Thriving in the New World requires a CFO to expand their Guardian role for the organization. The CFO must see themselves driving the organization’s efforts to harness increasing levels of complexity while embedding behaviours and systems to defend against existing and emerging threats to business continuity.
Organizations of all sizes have relied on their financial leaders to develop internal control systems and financial compliance with taxation and regulatory bodies. The business owner and key stakeholders will better navigate the future by ensuring their financial leader is accountable for maximising the organization’s overall information integrity and for broadening the compliance framework.
Successfully achieving this broader mandate will require the CFO to elevate their collaboration and partnership with other functional leaders. Success will also depend on how intensely the leadership team commits to sharpening their ability to convert information into insight. There are two initiatives your CFO can pursue to create greater visibility of information related opportunities and potential compliance challenges.
Harnessing Digital Transformation
The recent pandemic has accelerated the digital transformation for every business. Over the past year, it has become clear that companies who want to win must consistently adopt emerging technologies to exploit the opportunities offered by digitization. Businesses who select the right solutions will convert the promise of richer information into higher revenue and lower costs.
It is likely your business is headed towards larger technology investment. Business leaders must, of course, rely on their technology advisors and their market oriented leadership to drive digital transformation; however, the contribution of the CFO should not be overlooked. Owners and CEOs should seek to pair their technology advisor with their financial advisor to ensure the technology selection process is sufficiently thorough and holistic.
Decision makers often desire greater amounts of information; however, there is no guarantee it leads to better decisions. For most organizations, their finance teams have the most experience in digesting large amounts of information and structuring it to make recommendations. Fostering collaboration between finance staff and your digital marketing leaders will promote more streamlined, more accurate, more actionable information.
Creating a Compliance Culture
The reality is that discussions regarding “compliance” are low on the excitement list for most individuals, and almost certainly not the driving force for most CEO’s or owner operators. For finance and operations teams, compliance may not be their primary passion; however, their functional success links directly to processes that ensure compliance requirements are visible and achieved. The challenge for compliance in a post pandemic world has grown. Workers remotely accessing business systems and confidential data puts greater pressure on protecting customer information and maintaining adherence to internal practices.
It is no surprise that the first step to creating a compliance culture begins with the leadership team. For many business the choice to task the CFO to take on compliance culture responsibilities will reinforce to employees the organization’s commitment to a disciplined overall compliance framework. Your CFO should bring a compliance mindset to the organization. Equally importantly, they should bring proven methods to establish compliance systems.
Once the initial building blocks of leadership commitment and senior level accountability are established, the CFO can work with their colleagues to put in place three additional elements that have proven effective in financial compliance. These elements are Visibility, Review and Corrective Action. These three elements have been essential for every finance leader to demonstrate a reliable compliance framework to tax authorities, regulatory bodies, and financial stakeholders.
In this series of Thriving in the New World, The CFO Centre explores what exactly it means to be an operator in the “new world” and essential elements that allow your business to thrive.
Most owner-operated businesses would agree that increased cash and more access to capital would help them exceed their business objectives. Recent societal and economic realities have strained or even exhausted cash resources for many companies. Even those companies enjoying unprecedented growth are scrambling to fund unexpected expansion. The essential building block for liquidity has always been Operational Excellence, defined as consistent and reliable execution of each business’ unique processes to acquire and satisfy customers.
High performing operations processes have always been the foundation for generating cash from within the business. Equally important for those business owners seeking to thrive in a post Covid world is the critical need to demonstrate operational excellence to third party financing sources. Seeking to expand your credit line with your bank or pursuing additional investors will require the business owner to present a clear and compelling story for how the company will produce profits, cash and sufficient return on capital.
The traditional role for a CFO in Operational Excellence is to provide accurate financial information and act as leading voice in cost reduction. Creating a truly reliable foundation for generating cash and profits; often requires financial leaders to contribute more than they have ever before. The experience, attributes and mindset of many CFO’s positions them to act as a catalyst for delivering cash and profit maximization across the full range of business processes.
Fix the Finance Foundation
The processes and practices of the finance function must be viewed as rock solid by the owner and the rest of the organization to create a path for participation or preferably leadership of broader operational improvement initiatives.
There are three key functional outcomes that must be in place to give the finance team the credibility to extend its involvement to other operational processes. Without these deliverables in place, the organization’s ability to undertake deeper process review will be severely impaired.
The first base level capability is timely, accurate and useful financial reporting. If the leaders of the company are not receiving this level of financial reporting, then it is unlikely that the finance leader has earned the right to apply their team’s expertise to general operating processes.
The second must have competency from the finance team is an understanding of the cost drivers for the business. The understanding of costs does not have to be perfect; however, there must be a methodology in place to capture and analyze the complete range of items that form the cost of products or services
The third requirement for finance team effectiveness is to have a solid grasp of the company strategies that will drive future growth and success. If your finance staff are seen just as number crunchers it will be difficult for them to contribute to operational initiatives. The first installment of our CFO contribution series suggests a practical approach to engage your finance leader in developing future proofing strategies.
Own Cash Flow
The responsibility of generating positive cash flow clearly belongs to the CEO and the entire organization; however, expanding the mindset of your financial leader to thinking and acting as the owner of cash flow can be a powerful tool. Finance and accounting staff have historically only been tasked with producing cash flow forecasts based on inputs from other leaders.
We suggest making a clear organization signal showing reliance on the finance team to go beyond analyzing cash inputs and outputs. The new expectation should include concrete actions aimed at increasing the amount or timing of cash inputs while reducing the amount or timing of cash outputs. One example of a high impact cash inflow recommendation is to convert the finance team’s experience with both external and internal obstacles to timely collection of receivables into operational practices that eliminate these obstacles in advance.
Refine and Revolutionize Business Processes
Each organization varies in complexity of business processes, capabilities of process analysis, and often very different levels of CEO interest or prioritization of process improvement initiatives. Given the nature of many small to medium-sized organizations, there can often be aptitude and attitude gaps leading to under prioritizing detailed data-driven process review work.
Even a small finance team can become the internal champions for generating improved results achieved through documenting and enhancing your most critical processes. Elevating the CFO to, at minimum, a shared level of ownership with the firm’s operational leaders will apply complementary expertise to process review efforts. Converting process improvements into additional cash and profit can often involve just a few additional questions that may be missed by other functional areas.
Create Compelling Capital Acquisition Content
There is a high probability that pursuing operational excellence will lead to capturing more cash from optimized processes and deliver positive returns in the short term.
The longer-term benefit of intense CFO involvement in the operational aspects of the company is the ability to work with the owner to put a more convincing investment case forward to potential sources of debt or equity financing. Revenue growth is understandably the primary focal point for future investment; however, the business case is significantly strengthened by a tangible action plan showcasing gross margin enhancement, profit improvement and positive cash generation.
Reviewing, examining and revising processes has always been part of running a successful enterprise. Although most companies have made improvements over the life of their business; there is often a substantial opportunity to further optimize the organization’s capability to convert every dollar of revenue into more profit and more cash. One of the positive byproducts of the turmoil related to the pandemic is that business owners, management and employees are more aware and likely more open to the need for change than ever before. The time is right for businesses to count on their CFO to bring a thorough, disciplined methodology to deliver operational excellence and improved financial results. Uncover more.
In the introduction to our CFO Contribution Series, Thriving In the New World Strategist, we suggested that most business owners may not be well served by high-level, third party driven, divergent strategic exercises. Certainly, there is significant value in undertaking far reaching, blue sky thinking. Most small to medium size organizations will be better served by incorporating their own foresight into targeted, most probable future scenarios developed by highly engaged participants directly linked to the success of the business.
There can be no doubt the Covid 19 pandemic has led to unprecedented change for most businesses. Revenue levels have plunged for some firms while others are experiencing unexpected increases in new customers and unforecasted demand levels. Supply Chains have been disrupted. Optimizing employee productivity and satisfaction have become more art than science. Short-term cash availability and long term capital requirements are highly uncertain. Even the most confident experts are reluctant to make a call on the economic climate we are likely to experience a year from now or even six months from now.
Success in this uncharted New World requires business owners to make effective decisions to address today’s challenges and to establish a strong market position in an uncertain future. We call this Future Proofing your business. The path forward will be unique for every enterprise. For most businesses, the contribution of an integrated senior financial leader can be a major factor in making the best decisions for steering the business towards a successful future.
Owner operators will particularly benefit by injecting their full time or part time CFO into idea
generation and implementation planning to future proof their business using the following four-step process.
Developing Most Probable Future Scenarios
The insight of the CEO along with sales and market-oriented management will understandably be
essential to develop and select three or four most likely market scenarios. Important dimensions for assessing your business’ future would include revenue outlook, new revenue sources, changes in access to customers or preferences of customers, competitive forces, regulatory factors and assessment of staff effectiveness. Identifying these factors specific to your business and your industry should be considered in conjunction with the team’s projections of potential future operating environments.
Involving a holistic professional with the ability to stretch the team’s future thinking to include the full spectrum of potential obstacles often leads to more robust, more complete future scenarios. Team members should expect the organization’s financial leader to embrace the uncertainties inherent in guessing at potential futures while also expecting them to act as a catalyst to describe the leading scenarios with sufficient clarity to facilitate resiliency testing and implementation planning.
Leveraging Emerging Technology
The pace of change over the past five to ten years combined with the recent accelerated societal and economic changes linked to the pandemic forces all businesses to adapt and respond quicker and more intensively than ever before. Adapting and responding effectively requires timely and appropriate application of emerging technology solutions to uncover new connections to customers and to unlock methods to streamline and enhance business processes.
A few of the more pervasive and perhaps highest potential technology trends destined to shape the future are Artificial Intelligence, Blockchain Technology and Internet of Things. Finance leaders bring essential analytical skills, as well as opportunity and risk assessment expertise. These attributes will help the business select the most advantageous solutions and deploy these applications to deliver favourable returns.
Stress Testing Scenarios and Strategies
Once the business has collaboratively generated their high probability future scenarios and articulated corresponding strategies to maximize results; a critical need emerges for disciplined evaluation to ensure the selected paths forward can stand up to expected obstacles and deviations.
The CFO’s involvement in scenario testing is likely to be most accepted and welcomed by the business owner and the future proofing team. A New World CFO is one that passionately embraces uncertainties and optimism while maintaining their proven ability to rigorously apply a check and balance approach to the team’s chosen future scenarios and strategies.
Commitment to Highest Impact Initiatives
The hardest decision for many organizations undertaking future proofing activities during today’s tumultuous environment will be to commit the necessary financial and human resources to those chosen few initiatives expected to best position the business over the next six months to five years.
Creating the internal and external confidence to act now often hinges on the development of concise, compelling business cases to define the initiative, its costs and expected profits. The involvement of your financial leader in the entire future proofing process will significantly enhance the quality and effectiveness of these strategic business cases. In situations where the organization is seeking external financing or participation from partnering organizations; the voice of an informed, engaged, credible CFO will be a significant factor in securing the desired external support.
Business owners and their management teams have the responsibility to navigate the firm through today’s urgent challenges and opportunities. They also bear the greater responsibility to establish direction and take action to prepare the organization to succeed for many years ahead. A New World CFO welcomes this responsibility and possesses the knowledge and dedication needed to deliver results today and in the future. Discover more.
Thriving in the New World series is The CFO Centre’s unique approach on how we can truly make a difference to your business. Explore how a transformational CFO, as a Strategist, Operator, Leader and Guardian, is essential to future proof your business.
The Covid-19 pandemic has transported almost every business into a new reality with greater obstacles and greater, or certainly different, opportunities. Many business owners are operating at ground level to address challenges that threaten the livelihood of their employees, the continuity of their customers and the future of their business.
Now is not the time for strategic retreats, or high-level consulting reviews. Entrepreneurs that thrive in this new world will be those that combine their experience and knowledge with the insights and expertise of involved, committed individuals. These entrepreneurs will possess the mindset to navigate each day’s most pressing issues while charting the course for the business to move forward.
Now is the time to ensure your business is enjoying the leadership and hands on guidance of a New World CFO. Accenture defines the new CFO as a “value-oriented individual who views the world through a different lens” . They see themselves as value architects whose primary focus is helping the organization drive profitable growth.
All businesses have staff or advisors in place to manage the financial requirements of their business.
Perhaps more than ever before, businesses of all sizes, and all stages of development will benefit from finance oriented leadership that goes far beyond the numbers, far beyond basic reporting and far beyond being the controller or watchdog for the business.
If you own and operate a small to medium-sized business, you may have gotten by without access to the “C” level expertise of an experienced CFO. Thriving in your new world may require access to a proven, holistic financial leader driven to grow your business profitably.
This four-part – New World CFO series will provide specific, understandable and implementable information designed to help your business thrive and survive. Uncover more about the benefits of futureproofing.
Have you ever been so far off the grid – on a wilderness expedition, maybe – that your smartphone doesn’t know where you are? If you click on your “maps” app, your phone just shows you a blue dot, figuratively shrugs its shoulders and says, “You’re on the blue dot. But I have no clue what’s around you, where you’ve been or where you’re going.”
That uncomfortable “lost” feeling applies to more than just wilderness trekking. It can apply to your business – when you have no clear idea of which products or services are most profitable, how much you can afford to spend on new equipment, and whether you are on track to your goal (maybe, a comfortable retirement?).
So what’s the “maps app” for your business, so you can see how to get where you want to go? It’s your financial reporting system.
Financial Reporting – One Key to Profitable Growth
To be successful, you and your senior managers need regular access to accurate insights into your business. You need to be able to spot problems when they first emerge; measure and assess what’s working; identify and capitalize on opportunities, and recognize and manage threats.
When you know the reality of how your business is actually performing, you have a platform to confront the reality and can make decisions based on facts rather than speculation, bias and anecdotal evidence.
The importance of business reporting is twofold:
To have visibility into the future (knowing what is likely to happen around the corner).
To have retrospective visibility over past performance (that is, to analyze performance data and use it as a tool to course correct for the future).
A lot of businesses wait too long to introduce a proper business financial reporting structure. But without the right information collected in a timely way, effective analysis and robust planning is impossible.
Well-constructed business reports are the secret weapon for CEOs and business owners of ambitious growth companies. They will reveal how your company is performing and how far you are from reaching your goals.
Three key aspects to your financial GPS
While large companies have sophisticated financial systems tied to human resources metrics, production equipment, and inventory controls, you don’t need to get that elaborate – yet.
Start with mastery of three key financial statements:
The Balance Sheet
The Cash Flow Statement
The Profit and Loss Account
These reports can reveal such information as:
How effective your team is at controlling costs and deploying expenses to generate sales
Which of your products or services are the fastest growing and the most profitable
Your highest growth potential and most profitable customers
Where your break-even point is (how much sales the business needs to produce to cover all its costs)
Having all your business data at your fingertips means that you can spot gaps and weaknesses at a glance, have clear visibility over the future and course correct daily to ensure you are still en route to your destination.
Your company’s balance sheet: shows what your company owes and what it owes at a given time. It reveals:
The net value of your company (which is useful if you plan to raise capital to finance future growth, sell your business, etc.)
Current and long-term debt obligations
Asset management (how effectively you’re managing your assets) and liquidity ratios
Lenders, investors and potential customers can use your balance sheet to assess your company’s creditworthiness, as well as its stability and liquidity – indicating its ability to fund growth without resorting to outside financing.
Profit and loss account: while the balance sheet is like a still image posted to Instagram, the P&L account is more like a video. It is the main way businesses determine how well they’re performing over time.
This is the main tool businesses use to gauge their profitability. It shows how well (or not) your company performed over a particular period of time in terms of revenue, expenses and earnings.
The Profit and Loss Account reveals the steps you can take to increase profitability (for example, whether to focus on more profitable product lines or services or to cut unnecessary expenses).
Investors will use your Profit and Loss Account to assess the ability of a Company to generate cash from operations, service current financing obligations and assess the level of risk involved in extending additional credit or venture capital to your company.
Cash flow statement: reveals how your company spends its cash (cash outflows) and where the money comes from (cash inflows) during a period of time. It is divided into three sections related to your company’s business operations: cash flow from operations, financing, and investing transactions.
Essentially, the Cash Flow Statement reveals whether or not your company has the cash to cover its daily activities, pay bills on time and maintain a positive cash flow. It also helps you to determine whether you’ll need additional working capital to buy inventory or to fund seasonal fluctuations.
Interpret your key financial statements using ratios
To interpret and understand the numbers contained in your financial statements, you should use financial ratios. The ratios are computed from numbers taken from the Profit and Loss Account and the Balance Sheet.
They measure performance in percentage terms rather than raw numbers. This means you can compare your company’s performance with other businesses in your industry, with your previous results and with your projections. _
Typically, owners, managers, and stakeholders look at four categories of ratios to analyze a company’s performance:
Liquidity ratios – show your company’s ability to meet its financial obligations
Profitability ratios – help evaluate your company’s ability to generate a return on its resources
Leverage ratios – show how your business is using debt, relative to capital
Efficiency ratios – reveal how effectively your company is managing assets.
Some ratios will be more applicable to certain industries and businesses than others. If you provide a service rather than sell products, then ratios like return on assets and inventory turnover are unlikely to be relevant to your company whereas the receivables revenue is critical to your business operations.
It’s best to choose the five most relevant ratios to your business and track those as part of your monthly management operating plan.
The benefits of having regular access to high-quality financial management reports are far-reaching. Good reports reveal the efficiency (or otherwise) of the constituent parts of the business and enable you to deal with potential threats and take advantage of opportunities to grow your business.
The compound effect of making regular, quick and high-quality decisions based on a strong set of data and reports cannot be overestimated.
Planning for growth is something every business owner will say they do, but not all business owners will do this effectively and with a focus that will generate profitable growth.
Many businesses plan for growth, but not profitable growth. Some businesses focus on growing sales without a focus on margins while others build infrastructures to support sales and growth that never materialize.
Michael Porter said, “If your goal is anything but profitability – if it’s to be big, or to grow fast, or to become a technology leader – you’ll hit problems.”
A business must focus on profitable, scalable and sustainable activities if it is to grow. Profit and the generation of cash to re-invest in your business must be made a priority, as it is an essential part of the financial strategy and structure of a successful business. Profit and a clear business plan will create a focus and the alignment of the organization, as well as attract investors and other sources of funds to fuel growth – all of which impacts the underlying business value of the business.
CFO Centre has identified 7 Keys to Profitable Growth:
Developing a strong relationship with your bank provides tremendous benefits including offering necessary funding, preferential rates, and better terms. Your bank can provide expert financial advice and help you to find solutions to financial challenges. It can also help you to grow your business and reach your financial objectives.
Since your bank works with a wide variety of businesses, it can also be an excellent source of prospective vendors, partners, and customers for your business.
As banks deal with SMEs in every industry, they are also an excellent source of information and advice about marketing, expansion, fraud prevention, and e-commerce. Some banks take the initiative and offer their customers business ideas and opportunities. So if you don’t have a strong relationship with your bank, you’re missing out in many ways that could help your business to prosper.
Very few business owners appreciate the value of having a strong relationship with their bank.
Why you should develop a strong relationship with your bank
Having a borrowing history and a solid relationship with your bank will make it easier for you to get credit.
“You need to have a good relationship with your bank,” says Black. “If you treat the bank as a commodity and don’t tell them anything, then when you need them most, they may not be there.”
“Tell the bank the good and the bad news in equal measure, as and when it occurs,” recommends Black. “If you have a new contract or a good story, tell the bank about it. Many don’t do this.”
There’s more to it than regular phone calls, however. You also need to demonstrate that you have a coherent strategy and follow it, says Black. That will help to establish your credibility too.
“Continually changing the strategy or appearing to move from one to another does not give the bank confidence,” says Black. “The worst situation to be in is one where the bank does not even understand your strategy.”
Make sure the forecasts you provide are realistic and credible, recommends Black. “The bank will build up a history of how accurate the forecasts are that a business provides. No forecast can ever be totally accurate, but the banks see no end of forecasts showing a massive increase in profits and cash just to underpin the latest request.”
Let your banker know about regulatory changes that could have an impact on your company’s growth opportunities.
Banks need to know:
Who your customers are
Who your vendors are
What is going on in your industry
For that to happen, you need to establish regular communication with your bank manager.
Share your company’s long-term strategy with the bank. Your bank may be able to provide additional resources to help you achieve your goals.
Schedule regular meetings with your bank throughout the year so that he or she gets an accurate picture of your business. It will also make it more likely the bank will respond faster when needs or opportunities occur.
The stronger your relationship is with your bank, the better they will be able to understand your business when you come to them for advice and solutions to help it grow. Banks know things don’t always go as planned. They want to be comfortable that they understand your ability to deal with these situations and make good decisions to improve, building a track record with them based on trust, sharing information and debate. It’s astonishing how many business owners don’t invest in building a track record and strong relationship with their bank.
At a recent event focusing on how to build a world-class finance function, CFO Centre Group CEO, Sara Daw, found only four out of 50 business owners who attended considered their bank was a strategic partner to their business. This is far too low. At The CFO Centre, we make building a strong value-adding relationship with your bank a priority.
If you don’t have a good relationship with your bank manager, you’re missing out on more than a possible future credit facility. You’re missing a valuable free resource for advice and information.
Your bank can provide a regular evaluation of your business and financial strategy, as well as ideas and solutions to overcome many challenges you might face.
Banks also offer a wide array of services including:
Cash management tools
Credit card processing
Online and mobile banking services
Since banks deal with SMEs in every industry, they are also an excellent source of information and advice about marketing, expansion, fraud prevention, and e-commerce.
They can walk you through your balance sheet and explain how they perceive your finances and business. They can also learn more about where and when you’re likely to need the money to grow the business.
Giving information and asking for advice helps to build trust between you and your bank manager. Gradually, you learn to trust their advice and they begin to trust in your ability to repay your loans.
Banks hate surprises so if your business is encountering problems, it’s important to let your bank manager know as soon as possible. If you know that you’re likely to miss payments or be late in paying vendors, let your bank manager know in advance so they can assess the situation and provide you with options.
This will also demonstrate to your bank manager that you can manage the business and also be trusted to inform the bank before the problem gets worse. Your bank manager might even be able to extend your line of credit or temporarily waive your fees.
You can increase your chances of getting a loan or credit extension by demonstrating your ability to repay, whether it is a short-term overdraft or alonger-term loan. The bank will expect to see the proof so you’ll need to provide the following documents:
Your track record
Your previous results
A business plan (which needs to cover how the company started, your products/services; the management of the business and its plans for the future; market research undertaken to support assumptions and forecasts; and your financial requirements)
Your last audited accounts
Current and up-to-date management accounts
Accounts Receivable and Accounts Payable lists
A budget for the current/next trading year
A cash flow forecast
How a part-time CFO will strengthen your banking relationship
Many business owners are uncomfortable speaking with their bank manager. Owners and CEOs often do not know how to communicate their business strategy and needs to the bank and do not know what information the bank needs to support their funding requests. This is where an experienced CFO can be an essential part of your team; someone who understands how banks make their decisions and can, therefore, position your application for a greater chance of success.
Your part-time CFO will:
Develop a relationship with key personnel at your bank.
Share information about your business with the bank and keep the bank fully updated. The more trust that can be built the more the bank will be willing to help.
Provide the bank with a credible business plan which takes into account previous track record including debt and cash flow history.
Provide you with independent advice on bank products and their suitability.
Negotiate the best deal on bank facilities.
Provide access to senior contacts in the bank where required.
Introduce new banking options if needed and negotiate terms.
Your part-time CFO will work hard to forge a strong relationship with your bank so that when you need access to any of the bank’s services your request is treated as a priority.
What’s more, your part-time CFO has many years of banking experience so can advise you on the best banking deals.
Your part-time CFO knows where to go for supplementary funding to complement your bank finance (if necessary) and how to benchmark funding deals for your peace of mind.
CFOs can skillfully communicate your needs in a way that appeals to bank managers. That helps to add further credibility to your credit application.
Your bank can play a significant role in your company’s future growth, both in terms of providing necessary funding and strategic advice.
That will only happen if you take the necessary time and energy to foster a relationship with your bank manager. The benefits of doing so, however, make it one of the best investments you’ll make.
1 ‘How to get the most out of your banking relationship’, Black, Peter, Forum of Private Business, www.fpb.org
If you’ve ever looked through a storage box holding clothes you wore as a child, you may have wondered, “How did I ever fit into something that small?”
Your company may be in the same situation. The equipment, personnel, and premises that fitted well when the company was starting out, may be constraining its growth as it matures.
One of the most pressing areas for change may not be your production system, office space or loading dock. If you find that cash shortages are constraining your business, if you don’t know if you can afford to expand your product offering, or you have no real idea which of your products are the most profitable, you may have outgrown your finance function.
Child-sized clothing might have fitted you well when you were small, and it could be that the financial system you had when your company was young, did what you needed it to do. Most companies start out with the founder keeping track of everything, maybe with the help of a bookkeeper or accountant, later growing into a department with a controller at the head.
But there is a world of difference between the “controller” mindset and the benefits available through someone who is able to help you take your company to a higher level – a Chief Financial Officer, or CFO.
Having access to those skills is important. As noted in the CFO Centre’s e-book, How a CFO Centre top level part-time CFO can transform your business, a CFO brings enormous practical financial and strategic skills and knowledge to your company.
A report by the International Federation of Accountants quotes James Riley, Group Finance Director and Executive Director, Jardine Matheson Holdings Ltd.:
A good CFO should be at the elbow of the CEO, ready to support and challenge him/her in leading the business. The CFO should, above all, be a good communicator — to the board on the performance of the business and the issues it is facing; to his/her peers in getting across key information and concepts to facilitate discussion and decision making; and to subordinates so that they are both efficient and motivated.
In this post, you’ll learn about the difference between a controller and a CFO, and why it may be time you made the change – and how you can do that without putting an undue cost burden on your company.
The controller mindset: accuracy, compliance, tactics
All companies need someone with a controller mindset, even if they don’t have that specific title on their business card. The controller watches the details, so you don’t have to. The controller focuses on making sure that financial records are accurate, prepares monthly financial reports, ensures payroll is made on time, invoices are issued and collected and ensures compliance with regulations.
Essentially, the controller manages the company’s books and records and is responsible for the transaction processing in a company and reporting on those transactions. With the focus on recording and reporting on past events, the controller’s role is mainly backward-looking.
And just to repeat – you need someone who makes sure all of these issues are covered.
But your company, even if it’s small, also needs someone able to watch the big picture. And as it grows, that need becomes more acute.
By comparison, the role of the CFO is to provide forward-looking financial management. It’s a proactive role since it is concerned with the company’s future financial success.
What are the signs that you may need more than what a controller mindset can provide? Maybe — if you need to understand the risks your company is facing, or you need to know which of several possible ways forward is best to improve performance or help you grow profitability, or it could be that you need to someone to help align the organization by establishing performance metrics and mindset throughout the organization, or perhaps you need to know how to finance your growth.
In short, you don’t just need someone to provide a utility function – you need a combination of coach/advisor regarding the resources you need to make your intended future happen.
The CFO mindset: big-picture, advisor, strategy
The role and responsibilities of a CFO have expanded in the past two decades, according to the International Federation of Accountants. That expansion it says has been driven by complexity as a result of globalized capital and markets, regulatory and business drivers, a growth in information and communications, and changing expectations of the CFO’s role. Whereas the CFO was once seen as a company’s ‘gatekeeper’, he or she is now expected to participate in driving an organization towards its goals.
The CFO still has the responsibilities for overseeing the Controllers role in record keeping to safeguard the company’s assets and reporting on financial performance
By contrast with a controller, the CFO expands that role to focus on improving the operating performance of a company, analyzing the numbers and presenting solutions on how to make those numbers better. This can include higher sales, lower costs or greater margins.
A CFO will focus on strategy, helping to shape the company’s overall strategy and direction, as well as a catalyst, instilling a financial approach and mindset throughout the organization to help other parts of the business perform better.
The controller looks to the short term, the CFO is long-term. The controller helps make sure your company is compliant with issues such as environmental reporting and taxes; the CFO helps you design and implement a strategy. The controller seeks to maintain what you have; the CFO helps you expand.
If your company is in a growth phase – or you want it to be in a growth phase, the controller has your back – and the CFO helps you move forward. It means together you can achieve better results, faster.
Feel free to reach out to us here at the CFO Centre. We’ll sit down and have a talk, even if it’s phone or video call, to get an idea of where you want to take your company, and what your options might be to support the growth you want.
Many of the issues in this post are covered in the CFO Centre’s e-book “Financial Reporting,” which goes into detail about the insights that you can gain from a CFO’s strategic view of your company’s financials.
THE ROLE AND EXPECTATIONS OF A FD: A Global Debate on Preparing Accountants for Finance Leadership, the International Federation of Accountants (IFAC), October 2013, www.ifac.org
‘Four Faces of the FD’, Perspectives, Deloitte, http://www2.deloitte.com
Many businesses get by without one. “It’s in my head,” you might say. Or, it could be a document you put together years ago, maybe because your bank required it to extend financing, and you haven’t looked at it since.
But as the CFO Centre’s e-book “Business planning and strategy implementation” points out, according to a survey by business and finance software provider Exact, companies that have a business plan in place were more than twice as successful at achieving their goals than those that did not (a 69% success rate versus 31%).
What’s wrong with many business plans?
If having a business plan is so important, how can your company get the best possible benefit out of the work that goes into preparing one?
Our work here at the CFO Centre has found that while having a business plan helps, there are some important elements to success (many of these are presented in more detail in the e-book).
One is that the plan must be a living document – it needs to be something that you review frequently, updating it as circumstances change, and using it to provide guidance on what your daily, monthly and yearly priorities should be.
Another aspect of success, believe it or not, involves packaging. You may be aware that a business plan that is used as a finance-obtaining tool will succeed more if it features attractive layout and design. But having a document that’s pleasant to look at – not just text on a page – will work better even if it’s just used internally. That’s because the people who read it, including you, will have a greater sense of confidence that the ideas in it can be made to happen.
How a timeline helps make it all happen
But the one important aspect, that many business plans miss, is the element of time. Without a clear picture of what is to happen by what time, a business plan is just a wish-list.
The best way to help make sure that the business plan stays alive – and more importantly so that what’s in it comes to pass – is through including a timeline.
A timeline (or timetable, if you prefer) sets out the milestones of your business plan – the number of employees, number of locations, sales targets, net revenue expected and other targets – and indicates what date they are expected to be reached.
For example, let’s say you have a winning retail concept that you want to turn into a franchise. Maybe even a national franchise.
To do that, you need to determine what processes need to be implemented in order to manage a store like yours effectively. That, in turn, leads to a set of written procedures – such as the steps to be taken upon opening the store or on closing, how to make each of the products that are sold, and other aspects of success. Maybe then you need to establish a time by which you expect to have that first satellite operation running, maybe as a corporate-owned location, just to see what happens when you’re not on site to trouble-shoot all the time.
It could be that this sounds so complicated and intimidating that you never actually get your franchising idea off the ground.
Here’s how a timeline helps make your business plan happen:
It breaks down big, scary projects into smaller, bite-sized chunks you can actually do
It reassures you by pointing out that you don’t need to do everything right now
It moves you along because you see a deadline for one of those “chunks” coming up, so you can get working on it
Start with the end in mind, then work backward
This involves a 5 step process.
Get a firm image of your goal. Established business wisdom says to consider first where you want to be (say, 20 franchise outlets across the country, ten years from now) and then spell out in detail what that will look like. Going into detail gives you a more clear idea of what needs to be in place for that to happen. Set a date for that to happen.
Determine the big milestones along the way. This might include writing out the elements of success in your current business, creating written procedures, testing those procedures to see if they cover all reasonable contingencies, opening a second outlet to further test those procedures, selling your first franchise to someone you know already, and onwards.
Write out your timeline. It might be on paper, on a computerized document, on a calendar program that will remind you about deadlines, or whatever works for you. Maybe multiple formats will be a good way to keep you on track.
Implement. The rest is up to you and your team. Delegate tasks, outsource, do it yourself – but be sure to stay with your timeline.
Entrepreneurship means taking risks, such as launching new products, entering new markets, or using new processes. Because this involves uncertainty, there are always chances that things will go wrong.
Our experience at the CFO Centre has been that the most successful companies take the time to understand the downside of the risks they take, and then find a way to compensate for those downsides.
As the CFO Cente’s book “Scale Up” says, a lot of business owners spend an unhealthy amount of time worrying about what might go wrong, but don’t have a formal risk management framework in place. One of the most dangerous positions to be in is not knowing what might harm you. That’s why “Scale Up” suggests starting with a comprehensive risk analysis, to identify potential risks to your business.
This post talks about how you can understand the risks your company faces, and develop a way to manage those risks.
Why is business risk analysis important to you?
Business risk analysis is an essential part of the planning process. It reveals all the hidden hazards, which occupy the business owner’s mind on a subconscious level but which have not been carefully considered and documented on a conscious level.
Not understanding the risks your company faces can bring your company to its knees, as a 2011 report, ‘The Road to Ruin’ from Cass Business School revealed.
Alan Punter, a visiting Professor of Risk Finance at Cass Business School, said the result of a detailed analysis of 18 business crises during which enterprises failed revealed that directors were often unaware of the risks they faced.
“Seven of the firms collapsed and three had to be rescued by the state while most of the rest suffered large losses and significant damage to their reputations,” he said.
“About 20 Chief Executives and Chairmen subsequently lost their jobs, and many Non-Executive Directors (NEDs) were removed or resigned in the aftermath of the crises. In almost all cases, the companies and/or board members personally were fined, and executives were given prison sentences in four cases.”
“One of our main goals was to identify whether these failures were random or had elements in common.”
“And our conclusion? To quote Paul Hopkin of Airmic, the Risk Management Association that commissioned the research: ‘This report makes clear that there is a pattern to the apparently disconnected circumstances that cause companies in completely different areas to fail. In simple terms, directors are too often blind to the risks they face.’”
A lot of business owners spend an unhealthy amount of their time worrying about what might go wrong but don’t have a formal risk management framework in place. It is dangerous not knowing what might go wrong.
What are the risks facing your business?
Business risks can be broken up into the following:
Strategic risks – risks that are associated with operating in a particular industry
Compliance risks – risks that are associated with the need to comply with laws and regulations.
Financial risks – risks that are associated with the financial structure of your business, the transactions your business makes, and the financial systems you have in place
Operational risks– risks that are associated with your business’ operational and administrative procedures.
Market/Environmental risks – external risks that a company has little control over such as major storms or natural disasters, the global financial crisis, changes in government legislation or policies.
The ‘shoot, fire, aim’ approach favored by many entrepreneurs is great for making things happen quickly but often jeopardizes the long-term stability of the business.
What is needed is balance.
Once the business understands the risks, it means that it can move forward decisively and confidently. It’s hard to do this when there is a cloud of confusion hanging over the business.
Where to start?
You need to assess your business and identify potential risks. Once you understand the extent of possible risks, you will be able to develop cost-effective and realistic strategies for dealing with them. Consider your critical business activities, including your staff, key services and resources, and the things that could affect them (for example, illness, natural disaster, power failures, etc.). Doing this assessment will help you to work out which aspects of your business could not operate without.
Identify the risks
Look at your business plan and determine what you cannot do without and what type of incidents could have an adverse impact on those areas. Ask yourself whether the risks are internal or external. When, how, why and where are risks likely to occur in your business? Who might be affected or involved if an accident occurs?
Assess your processes
Evaluate your work processes (use inspections, checklists, and flow charts). Identify each step in your processes and think about the associated risks. What would stop each step from happening? How would that affect the rest of the process?
Analyzing the level of risk
Once you’ve identified risks relating to your business, you’ll need to analyze their likelihood and consequences, and then come up with options for managing them. You need to separate small risks that may be acceptable from significant risks that must be managed immediately.
You need to consider:
How important each activity is to your business
The amount of control you have over the risk
Potential losses to your business
The benefits or opportunities presented by the risk
By managing the company’s risk profile and the risk profiles of the shareholders the whole business can be brought into alignment and can operate as a unit rather than as a set of individual parts.
This is actually one of the most critical roles in any business and your part-time CFO will support and guide you through the process.
At the CFO Centre, our CFOs have an intimate understanding of every conceivable risk that growing businesses face. This means that we can help you build a much stronger business by knowing how to navigate through the growth stages of the business cycle confident that you are equipped to meet the challenges as they present themselves.
It is never possible to eliminate all risks in a business, but it is possible to create a framework and implement systems which lower your exposure to risk. That, in turn, allows you to focus primarily on growing your business.
Knowing that you have a framework in place to mitigate risk means that you can free up time and mental energy.
Lower your risk today
Let one of The CFO Centre’s part-time CFOs help you with business risk analysis. To book your free one-to-one call with one of our part-time CFOs just click here.
 ‘The Road to Ruin’, Punter, Alan, Financial Director, www.financialdirector.co.uk, Aug 18, 2011