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Original Article featured in FEI Weekly
The role of CFO is not for the faint-hearted. The CFO is charged with providing steadiness and regularity to the daily operations of the business while simultaneously addressing a multitude of ad hoc requests from an array of different stakeholders, each of whom needs the information yesterday or the planet will surely explode.
The CFO needs a lot more than numbers to do their job. They need a deep and strategic understanding of the business that enables them to drive the strategic conversations that a good company must have to succeed. Impactful CFOs cope with the pressure. Great CFOs thrive on it. Here are eight strategies to overcome dilemmas facing today’s CFO.
Every analysis starts with a question. To answer the question, we begin by gathering and organizing the data we need to properly analyze and derive an answer. Most of the time, upwards of 90% of the effort goes to gathering and organizing the data and about 10% to a thoughtful analysis of the question. If we are honest, most of the time we have already answered the question before we get to the analytical part.
This ratio is backwards.
Having a CFO spend hours compiling data is akin to having the world-class surgeon preparing the operating table and laying out the surgical instruments. The surgeon has a nurse to do this, the CFO must utilize technology.
Organizing the data in a readily accessible fashion rather than distributed across numerous disparate systems, not only minimizes the low value “preparing to analyze” hours, but it allows the CFO to get to a decision faster. In a growing company, speed and agility are at a premium and a CFO who takes too long to get to a viewpoint will get run over by the rest of the organization. Just like money, a good decision made sooner is more valuable than one made later. Maximize the present value of your decisions.
Having disparate systems is one of the main reasons CFOs often resort to Excel. When making an informed decision, some of the needed data is in the accounting system, some in the CRM and some in the HRIS system. Excel can be a useful vehicle to pull data from these systems into one place so that you can apply analytics. The downside is that very quickly, an Excel workbook can grow to light-dimming proportions. In addition, updating the analysis requires a lot of cutting and pasting, inevitably leading to errors.
A far better approach is to utilize a platform to pull all of your data into one place in advance. Then when you need to put together an analysis, you are more than halfway there. Creating direct connections ensures that the data in your platform is synchronized with the various sources of truth and eliminates the risk of errors.
Good CFOs foster a one team, one P&L approach. They make sure that goals are clear, well documented and measurable. They also make sure that every member of the team understands the measurements. The role of a CFO is somewhat analogous to a point guard in basketball. The point guard is primarily to distribute the ball to the other players so that they can make a shot.
To do this, he needs to understand how to set his teammates up for success – for example, do they prefer the pass high, low, on the run, in the corner, etc. In the same way, a CFO needs to have a deep understanding of what their colleagues need to know to be successful in their respective roles.
For example, what analysis needs to be fed to the sales lead to capitalize on the pipeline or what metrics will help HR manage attrition effectively. Every management team member comes with a different perspective, a CFO is the translation layer that brings them all to a set of unified goals.
Most companies have a regular weekly or bi-weekly management meeting to discuss performance, address issues and opportunities and make decisions. Almost every executive can remember a few of these meetings that deteriorated into painful data reconciling exercises instead. The CFO presents the monthly P&L and the Sales VP pulls out his spreadsheet and begins refuting the CFO’s numbers. These meetings almost never reach any conclusion or decision. (Studies show that in these situations, the Sales VP’s numbers are higher than the CFO’s approximately 110% of the time).
Excellent CFOs are the Supreme Court of information in a Company. They understand the sources of truth that exist within a company and how they interrelate. While other departments will do financial analysis specific to their functions, the CFO makes sure that downstream analyses are consistent with the defined sources of truth.
A high-quality CFO builds a mature finance function that eliminates the data disparity distractions from the equation and focuses the company on the real goal of having productive and informed discussions that lead to winning decisions. The better the conversation, the better the decisions.
Far too many finance professionals forget that the words Accounting and Accountability share the same root. One of the key purposes of finance is to foster accountability. This doesn’t mean deciding whether telecommunications expenses are allocated by headcount or number of calls made or that we have calculated our lease expense utilizing the sum of lunar months method. No, It means that every expenditure of the Company has an owner with clear responsibility for ensuring that we get the maximum benefit from it.
Accountability is at the core of all great companies. The CFO must create a process in which every vendor and every employee has a clear P&L owner. This means tracking expenses at the appropriate level and working with the departmental P&L owners to build regular updated forecasts.
The key to this is to have a clear responsibility matrix in which vendors and employees are tied to specific departments and natural accounts. For example, accounting software would be in “Technology Expense” in the “Finance department”, ultimately owned by the CFO. Accounting would record the expense against this department and expense line and the CFO would update a monthly forecast based upon actual results.
Individual departmental P&L’s must automatically roll up into the consolidated company financials. If this isn’t automated and quick, it won’t happen. Having a robust reporting and planning platform is essential.
Finalizing a budget can feel like a milestone worthy of celebration. However, it’s usually finance celebrating the end of a dreaded, yet mandatory process. Your annual budgeting process should be a decision-making exercise for the Company, not a data aggregation exercise for Finance.
In a recent CFO survey, we found that 54% of finance functions spend three or more months on their annual budget process.
The vast majority of this time was spent transferring Excel templates back and forth to department heads and then amalgamating all of the templates in a “mother of God” workbook. If you are devoting over 25% of the year just for a budget that will probably be obsolete within 60 days, you are missing the forest for the trees.
Excellent CFO’s automate the compilation portion of a budget, utilizing collaborative web-based interfaces to quickly and efficiently gather information from department heads. Also, see #2 above. Studies have shown that 80% of Companies still use Excel as their primary budgeting and forecasting tools.
All companies will have the occasional shock to the system. This often happens to finance and to CFOs when a new investor is brought into the business. After the initial honeymoon period, one of your investors will start requesting additional data – usually in the form of a 20-page deck that they receive from one of their other portfolio companies.
High-performing CFOs prepare for this day well in advance. They create flexible data sources so that it is easy to tailor reports to any need. They develop a well thought out analytical framework built on a strong foundation of data.
The CFO can create significant value by building sound financial processes, forecasts, and metrics in advance of the shock or event. Investors performing due diligence who find error-free financials and well-thought-out metrics will apply a lower discount to the risk factors inherent in any investment. It helps the investors build out their thesis and reduces the time necessary to complete the transaction, reducing the risk of not closing.
A CFO who adds 10% to the transaction price on a $200 million investment has paid for the comparatively minimal costs of investing in good financial systems many times over. Impactful CFOs consider their investments in finance through this ultimate value lens.
Most of the resources of the finance function are in the areas of accounting and transaction processing. These controller functions are laser-focused on the process of recording debits and credits, closing the books and compiling the financials.
Their primary job is to tell you where you are as of today (or really at the end of the last month). This is not to minimize these functions. If you don’t know where you are, it is very hard to know where you are going – these functions are critical and they need to work well.
Additionally, the goal of FP&A is to build on this knowledge of where we are to figure out where we will be. Determining your past financial performance is a highly precise, well-defined process.Ascertaining the future on the other hand,requires flexibility of both mind and data.
The FP&A team needs to quickly be able to create multiple scenarios, key metrics and decision-oriented analyses. Accounting gives you the words, but it is FP&A that writes the story of the business.The good CFO appreciates the importance of building a strong FP&A capability on a foundation of sound accounting.
Other than the CEO, there is probably no individual in a business with as much potential to create value – either through operational efficiency or creating equity value for shareholders – than the CFO.
Often finance professionals are mischaracterized as penny-pinching or cheap and there may be some who too often find themselves on the wrong side of the decimal point. However, the best CFOs understand the potential value they create and they boldly invest in the best tools and processes through that lens.
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