CFO As Navigator – Becoming the ‘Perfect’ CFO
CFOs will continue to be under relentless pressure to raise their game—at least, this is the message many are receiving from their colleagues (CXOs) and board members, whose new mantra seems to be: “Take us further and faster.”
All you have to do is look at any of a large number of recent surveys on CEO/CXO expectations to see that today’s CFOs are expected to go beyond the traditional CFO role, including into areas such as enterprise risk and investor relationships. In fact, four key directives emerge from this data:
- CFOs need to step back from over-emphasizing commentary on variance against budget and explain the origin of that variance from a business perspective. They should also explain the specific actions the enterprise should take beyond “increasing revenues and reducing costs.”
- CFOs must express and explain past performance within the context of the overall strategy and corporate plan, but—more importantly—they need to highlight future trends that could impact the enterprise’s strategic imperatives and aspirations.
- CFOs need to be analytical—not only at the general ledger level but also at the sub-ledger level; in other words, they need to be able to provide business analytics at the customer-channel/sales person-product level.
- CFOs need to be acutely aware of the competitive landscape and its implications for the enterprise’s future performance.
Similar sentiments are being expressed at the board level, especially by external board members. In my experience, board members want, at minimum, for the CFO to:
- Demonstrate a clear understanding of the linkage between strategy and the financial plan;
- Articulate how growth would be financed and explain its impact on financial risk and flexibility—if growth is the key objective;
- Report on the key operational metrics that can provide insights into future financial performance (and not just provide a bland explanation of the past); and
- Demonstrate leadership by dissecting the numbers in business terms, devoid of financial jargon.
The immediate question then is: What must a CFO do to meet the high expectations of CEOs/CXOs and board members? Clearly there are multiple paths for meeting these expectations, and the right path will depend on the nature of the enterprise and the specific challenges it faces. However, I can think of seven specific actions CFOs can take.
Seven actionable steps
First and foremost, the CFO must provide clarity about financial metrics that define enterprise success. These metrics must go beyond earnings or earnings against budget; they should also include metrics that account for capital intensity (e.g. Return on Capital Employed) and the opportunity cost of capital associated with each business unit.
The CFO must be able to articulate his or her understanding of the company strategy, the resulting strategy map, and the value drivers that must be tracked, monitored, and implemented. Only then can the enterprise gain an understanding of the core competencies (or lack thereof) and key barriers (if any) that need to be removed through effective intervention and necessary investment and benefit-cost ratio.
CFOs must analyse and convey the interdependence between financial capacity and enterprise requirements for growth and value creation. No growth strategy can be executed unless everyone around the table understands the analytical relationship between profits, dividend payout, and debt capacity, and it is the CFO’s job to communicate this information in a succinct manner, without any financial jargon.
CFOs need to make radical changes to the traditional budgeting process—it should be designed bottom-up, but explained top-down; it must be disassociated from the
executive compensation design, and it should be done periodically (e.g. four or five-quarter rolling forecasts), not just annually. Far too much energy and time is spent on the annual budgeting process, with questionable value.
The CFO must drive the enterprise to make fact-based decisions using a well-designed analytics platform that provides relevant, timely, and actionable information to all CXOs. There is significant evidence indicating that high-performing enterprises display a high degree of analytical thinking, which they leverage for predictive analytics.
CFOs must get involved in designing incentive systems that are metric-based, which include clear recognition of the asset intensity of respective business lines, and that are based on “actual” performance and not on variance to budget. This may mean getting involved in human resources management—specifically, focusing on ensuring that the performance review process is objectives-based, with clarity about what is expected, and then ensuring that the process is objectively monitored and managed. Although this may seem to be a complete departure from the “numbers” world and an encroachment on the territory of HR, the time has come to bring analytical thinking to people management (which some HR colleagues may actually welcome).
The CFO must focus on one big initiative per year that is external to the traditional finance function, co-champion it with the corresponding CXO, and execute it successfully. This is the only way the CFO and the finance team can really understand the business and appreciate the complexities their CXO colleagues face.
Becoming a “perfect” CFO may seem a daunting or even impossible task. But CFOs seeking to “raise their game” can achieve this goal if they find a balance between minimizing the transnational role and redirecting resources to meet business demands that go beyond the traditional role. It can be done!
Originally published in Beyond Numbers, April 2013
About Dr. Vijay Jog
Vijay Jog Ph.D. is the Founder and President of Corporate Renaissance Group (CRGroup) – a global firm that specializes in improving enterprise performance through innovative technology driven solutions. He is also a Chancellor Professor at Carleton University where he teaches at the Sprott School of Business. This article is based on his 25 years of experience in dealing with technology and his interactions with CEOs/CFOS and CIOs.
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