Modernization in the financial sector has been in trend since the 1980s. Over the years, digitalization has come to play an essential role in many industries, including finance. There are significant criticalities with the traditional finance handling techniques as it involves a lot of paperwork and record-keeping, which is a threat to data privacy, accuracy, and management. Modernization is the process of improving the quality of something with advanced technologies. Paper transactions and subsequent paperwork have considerably been reduced as public and private organizations started onboarding their journey of modernization. Financial technology (fintech) companies have attained rapid growth in the past few decades. Organizations have now realized the significant benefits and sophistication that technology advancements bring to their finance executives and business on the whole.
Top 10 finance models
1. Three Statement Model: A basic model for budgeting that is most likely to be used by a smaller business. This model has three components; a statement of income, expenses, and balance sheet.
2. Discounted Cash Flow (DCF) Model: This model builds on the three statement model by adding the adjustment for the discount rate, providing a more accurate description of the company’s financial performance.
3. Merger Model (M&A): A model that determines the price of a company on the market. This model uses the DCF Model and discounts an estimated future cash flow upwards by a discount rate to arrive at the ‘fair value’ for the company.
4. Initial Public Offering (IPO) Model: A company’s IPO is when new stocks are offered to the public. This model is typically used when a company goes public or sells shares for the first time.
5. Leveraged Buyout (LBO) Model: This model is used when a company with cash flows needs new capital. The company that needs to raise capital will borrow money from a bank or other lenders and then buy out the shares of the target company.
6. Sum of the Parts Model: The sum of the parts model is a way of valuing a company that has been broken up into smaller companies. This model uses market capitalization to estimate the value of an individual company by multiplying the total current market capitalization of all the smaller companies together.
7. Consolidation Model: When a large company buys out its smaller competitors, it ensures the deal is fair for both parties. This model takes the expected earnings of both companies and subtracts the costs to integrate the two companies.
8. Budget Model: The government and big business owners use this model for budgeting purposes though many small businesses will also use it. The budget model is used to estimate income and expenses and can be used to close out a company’s financial statements.
9. Forecasting Model: A model that measures and evaluates how well a company performs and adjusts the earnings in future years to represent the company’s actual performance. Companies also use this model to plan future expenses.
10. Option Pricing Model: A model that is used to find the exact price. Options are financial products that give you the right, but not the obligation, to buy or sell a security.
Digital technologies overtaking the traditional finance theories
The traditional financial sector was based on records and paperwork that were prone to manual errors. However, the current digital world is significantly improving its financial system through digital technologies. The development of digital technologies like electronic banking has been a very positive influence in many areas of life.
Technology advancements deliver greater convenience and experience. Many traditional financial institutions have begun to recognize the extensive benefits of digitizing their operations and workforce, which include reducing costs and improving efficiency in their day-to-day activities.
These technologies aim at simplifying processes by automating many of the manual tasks, thereby reducing complexities, maximizing efficiency, and improving productivity. For example, automated invoice management reduces the time the staff spends to go through each invoice manually, verify the data, and forward it to the relevant team for further processing.
Today, employees are expected to have a unique set of skills and deal with versatile tasks. They will need to manage new finance technologies, adapt to advanced processes, understand the operational and regulatory requirements. However, digital transformation has redefined the way every staff has worked in the past and how they are expected to work in the future.
Automation: Revolutionizing the future of finance
Intelligent automation is all about incorporating the latest technologies such as Artificial Intelligence (AI) and Machine Learning (ML) to simplify, leverage, and speed up financial processes. Several activities that include invoice processing, payroll administration, financial report generation, expense management, and compiling documents can now be done with less human intervention.
The core objective of these technologies is to optimize various financial functions across multiple industries. By automating finance, the cost you spend on data entry is reduced by 70% while the processes executed are with enhanced visibility and reduced human error.
AI is becoming more popular among financial institutions as it helps them identify potential fraud, thereby making services and transactions much safer. Digital banking has mobilized a wide range of banking functions that includes managing loans and accounts, paying bills, transferring cash, and any online account services anytime round the clock. A smartphone is all that’s needed to adopt sophistication into various banking activities you do on a day-to-day basis.
In conclusion, the digitalization of operations in finance is revolutionizing the future of finance and making it more easy and efficient for the customers and employees.