Why Corporate Finance Teams are More Than Bean Counters
By Simon Reynolds, Head of Finance, Gazprom Energy
The fluctuating energy market creates a finance environment like no other. As a result, heads of finance in this industry must be well versed in the market and able to consistently and effectively plan for changes at the same time as overseeing payment transactions and delivering financial reports. Here, Simon Reynolds, Head of Finance at Gazprom Energy, examines how the finance team’s role has changed from essentially ‘counting beans’ to playing a vital part in developing data-driven strategic business plans.
The energy market is an ever-changing beast that can be difficult to navigate. One of the main challenges of working in a commodity market is fast-paced and constant change. When you compare the roles of head of finance in the energy market and head of finance in manufacturing, for example, there is a stark difference. This is due to the nature of the product and the way it is processed throughout the supply chain – there is no tangible product in energy. The different elements of the energy industry, from sales margins through to trading and reconciliations, mean the head of finance must have a broad knowledge of how customers buy. They must also possess an in-depth understanding of key components such as a robust hedging foreign exchange strategy to reduce risk and financial impact to the business. This makes the role extremely complex and one that often takes years to master. For multinational providers, there is the added challenge of dealing with overseas teams and clients. This particular element emphasises the need for a well-led team with key structures in place in order to fully understand and strategise around a range of diverse finance regulations across many countries.
When working in energy retail, collaboration between the finance and risk teams is crucial to avoiding pitfalls. By working closely with the risk team, the finance team can adjust its processes through a ‘lessons learnt’ system. The two teams can collaborate by using live streams of data to review analytics of customer behaviour and conduct a fundamental analysis.
The synergy between both teams is particularly important when looking at credit risk. The risk team will assess the creditworthiness of potential customers at the start of the sale process and then on an ongoing basis after a supply contract has been signed. Any risk changes in the profile are fed through to the finance team for further assessment.
For example, the risk team could assess a customer to have an A-rated credit history, however, some industries are known for making late payments and this cannot necessarily be picked up on by the risk team. Therefore, it is down to the finance team to pinpoint this and notify the risk team of this.
The finance and risk teams also work closely when purchasing renewable obligation certificates to obtain a full assessment of the financial risk that comes with these purchases. For instance, the risk team may believe that certain counterparties could pose a financial risk to the business and it is then down to the finance team to provide evidence of why, financially, the risk is not as great as initially thought. Only by combining the insight and skills of both teams can the energy supplier have a holistic view of the potential risk and how to navigate it effectively.
International trading and financial regulations
Financial regulations play a huge part in the complexity of the energy market, particularly from a global perspective. A process carried out in one country may be significantly different for another. Energy suppliers should be sure to have a strong regulation team to safeguard against any legal issues, guarantee compliance and to work with the finance team to provide regular reviews on processes across a range of countries.
For example, the UK uses the BACS electronic system to make payments between bank accounts, whereas France uses SEPA. Customers in the UK make payments in various ways, but in the Netherlands, payments are often made via an online platform called Ideal. Operating in an industry where efficiency is key to driving down costs means energy providers often have to standardise procedures, whereas in other instances they must be flexible according to their customer’s location.
Engaging the client base
There is a big difference between how small and medium-sized (SMEs) operate when purchasing energy compared with large commercial businesses. The finance department of an energy provider plays a huge role in ensuring that processes are in place to suit customers of a range of different sizes.
For example, while larger corporate companies are treated in a similar way in the energy market as they are in other markets – committing to longer-term contracts that have been carefully considered and built into their finance strategies – the majority of SME customers don’t want too much one-to-one contact with their supplier. This creates challenges for energy providers because these customers tend to view commercial energy purchasing in the same way as they would their home energy contracts. In order to adapt to these customer needs, the head of finance may have to review cash cycles and make adjustments, such as developing a self-service platform for SMEs, while still offering high levels of engagement for larger commercial customers.
Exploring new opportunities through data analytics
Energy providers’ finance teams are now taking a front seat in the overall business rather than simply functioning as a supporting role. This transition involves taking a more strategic approach by implementing a vision across the whole of the business. In order to carry this out effectively, finance teams must put data analytics at the core of their strategies. With 90% of data being generated over the past two years alone, it is crucial that finance leaders understand the right data to use and what to do with it. While analytics fuel opportunities for improved business outcomes, there are challenges that come with this approach – poor data quality and integration can hinder strategies and waste valuable time.