Reimagining Corporate Finance using AI

07.07.2023

AI is more than just a technological advancement; it represents a fundamental shift in how we approach problems, make decisions, and create value. It's not just about generating text or images, automating tasks, or analyzing data; it's about augmenting human intelligence, enhancing our capabilities, and expanding our potential. It's about creating a future where technology doesn't replace humans but works alongside us, enabling us to achieve more than we could on our own.

There's no dearth of literature today on how AI could save humanity, transform education, create life-enhancing medicines, solve climate change, remodel social behaviors, and enhance productivity multi-fold (add ~$4 Tr annually, per McKinsey). You could spend a lifetime reading it, well... or have your AI give you the TL; DR. Whether you like it or not, AI is here to stay. It will enable us to do all these things and much more. Perhaps even take us to stars, find new planets, and build colonies. As we saw with other platform shifts, e.g., internet or mobile, limiting our imagination doesn't help. Builders harness it, and winners embrace it, while bystanders get stranded.  

We also witnessed that these big platform shifts enable many sections of users to leapfrog various stages of technology evolution and directly adopt the latest technologies giving them a distinct advantage. E.g., emerging companies in the last decade directly adopted cloud hosting technologies like AWS and never had to worry about buying their servers or storage while gaining unprecedented agility; Or India, which leapfrogged to unprecedented smartphone adoption leading the way for real-time money movement, bar none.  

As we think about technology across various functions of a business (refer above), it's quite clear that Finance hasn't been at the forefront of technology adoption, which in turn resulted in a lack of development of sophisticated technologies for the function. Perhaps, it has been waiting for AI to come about; or the confluence of elements has just made it ripe for re-imagination.   

Let's double-click on reasons for the stage being set for (relatively) rapid adoption of technology by the Finance function.  

• Business-related data is exploding;
• Business complexity is increasing;
• CEOs and other functional leaders have more demands on their time than ever before;
• Markets are getting more competitive, putting a constant squeeze on growth / profitability or both; and
• Increasing importance of various stakeholders across the company - customers, employees, vendors, investors, society / environment, banks / creditors, government, etc. 

All this requires the "numbers guy" to have a seat at the strategic table, analyze all these data points / signals, and be the purveyor of data-driven decision-making across the company. This is the new role of the finance function represented by the CFO. The acronym is morphing from Chief Financial Officer to Chief Future Officer. But not surprisingly, existing solutions aren't built for this walk into the future.    

Further, Corporate Finance, by its very nature, is evidence-based, data-oriented, process-driven, and operates like clockwork, where precision, accuracy, and timeliness are paramount. Today, it relies heavily on manual data entry and structured formats, with financial teams spending countless hours inputting data into existing software or complex spreadsheet models, running scenarios, and analyzing results. These labor-intensive or time-consuming processes would find no takers in the rapidly evolving world of AI. 

As a result, this perfect confluence presents an unprecedented opportunity to reimagine Corporate Finance using AI. In fact, it comes as a boon to CFOs who have been thinking only about process mining / automation but rather really needed to get Finance Intelligence / Automation at their fingertips. 

We believe AI would enable the re-imagination of Corporate Finance across the following six vectors: 

Automate

AI can automate many, if not all, of the manual, data-entry-heavy tasks in corporate Finance. For instance, invoice processing, which involves extracting data from invoices and inputting it into financial systems, can be automated using AI. This reduces the risk of human error and frees up time for finance teams to focus on more strategic tasks. Similarly, financial reporting, a task that often requires significant manual effort, can be streamlined with AI, ensuring timely and accurate reports.

Analyze

AI can analyze vast amounts of data, identifying anomalies, patterns, and trends that human analysts might miss. For example, AI can analyze financial statements, market data, and economic indicators to provide insights into a company's financial health and market position. This can inform strategic decisions, such as capital allocation or mergers and acquisitions. It can identify anomalies on receivables, payables, or taxation front, making FinOps super-efficient and reducing fraud. Furthermore, AI can analyze industry trends and competitor data, providing a more holistic view of the market landscape.

Ask

AI can also serve as a powerful tool for querying financial data. Natural Language Processing (NLP), a branch of AI, can be used to develop systems where users can ask financial questions in plain English and get answers in real-time. For instance, a CFO could ask, "What was our cash flow from operations last quarter?" and get an immediate response without having to sift through spreadsheets or financial reports. Based on the roles and responsibilities of various individuals across the organization, CFOs can provide this kind of Q&A facility on limited, context-aware financial data to other individuals as well. 

Create

AI can create new financial models and scenarios, providing a more robust basis for strategic decision-making. For example, AI can use machine learning algorithms to create predictive models that forecast future financial performance based on historical data and various assumptions. These models can be more accurate and comprehensive than traditional methods. AI can also automate the creation of regular reports, Management Information Systems (MIS) updates, board updates, regulatory filings, and diligence data. For instance, an AI system can generate a quarterly board update, pulling in the latest financial data, comparing it against benchmarks and forecasts, and highlighting key trends and anomalies.  

Predict

AI's predictive capabilities can be instrumental in risk management and forecasting future performance. AI can analyze real-time data from various sources to predict potential risks before they materialize, aiding in effective risk management. Furthermore, predictive financial models powered by AI can forecast future performance, providing valuable insights for strategic planning. These models can be further armed with a pipeline of actual data flowing into them, making them "real-time" and constantly updating their predictions. For example, an AI model could continuously ingest sales data, market trends, and economic indicators to update its revenue forecasts in real-time. This allows companies to stay ahead of the curve, adjusting their strategies and plans based on the most up-to-date predictions rather than waiting for quarterly review meetings.

Benchmark

AI can also automatically benchmark a company's performance against industry standards or competitors. By analyzing a wide range of financial and non-financial metrics, AI can provide a comprehensive view of a company's position in the market. For instance, AI can continuously monitor and analyze competitors' financial data, market share, product offerings, and customer reviews. It could then use this data to create various benchmarks, comparing the company's performance against its competitors on multiple dimensions. This automated benchmarking can provide real-time insights, helping companies identify areas of strength and opportunities for improvement. 

The times we are living in are truly remarkable. We could finally unlock the concept of "management by exception," where the AI solution will notify the human when an intervention (review or decision-making) is required. Active monitoring and usage of software solutions would go away. E.g., we will see a fully automated AI-based ERP system passing journal entries based on invoices generated for customers and received from vendors, asking for human approval only before making payments above a certain threshold. Again, the opportunities are limitless.

While the potential of AI in Corporate Finance is immense, current machine learning Large Language Models (LLMs) often fall short. They struggle with the context and nuances of financial analysis, such as understanding the implications of different assumptions or the interplay between various financial metrics. Moreover, they lack the ability to understand and analyze structured formats like spreadsheets the same way a human would.

Hence, a new paradigm is needed. We need AI models that are not just trained on financial data but also understand the underlying financial concepts and principles. These models should be able to understand, analyze, and even improve upon traditional financial models. They should be able to handle structured formats like spreadsheets and interact with users naturally and intuitively.

In conclusion, applying AI in Corporate Finance is about more than just automating tasks or analyzing data. It's about reimagining the entire landscape of Corporate Finance. It's about freeing up finance teams from the minutiae of financial modeling and data entry and empowering them to focus on strategic decision-making. It's about making Corporate Finance more efficient, accurate, and strategic, and ultimately, driving business success.

The future of Corporate Finance is not a distant reality; it's near, and AI powers it. As we stand on the brink of this exciting new era, I invite you to join us on this journey of discovery and transformation. Together, we can redefine the world of corporate Finance, making it more efficient, accurate, and strategic.

Stay tuned for more updates from us, and be the first to know about our product launch by signing up for our waitlist. Let's embrace the future of Corporate Finance together.

With Love
Team CFOGPT