THE CHANGING ROLE OF CFO
Initially CFO’s role was to review the accounts and cash flow on daily basis, to get involve in finalization of accounts, manage the cash flow, do the financial planning and budgeting and report the performance of the company on monthly basis.
Over the period of last few years the role of CFO has changed. Of 1,400 CFOs surveyed throughout the United States, the largest percentage of respondents, 25 percent, said a greater focus on increasing profitability represents the biggest change in the CFO role over the past five years. Second was increased interaction with other departments, at 20 percent; third, an expanded leadership or management role, 17 percent; fourth, more strategic planning, 15 percent; and fifth, increased focus on corporate governance initiatives, 12 percent. CFOs are moving to a more complex role from budgets to value creation. Internally, Finance as a department or group is responsible for the most critical aspects of any firm. Externally, Finance is the face of the firm to regulators, lenders, partners and, in many cases, the public at large. In severe economic situations, Finance has the responsibility for establishing, managing, or restoring public trust in a firm.
The CFO are adding most value as a strategic partner to the CEO, understanding commercial opportunity, setting corporate goals as well as managing, and also developing external stakeholders. They are now taking active interest in the strategic issues of the company. They increasingly are playing a central role in the definition and execution of strategy and the setting and delivery of performance targets, ensuring that the company meets its stakeholder’s obligations. CFOs are now working hand in hand with the CEO of the company to craft the strategies of the company and drive it. They are a finance leader who is more than just a scorekeeper, who is a key strategic business partner to the CEO. They are now also part of board of directors of the company and involved in the framing of policies and strategies of the company.
CFO has aligned to shape the CEO’s agenda around their own focus on value creation. CFOs who conducted a value audit could immediately pitch their insights to the CEO and the board—thus gaining credibility and starting to shape the dialogue. What’s more, the CFO is in a unique position to put numbers against a company’s strategic options in a way that lends a sharp edge to decision making. The CFO at a high-tech company, for example, created a plan that identified several key issues for the long-term health of the business, including how large enterprises could use its product more efficiently. This CFO then prodded sales and service to develop a new strategy and team to drive the product’s adoption.
To play these roles, a CFO must establish trust with the board and the CEO, avoiding any appearance of conflict with them while challenging their decisions and the company’s direction if necessary. Maintaining the right balance is an art, not a science. It’s important to be always aligned with the CEO and also to be able to factually call the balls and strikes as you see them. When you cannot balance the two, you need to find a new role.
When Starbucks announced that it was eliminating its chief operating officer position, it became the latest member of an ever-growing club. And as COOs slowly fade from the C-suite, CFOs are stepping in to fill the gap, assuming more responsibility for areas that redound to the bottom line. CFOs are gaining a higher profile in their organizations as a result, along with, apparently, more compensation. But the downside is more pressure — more hours in the day required to accomplish more tasks, and more blame when profits fail to meet expectations or just fail altogether. They are no longer in a support function; but are on the front lines, accountable for the good and bad.
The CFO needs to have a bigger voice at the table when it comes to driving shareholder value. It is critical to the success of the enterprise that the CFO’s office learns to balance the “day job” of tracking and reporting accurate and quality data with the leadership activities expected of today’s CFO and finance organization.” Without this, the businesses they serve will be at a severe disadvantage.
They also actively involved in the negotiation with suppliers and customers. They communicate actively with the investor’s community to give feedback on the performance of the company. CFO as custodian of information and in unique position to interact with all the depts. has the potential to make lot of value addition to the business. They have a number of tools at their disposal, including dashboards, performance targets, enhanced planning processes, the corporate review calendar, and even their own relationships with the leaders of business units and functions.
The most critical activity during a CFO’s first hundred days, should be to, understand what drives their company’s business. These drivers include the way a company makes money, its margin advantage, its returns on invested capital (ROIC), and the reasons for them. The CFO should learn about business drivers that are less important to individual business unit performance. At the same time, the CFO must also consider potential ways to improve these drivers, such as sources of growth, operational improvements, and changes in the business model, as well as and how much the company might gain from all of them. To develop that understanding, CFO should conduct a strategy and value audit soon after assuming the position. They should evaluate their companies from an investor’s perspective to understand how the capital markets would value the relative impact of revenue versus higher margins or capital efficiency and assessed whether efforts to adjust prices, cut costs, and the like would create value, and if so how much. The CFO should start mastering existing information, usually by meeting with business unit heads, who shared the specifics of product lines or markets. CFO should look for external perspectives on their companies and on the marketplace by talking to customers, investors, or professional service providers.
It is important for CFOs to visit international locations where their company’s business is having active presence to understand that market so that they become truly global and yet develop ability to understand the local market.
Many CFOs believe that as individuals, they are the personification of credibility and trust for banks and investors. This is particularly pertinent when the banks are under more pressure themselves.
Hence if we summarize the role of CFO then it should be as follows:
- Act as a strategic partner with the rest of the business.
- Accurately report quality data (close the books efficiently and effectively)
- Provide strong analytics and management reporting to support decision making.
- Maintain standardized, sound, and consistent underlying financial processes.
- Impose financial discipline on operations and other back-office functions.
- Comply on a sustainable basis with financial regulations such as SOX, etc.
- Adapt finance function and systems-to-business changes such as acquisitions or divestitures.
- Promote financial acumen of nonfinancial managers across larger organization
Every organization needs to recognize this new role of CFO and make them instrumental in achieving strategic goals of the organization.