Digital Transformation In Business Finance
We are immersed in what has been called the fourth industrial revolution, which is based on the digital revolution and the phenomenon of total connectivity, during a globalized world in which the physical borders for competition and markets. It has long been established that the main difference concerning previous revolutions lies in the speed and scope of the changes it provokes. It requires constant adaptation by economic agents through what has come to be called the digital transformation.
We could define the concept of digital transformation, or DX, as a continuous process that allows organizations to adapt to disruptive changes in all aspects of their business activity – and to lead them – through the application of digital skills to create new business models, products and services.
Digital transformation enables organizations to seamlessly blend digital and physical customer experiences while improving operational efficiency and performance. In this context, digital is not a concept that you apply to business, but rather it is what you transform yourself into.
The great challenge for companies lies in the transformation of their business models and their ability to connect with a customer that operates in a global economy with which they are genuinely connected. The most significant difficulties they will face are:
- The appearance of new risks: it is no longer enough to do things well. You have to do them better than the competition.
- The need to consider a new investment cycle in high-tech products and strategic repositioning platforms.
- The acceleration of the global economy and the widening of the gap between winners and losers due to the new investment cycle.
- The existence of companies that already invest in advanced tools, new modes of transport, digital delivery of goods and services, and the automation of the last mile of distribution.
As a counterpart to the risks, there are also many possibilities offered by incorporating digitization into traditional businesses.
- Be faster and more flexible with lower costs, breaking the traditional principle that speed and product customization are accompanied by an increase in total costs per unit. Digitization breaks this principle and offers us everyday examples of new companies that personalize and improve products and services while reducing their cost.
- It was breaking, in many sectors, with the need to work with long series to obtain economies of scale. Digitization allows short and personalized series without cost increases.
- Reduce dependence in terms of production of the countries of the Asian area thanks to the decrease in the relative weight of labour in production costs.
- To collaborate in the same project with human teams scattered all over the world, making the most of the potential of different knowledge clusters.
- Expand the perspective of new business models in which to capitalize on the experience acquired in traditional businesses. Digitization transforms all sectors and all stages of the production process. A clear example of this is online sales, which is disrupting traditional distribution channels in all areas in a way that is as growing as it is unstoppable, to the extent that its use is supported by the younger population, who lives with the new ones.
The Digital Transformation In The Financial Statements Of Companies
In the context of globalization, product customization and digitization that we have described, all the changes produced will be reflected in the companies’ financial statements, showing the skills, knowledge, experience and capabilities of the directive teams for management and management. In this way, liquidity management takes on particular relevance because it has become a strategic element for the growth of companies due to its ability to help acquire and develop skills and abilities that allow them to renew product portfolios. And services with which to satisfy the new needs of their markets.
And it is that one of the keys of the process is in the vertigo speed in which events occur, technologies change, customer needs, communication channels, and, ultimately, new business models that make the traditional ones obsolete. The ability to obtain liquidity at a specific and key moment allows access to technology, technical and human capacities and the necessary investments that will enable us to adapt to new business models. On the contrary, keeping our resources immobilized in non-strategic investments, with long recovery periods, not quickly settled or only recoverable based on bearing severe losses that will weigh down the income statement for several years to come limits our liquid funds and represents a significant risk that could call into question the survival of the business.
Operating cash flows are indeed the primary source of liquid resources for the company. It is also important that they condition the availability of external financing by determining our ability to repay the credits together with the cost of their use. However, when there is an increase in investment needs, the operating cash flows are usually not sufficient to cover them in their entirety. That is when the company’s liquid reserves come into play and, above all, its borrowing capacity.
As we have seen, this borrowing capacity can be limited by maintaining unproductive or non-strategic investments for the new business model. Still, poor management of working capital can also drain resources, limiting investment capacity. We have some key indicators that will allow us an early diagnosis of this problem, which should be present in the management controls. We refer to the operational needs of funds (NOF) as an essential element in analyzing the working capital.
We could define the NOF as the financing needs that are revealed due to the need to have working capital to develop the productive activity limiting the operational risks. In this way, we must maintain minimum stocks that guarantee the security of supply and the production and sales cycles. We must also maintain an outstanding balance due from clients due to average commercial credit in the market in which we operate. Therefore, NOFs will increase with the simple growth of productive activity so that, if not managed properly, they could cause a bottleneck in the cash circuits.
Adequate management should include the periodic control of the balances of the active accounts so that their reasonableness and adaptation to the company’s policy can be verified and avoid situations of risk of potential losses. Thanks to this control system, we will be able to detect situations that could be limiting our financing capacity: excess stocks in warehouses, which could show obsolete material, in poor condition or excessive quantities; balances in customer accounts that hide delinquency situations or show management problems in portfolios (errors in invoices, delays in deliveries, etc.).
In conclusion, we want to point out that proper treasury management can give us significant competitive advantages to adapt the business model to market conditions and competitiveness. The speed of the changes produced does not usually grant alternatives to a business opportunity, nor does it usually wait for us to have the necessary financing. This forces us to select those truly strategic investments and control their payback period, as well as control investments in working capital so that they do not immobilize necessary resources.