Data Driven Capital Allocation: Why is it so Hard?
It’s no surprise that stale and inaccurate financial data — coupled with delays in verifying the integrity of that information — negatively impact capital allocation decisions. The misallocation of capital across business units is costly, whether it's a bear or bull market. And in a rising interest rate and inflationary environment, such costs will mount, dragging down overall business performance.
In general, the inability to access and aggregate a large volume and variety of trusted data quickly results in bad money management and poor decision-making. But it’s especially problematic with regards to the deployment and allocation of capital.
For instance, when CFOs don't have holistic visibility into financial data, they'll often play it safe with capital resource allocations, diplomatically spreading money like peanut butter across the organization. Unfortunately, this means blindly betting money on losers instead of investing more in winners backed by trusted financial data. This lack of deep insights also snowballs into a “don't ask, don't tell” dance with investors who will rightfully lose confidence in your financial operation over time.
It’s human nature to be indecisive and scared when flying blind in the dark. CFOs are no different. But the persistent problem with impeded financial visibility begs this question: What is wrong with today's finance management tools, and what's the solution?
Yesteryear’s ERPs cannot serve today’s digital world alone
The ERPs that support financial data today are ill-designed for a complex digital world. Today, financial information swims in an unstructured data lake that archaic databases by themselves cannot contain or make sense of.
Specifically, ERPs are inflexible because their data models are fixed with specific workflows and data relationships; any variable outside of the norm creates tremendous instability and requires customization; however, today's data doesn't often fit into ERP database fields. Therefore, CFOs don't have the tools that support the data of today’s digital world to see the entire financial story of their business. This frustration is expressed in these all-too-common complaints:
- I don't have detailed GAAP financials the way I want to support my decisions.
- I don't have timely financials in this constantly changing world.
- It's very difficult to pinpoint the root cause of business performance fluctuations.
Financial statements tell the story of your business — from performance to the ROI of an investment. Today, millions of moving pieces of information from various systems go into putting that story together. But due to the inflexible design of ERPs, financial reports are only able to be updated monthly during the month-end close. That's frustrating when allocating capital because often pivoting directions and acting fast is the key to success.
In today's digital world, transactions have a complex journey. That means financial statements should be a living, breathing document that updates as the business operates and not a static file that gets updated once per month.
It's time to invest in a Financial Data Management solution
Today, you need a solution that augments your ERP and enables your organization to consolidate financial information, maintain compliance with accounting rules and laws, and produce detailed financial reports in real-time.
Financial Data Management solutions augment ERP's rigidity by maintaining a logic-driven data structure (such as a chart of accounts) to provide different snapshots of financial data as needed by the various stakeholders of the organization.
As stated earlier, ERP systems often run into limitation because of their rigid schema and cannot navigate relationships amongst complex data of today's digital world. Today, the journey of transactions now resides within multiple systems, in their unique data models, and there's no longer a single source of truth for financial information.
To keep up with how quickly your business changes and evolves, it's wise to invest in a solution that can manage heterogeneous data by navigating deep hierarchies, finding hidden connections between distant items, and discovering inter-relationships between data. The solution also need to be optimized for quick processing of connections amongst complex financial data across these systems.
There’s no doubt about it: investing in a Financial Data Management solution that can deliver real-time financial data at the granularity a CFO needs would be a game changer for CFOs in any critical decision making process.
What’s next for CFOs
Increasingly, analysts, such as Gartner, define the clear path to consistent capital allocation responsiveness is "through CFOs transforming their posture from their traditional reviewer and advisor roles to that of an activist." This means that CFOs are recognized as stewards of their company, steering their organizations toward a portfolio of investments that will maximize long-term value.
Financial Data Management solutions can help savvy CFOs navigate their digital business away from rocky shoals and treacherous waters – complicated by war and a looming recession — into profitable new ports.