and make better decisions.”
Dr Arthur Pleijsier, founder of Straetegic Consulting, believes the current uncertain climate means finance teams need to know exactly where their value comes from in order to plan effectively, including mitigating risk.
He gives the example of uncertainty caused by the introduction – and subsequent rescinding – of tariffs by the US. “As a CFO, you need to understand that this is happening now and having an impact on your company,” he says. “To respond to this, you have to look at your value chain. Where do you really create value? Where do you manufacture? What happens when you sell into the US? If there are three or four other value generators in the company, as long as they are relatively OK and the impact happens somewhere else, then with that insight you can adapt strategy accordingly.”
Understanding where value derives in an organisation can help shape wider strategy. “Bringing finance and non-finance data together will give more insight into the company,” he says. “But finance can also make that value creation measurable. If you have a subsidiary company that creates a lot of value, can you put a number on that? How does that tie in with the financial statement, because there’s often a difference there?”
Financial information is often purely based on financial parameters; how that group company contributes to the overall result can be neglected. Tax authorities are increasingly expecting firms to report on value creation, he adds.
Dr Kamran Shaikh, Managing Director of Morgan Reach, an ICAEW Authorised Training Employer, believes finance teams can have an impact in three main ways. The first is through improving the quality of decision-making within the business, around topics such as whether to enter a particular market, what return profile a particular capital expenditure (capex) may have and how to price a product.
The second area is scenario and risk analysis, including using artificial intelligence (AI) to help teams incorporate macroeconomic indicators, operational data and historical trends to improve forecasting.
Finally, there’s capital discipline. “Value creation also means that finance teams are rigorous in how they allocate resources,” says Shaikh. “The most successful value-creating finance leaders do not just focus on cost disciplines, however; they also seek to architect value creation throughout the enterprise, linking finance with strategy, technology and talent, and capital allocation with enterprise goals.”
Finance teams can further move towards understanding and creating value through a combination of being more visible in the business and focusing on the right numbers. Richard Davis, founder and Director of financial support firm FNLY, urges finance professionals to be more present in the business.
“It means being in the room, delivering information, having a viewpoint and not just being a ‘yes’ person,” he says. “Obviously, finance needs to ensure cash flows and that people are getting paid, but the true value is being another leader alongside the CEO, supporting them, advising them and moving the business needle.”
Transfer pricing – essentially the setting of prices for goods, services or intellectual property exchanged between related entities in multinational corporations – can help finance teams understand where value sits within a business. “Transfer pricing looks at all the transactions within a multinational company,” says Pleijsier. “Finance staff should have a good and solid understanding of that. They need to understand where the value is created and put numbers on that.”
The rise of AI, which is automating many of the basic elements of finance, can free up time for finance to focus more on value. “In the near future, no manual intervention in the simple work will be needed,” adds Pleijsier. “That creates the time to really look into what your business truly is and how you can optimise your value proposition towards your customers.”
This means finance professionals at all levels need to adapt, says Davis. “The bookkeeper needs to become a tech person. Financial planning and analysis professionals need to understand large language models. CFOs need to play a role in ensuring that AI data is secure, understood and correct, and owning that voice is essential. The finance department is changing from a data entry, analysis and translation department to a tech data-driven solution team.”