Becoming the Value Added CFO

Dr. Vijay Jog, CRGroup‘s founder and president who is also a Chancellor’s Professor at the Sprott School of Business, was invited to be a speaker on Chiefs of Finance Live Lounge by its host, Ardy Assadi.

In this podcast, you can hear the exchange between Vijay and interviewer Ardy Assadi, as they sit down to speak about the changing role and expectations of the CFO.

The Changing Role of the CFO

To kick of the interview, Ardy asks Vijay to explain what he sees as the changing role of the CFO. Vijay touches on the need for agility – which requires leaders to have all the right information delivered to them at the right time. He says, “It’s not just income statements, cash flows and balance sheets – but more than that.” Specifically, Vijay explains:

The first change for the CFO is knowing what kind of information needs to be given, and when it needs to be given.
While traditional CFOs can look backwards and offer great insight on what happened, decision-makers today want CFOs to be forward-thinking and provide insight on what would or could happen in the future.
Systems in 1980s and 1990s were not overly sophisticated. CFOs spent a lot more time collecting data, massaging information, trying to create a report – but that has all changed. There is a lot more information available on the fingertips of the decision makers, and they no longer require CFOs to give them reports – they are now looking to them for insights.
Understanding business and understanding and describing numbers seems to be more important now, and that has really changed the role and expectations of the CFO. It is not easy for CFOs whose backgrounds have traditionally been accounting or audit or tax, which are more compliance-based, to be now be advisory-based. It is a big transition. Some are very successful, others find it difficult.

The new and expanded role of the CFO is facilitating change by collaborating to develop highly-compelling financial and operational agendas. What must the CFO do to meet the high expectations of CEOs, CXOs and other board members?

There is a demand on today’s CFOs to provide a big picture. From where the CFO sits, what is happening in the industry? What changes are happening in the competitive business model? What insight can they provide that will allow the decision makers to think strategically about how the business can grow organically or inorganically? The other thing that today’s CFOs must bring to the table is the ability for the company to have the financial capacity to support that growth.

If you stand back and strip down the complexity, there are really three drivers that we think about in finance:

Net income – are we profitable?
Dividend policy – are we reinvesting in the business?
Capital structure – how much capital can we get from outside debt and equity?

Once that perspective is provided by the CFO, the decision makers can think about strength and growth – organic and inorganic – and then recalibrate the strategy.

The other thing CFOs must bring to the table, at least at the board level, is insight about what the business would look like, from a financial perspective, in 24 or 36 months from now if it were to continue down the path it is on? That gives the board a perspective on where it will end up three years from now if nothing strategic is done, and what levers need to be pulled to change that.

Today’s CFOs also need to look at the competition more closely and find out what they are doing. Why are they succeeding? What is their capital flexibility like? What kind of decisions would they make that would have an impact on the business in the near-term and the mid-term, from a financial perspective?

The CFOs role now is to get away from the numbers (being internally-focused) and to become more externally-focused.

What steps can CFOs take to move their teams from more of a transactional operational focus to more of a tactical and strategic viewpoint?

Understand the business. CFOs should ask, “If I take away our income statement and balance sheet and ask you how the business is doing, how would I describe the success of the business?” Meaning, do you understand the business value-drivers that are related to, or are indicators of, our financial performance?
Go into the sub-ledger. Do not stop at the general ledger=based reporting. The income statement and balance sheet come from sub-ledgers, and CFOs need to have insight about that.
Non-financial metrics. CFOs must check that they are measuring the business drivers that result in the financial information.
CFOs must start thinking about designing the right incentive systems. As organizations move to service-sector, knowledge-based economies and nonunion-based businesses, CFOs must make sure that incentive systems are aligned so people come to work motivated to work. This is not the work of HR predominantly – CFOs must get involved. This is a big change because CFOs have to get away from their traditional finance role and think more broadly as to how they add value to the business.

Incentive systems are key and critical to keeping talent. What can CFOs do to drive and maintain the standard?

Top-level compensation seems to be based upon the size of the business as opposed to the performance of the business. CFOs need to incentivize based on how much value they have created for the shareholders. The value metrics that are used in corporate finance need to be linked to compensation.

Specific goals and objectives should also be linked to compensation. These should be assigned to demonstrate what employees contribute to the final goal of financial performance – providing line of sight measures. This helps teams to behave like shareholders because they are being incentivized in line with how the shareholder thinks about the business.

In corporate finance, so much time is spent thinking about the “time value of money” and how we invest in capital expenditures. We talk about the maintenance of equipment that is depreciating. The fact is people depreciate as well. So how do we maintain our people? CFOs need to start creating a thought process that builds our human capacity and knowledge capacity, and explores how those people are retained, as opposed to just worrying about capital expenditure. Now more than ever it is necessary to focus on incentive systems because 90% of the balance sheet is not on the balance sheet. We are a service-based economy, so it’s really important.

How can CFOs tie organizational goals with the incentives?

A lot of the driving is done with key KPIs. Value Drivers are unique to the kind of industry you live in:

In a service-based business, what matters most is time. How do we measure time? How do we know where our teams are spending time? How do we deliver projects? How do we deliver services?
Innovation-based teams would have very different metrics, such as meeting milestones, and making sure projects are being done right the first time.
In distribution, some key drivers would be measuring the delivery of the right material at the right time, and making sure that there are no returns and no expiries.

CFOs have to think about what drives value for their particular business and the lifecycle that business is in, and make sure the metrics are not only financial metrics. There must be non-financial metrics that show the business is performing the way it should be performing.

Some non-financials that CFOs should track revolve around people.

If you are a mid- to large-sized business, you should be measuring the turnover of key people because if the key people leave, we are in trouble.
There should be a succession planning metric system in place to ensure that the company’s talent pool is captured and retained.

Metrics should also relate to a business’ customers, and will vary based on whether the business is relationship-based or transaction-based. Relationship-based businesses must track business generated from existing customers, and measure what drives customers to do work with them. Is it to minimize the risk of their business? Is it because they receive the right product the first time? The metrics have to be related to the business success.

What advice would you give to those aspiring to become senior finance leaders?

First, to be successful, CFOs have to move away from their accounting hat, and ask themselves some fundamental questions:

How comfortable are you to go beyond the traditional financial statements?
Are you comfortable with uncertainty? While accounting is a lot more certain; finance, relatively, is uncertain. There are only questions, and very few answers in finance.
Do you have an analytical mind? Can you think multi-dimensionally when you think about drilling down into the information?
Are you willing to put in the work effort? Surveys show that the demands on CFOs are increasing and the resources for the finance team are decreasing. CFOs need to start doing smarting things, not more things.
Are you comfortable with technology? Today’s CFOs must leverage technology because resources are scarce.

How important are networking and mentorship?

CFOs must find time to network in order to understand what is happening in similar companies. To find a mentor, a CFO can ask someone more senior in any industry, “How can I learn from you?” Networking is key – there is so much to learn, and very little time. In this day and age, it doesn’t even have to be in person.

What qualities would you say CFOs should have to succeed in their career?

It is always important to like what you do. It helps to focus on one specific task at a time. Find good people who have the same philosophy of business and entrepreneurial hat. Reading helps me learn quite a bit. On the entrepreneurial side, clients always come first, employees come a close second, and money is just a result of the first two.

What do you read?

Magazines: