Improving Business Valuation with Finance Automation
Seven Benefits of Finance Automation + One bonus perk that may prove to be the most valuable of all
The benefits of finance automation are manifold and include improved efficiency, accelerated productivity, reduced costs and increased profits, improved scalability, increased employee value, higher employee satisfaction and better data. But there is another benefit that goes beyond the income statement and direct to your company’s balance sheet: automation can increase the value of your business.
First, let’s walk through the more readily apparent benefits of automation in finance systems. These will contribute to what may be the most important reason to automate your company’s financials.
“Automation software tools provide several benefits to businesses,” said Keith Rathbun, managing director of Supporting Strategies. Rathbun’s firm provides accounting services to small businesses. He reflects, “After 25 years in the corporate world I am now finally seeing these (automation) tools, that were once only available to huge companies with huge software budgets, now available to small businesses.”
Rathbun also cited that many of these new tools are cloud-based, “which provides flexibility in who and where these processes can be performed and helps capture additional information on financial transactions that would normally require manual intervention.”
The Benefits of Finance Automation
Today’s most widely used finance automation tools are based on robotic process automation (RPA), which works by linking data between internal systems and/or through front end connections that receive inputs and translate them into software data entries. These systems read and write information the same way humans do, but with far fewer errors and much faster. Corporate finance departments are using RPA-based tools to reduce manual tasks by training software to interpret and input data into systems that manage accounts payable, accounts receivable, payroll, expense management, and other activities that once required human workers.
We humans are fallible creatures. We can be distracted by our coworkers or attempts to multi-task while making mindless data entries into systems. We can misread digits or mistype them. Software is far less prone to misread information, greatly reducing the number of potential errors in data entry. With RPA, systems only have to be programmed once and they run on the same set of rules every time.
Automation leads to cost savings in many ways. Increased automation means fewer human employees are required to perform manual tasks, and software is frequently a less expensive long-term alternative to paying employees to perform the work. Further, the increased efficiency and error reduction that comes with automation, errors are reduced. Not only are you less likely to make errors, stakeholder satisfaction will be increased through quicker and more accurate communication about their product(s) or engagement.
Reduced Costs and Increased Profits
“When a customer calls in with a billing or service question, providing customer service is much easier with cross-linked software or an ERP (enterprise resource planning) system that allows employees to see the full picture of the client relationship and status,” Rathbun said.
Back-office automation facilitates scalability by providing greater output without the need to add more human resources. It is important for business leaders to understand that growth and scaling are not synonymous. Growing a business is adding more customers or revenue. Scaling a business means getting the company ready to operate at a much higher level with increased efficiency. Scaling is important for hypergrowth businesses so they can take on a whole new level of operations quickly.
Aaron Vick, a multi-x founder and former CEO in the legal tech industry explained the importance of building out automated systems to scale his business. “There was a point in time where the need to scale was imminent,” Vick said. “Without proper streamlining of the entire operation from assessing employee workloads to establishing various levels of automation, the company would have imploded when transitioning into the next phase of growth.”
Vick stressed the importance of looking at the most time-consuming manual processes and finding ways to automate those. “One of the purposeful design improvements we did was to automate monthly billing to alleviate human data entry responsibilities that were above and beyond client-focused success. By implementing an automated storage tracker as the company scaled, we were able to remove the burden from employees to track such information. The added benefit to the C Suite was the real-time historical reporting that was essential when navigating M&A that would have been a logistical nightmare for the CFO if it would have been manual data point reporting,” he said.
When employees shift their daily tasks from mindless activities like data entry and move to an environment where they are performing value-added, mindful tasks they are of greater value to the organization.
Increased Employee Value
Highly repetitive work performed at scale is much better suited for software than for human employees. Just as assembly lines are now run by robots, data entry tasks can be completed by software, which frees up human capital to focus on higher order tasks like analysis and strategy. While some jobs may be eliminated by automation, other more valuable roles will be created.
A study on automation, employment, and productivity, McKinsey Global Institute predicted that “the nature of work will change. As processes are transformed by the automation of individual activities, people will perform activities that are complementary to the work that machines do (and vice versa). These shifts will change the organization of companies, the structure and bases of competition of industries, and business models.”
Combining automation with improved business processes can unlock significant employee and business value. Learn more here, Innovate: How to Speed Up Your Financial Processes
It’s hard to imagine anyone going to school to study finance or accounting with the dream of one day sitting in front of a computer making journal entries or keying in information from a vendor invoice all day. However, this is exactly what many junior finance employees do in their first finance roles.
Higher Employee Satisfaction
Using white collar employees with specialized education to key in data is both a waste of company resources and a demotivator for the employees tasked with this mindless duty. With finance automation, these tasks can be offloaded to software, which frees up employees to add greater value. When employees provide greater value to the company, they are more satisfied with their work, and as shown in countless studies – happier workers are generally more productive. (One study conducted by Oxford University’s Saïd Business School studied telecom workers for a six-month period. They found happy employees were 13% more productive than their dissatisfied coworkers.)
A fortuitous side effect of linked and automated systems replacing manual efforts is the creation of data at each step in the process. This data can be used by business analysts to make even greater gains in efficiency.
Better Data Collection
Rathbun agrees. “These new automated tools allow us to capture unique information that allows for additional ways to slice and dice the financial data into more meaningful categories. This new information will help analysts recommend highly specific actions to take for things like price increases on individual products, or help with process improvements, or maybe to find new vendors that will help the business be more successful and profitable,” he said.
The Automation Perk That May Prove to Be The Most Valuable Of All
Shehzad Mian, a finance professor at Emory University, claims the advantages go even further. “Automation and data allow you to develop fundamentally different business models. And that by itself can be a source of competitive advantage and a source of value enhancement,” Mian said.
He added, “It also adds to top line growth. Data analytics and automation allow you to obtain better insights – about the customers, about the markets, about the supply chain, etc.”
When a business is operating at this level, its systems, processes, and analytics capabilities become a type of internal intellectual property, which leads to increased business value – not just on the P&L, but on the company’s balance sheet.
This CFO Talk with Prashanth Southekal, Managing Principal of DBP-Institute, a data analytics firm, Data Analytics for Finance Leaders, highlights the growing importance data analytics to the success of the CFO.
“When we see a company with superior back office and reporting capabilities, it tells us that certain investments have already been made that will allow the company to scale. Plus, it tells us that the owners and management understand the importance of real-time visibility into operations to get ahead of emerging trends in their business,” said David Fitzgerald, GP at Petra Capital Partners. Petra is a private equity firm that provides growth capital for businesses across the United States. They invest up to $20 million per company in equity or debt securities.
Fitzgerald said when a company has solid processes and a handle on their company data it is evident in their performance. “If a company can demonstrate that they can perform certain core functions more efficiently and at levels that exceed industry benchmarks, they should be valued at a premium. Examples of this could include customer acquisition costs (CAC), billing costs as % revenue, revenue per FTE, and many others,” he said.
A company that shows it is able to scale quickly and efficiently is particularly appealing to PE investors who frequently pursue M&A strategies to grow their portfolio businesses more quickly. The realization of forecasted synergies is important because unrealized synergies or ineffective post-merger integrations can devalue an acquisition. Automated, scalable and operationally efficient companies are better positioned to be the acquiring firm in a transaction than less digitally mature companies.
Whether or not a business is pursuing outside investment or aspiring to merge with another company, the value of embracing a data driven culture is inarguable.
“Data-focused companies are faster. They have faster insights, faster decision-making, faster reconfiguring of resources,” Mian said. “And much of this is back-office, traditional FP&A skill domain, which is the backbone of business decisions. This speed and agility can be an invaluable lever of value creation and in my opinion a key driver of how data-focused companies are more valuable than their non-digital counterparts.”
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