Despite the turbulence caused by the pandemic, the financial services industry has remained resilient and robust in these unprecedented times, mainly due to having acted on many of the lessons learned in the last financial crisis.
However, this isn’t a time for banks to rest on their laurels; instead, they must move beyond the survival mindset bred by COVID-19 and start to seek out opportunities for growth and spaces to innovate – so when the “next-normal” arrives, they are ready to meet the needs of their clients.
The Office of Finance has supported their front and middle office counterparts despite using disparate data sources, manual processes, and reliance on tools like spreadsheets. While they can continue to do this in the future, it will not provide the agile, value-added decision support that this requires.
During the pandemic, many banks, unsurprisingly, accelerated their digital transformation programs to enable their staff to work remotely and their clients to connect with them virtually. However, these digital transformation efforts often forget the ‘back-end’ processes vital to giving banks the agility they need.
To do this, the Office of Finance should take this opportunity to rethink their approach to Financial Planning & Analysis (FP&A) and dissect the processes, systems, and tools they currently have in place. Banks will need to be agile, flexible, and fast-moving – but to do this holistically requires a finance function that is also agile, flexible, and fast-moving.
With the right FP&A solution underpinning these processes, banks will see, among other key enhancements, increases in forecasting capability and scenario testing.
The first thing that banks can do to improve their agility is to increase the frequency with which they forecast. By moving to a rolling forecast, banks will better understand and manage the effects of one-off incidents, underlying trends, or more significant events. Aligned to this, creating and comparing different scenarios to see the financial impacts of their decisions will enhance the value that the Office of Finance adds to the wider organization.
Historically, forecasting has mainly focused on the income statement – because it’s easier. But that is not the only consideration the Office of Finance must make. The impact of decisions on their capital and liquidity also needs to be considered. Therefore, integrating and incorporating balance sheet and cash flow forecasting with the P&L will allow the Office of Finance to have a complete picture of what has happened, what is happening, and what may occur based on every decision. However, with existing systems – often disparate solutions that suffer from version control issues – this is frequently very time-consuming and involves considerable effort from the treasury function to accurately calculate the balance sheet, solvency ratios, and so on.
Finally, there will always be scenarios that require stress testing.
In the years ahead, banks should look to extend stress-testing throughout the organization. Utilizing the right technology, stress testing can help banks mitigate risk from external factors such as operational changes, cyber threats, and climate change.
However, in the short-term, embedding stress testing into the overarching FP&A process will allow banks to test across multiple scenarios. This means most of the work to prepare for regulatory-driven scenarios and stress tests are already done, giving the bank a comprehensive understanding of the impact.
If banks don’t upgrade the technology, processes, and controls they use to perform FP&A, this ideal vision is likely to remain just that – an ideal. Most banks continue to rely heavily on inefficient methods and systems, such as spreadsheets, that are no longer fit for purpose in today’s digital environment.
In a time of intense economic disruption, an agile and flexible FP&A process needs to become part of a bank’s DNA. Conducted through the right technology platforms, agile FP&A can provide business leaders with a tested roadmap to not just meet these challenges but proactively pivot their strategy to keep a strong bottom-line.
As the Covid-19 pandemic continues to impact markets worldwide, the Office of Finance is under greater pressure than ever before to provide business-critical insights that protect the bottom line. Even the most established enterprises can rely on legacy ways of working if they are to remain relevant and competitive in a changing world. Digital transformation in finance has never been more vital.
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