The Top Three Things CFOs and Finance Teams Should Know about Blockchain

Written by Kevin Wang, CPA, CGFM on January 31, 2019

Warren Averett blockchain image

As blockchain technology becomes a more and more common topic, finance teams are wondering less about what it is and more about what they should expect from it. Proponents continue to tout blockchain’s potential, while skeptics ask why we haven’t seen real world application. How can you know what blockchain means for your company and the way it manages finances? The stage of defining the technology has come and gone, and now, many find themselves asking, “Now what?”

In order to fully understand what the true applications of blockchain are going to be within their organizations, CFOs must dissect the functions within their finance department and look for certain characteristics within its processes. Below, I’ve outlined the top three things that CFOs and finance teams should look for when projecting how blockchain may impact their business’s financial operations.

#1 Reconciliation-Heavy Processes

As the business ecosystem becomes more and more connected, business-to-business transactions become easier and more commonplace. Yet, modern day finance departments continue to function independent of their trading partners. The result of this siloed approach is the abundance of reconciliation necessary to ensure each party’s ledgers are in agreement. The risk of errors or even fraud is completely reliant on the design and operating effectiveness of each organization’s internal controls.

With the emergence of distributed ledger technology of blockchain, transactions have the potential to be verified in near real time. Connecting the parties via a shared ledger significantly decreases the risk of errors or fraud and eliminates the need for reconciliations among the parties involved.

CFOs and controllers should be in constant communication with their enterprise resource planning system provider regarding what changes are anticipated with respect to blockchain.

#2 Processes Involving Manual Data Entry

Even though there have been numerous technological breakthroughs since the invention of the personal computer, the reality is that organizations are still in the process of switching over to a paperless environment. With that conversion comes hours upon hours of manual data entry and validation. Data entry is not only time consuming, but it also carries a large error rate. Data entry often results from the need to transpose figures from one report format to another in order for its utilization to be fully optimal.

One of the advantages of blockchain is that it provides structure to the data that resides on the ledger. Rather than being tied to certain reporting formats of traditional enterprise resource planning systems, the open-source nature of blockchain gives users and report writers access to the unstructured data tables. In essence, this allows the presentation of the data to be very customizable to an organization, yet standardized to the participants of the network. This organized flexibility is sure to result in a decreased need for manual data entry.

CFOs and their teams should perform a high-level review of the data transformation process from their system’s output to what is presented to the executive group in order to gain an understanding of the benefits of having structured yet flexible datasets.

#3 Processes that Include Multiple Parties and/or Intermediaries

Many organizations state that they value transparency but many often unintentionally come up short of that goal. This gap is all too often because organizations find difficulty in separating data that’s proprietary and data that’s privy to a wider audience. Today’s accounting systems can fall short of providing the flexibility to properly categorize data, which results in a long and laborious process to deliver on commitments to be transparent.

The best of both worlds is possible with blockchain. With the capabilities of encryption and cryptography, blockchain technology allows for transparency where deemed appropriate and confidentiality of sensitive information. Each intermediary within a process creates additional inefficiencies as well as a higher risk of error. Having this level of control over data eliminates a lot of the need for intermediaries.

Finance teams and leaders should create flowcharts detailing how they fit in the supply chain for the primary products and services bought and sold by the company. This diagram will come in handy when evaluating the various parties that may be co-participants on your blockchain networks.

Example and Final Thoughts

To shed a different light on the efficiencies that blockchain may create, consider for instance the relatively simple process of wiring funds internationally. In today’s set up, it often takes one or two full business days for a transaction to clear. The sender will initiate the transaction through his or her financial institution via a set of instructions. Depending on those instructions, which bank the recipient is using and what country the recipient resides, the sender’s bank will determine how to proceed. It’s likely that the wire will have to go through a clearinghouse, such as Fedwire or SWIFT. Due to the number of intermediaries involved, fees for outgoing international bank wires range from $25 to $50 each, and they often times don’t include any differences resulting from foreign currency exchange. The process is so inefficient that companies such as TransferWise and OFX exist strictly to capitalize on this inefficiency.

With the bitcoin blockchain, funds can be transferred anywhere in the world in ten minutes or less. The only parties involved in the transaction are the sender and recipient, and therefore, fees are nominal. Average fees for transferring bitcoins vary depending on the transactional volume at the time of transfer. As of November 2018, the average fee to transfer bitcoin to another user has ranged from 36 to 78 cents. If this illustration demonstrates the efficiencies that blockchain may create for an individual in this circumstance, imagine the efficiencies it may create for your company’s finance team.

Warren Averett prioritizes and values innovation because we believe that when we are innovative, we are in a stronger position to thrive and to help our clients accomplish what’s important to them. Are you accomplishing what’s most important to you? Contact our Firm today to learn how we can use our strategies and solutions to help you thrive.

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