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Thriving in the New World Guardian

Thriving in the New World Guardian

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.

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The Operator Highlights

Thriving in the New World Operator

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.

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Financial reporting | The CFO Centre Canada

Keys to Profitable Growth – Financial Reporting

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:

  1. To have visibility into the future (knowing what is likely to happen around the corner).
  2. 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.

Conclusion

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.

7 keys to profitable growth | The CFO Centre Canada

7 Keys to Profitable Growth

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:

  1. Define your business goals & objectives
    Produce a formal plan from which you can articulate a vision
  2. Critically review your business
    Identify competitive advantage, scalability & sustainability
  3. Establish a financial plan
    Identify milestones, KPIs & dashboards
  4. Create organizational alignment
    Nurture your culture, hire the right people & communicate the vision
  5. Identify the financial resources required
  6. Support the business with systems & processes to optimize performance
  7. Measure, review, evaluate & course correct
    Be proactive & prepared to be reactive

If you follow these 7 Keys and plan for profitable growth, you will ultimately:

  1. Improve and grow profits
  2. Maximize the scalability of your business
  3. Enhance management team and organizational structure
  4. Attract investors and other sources of funds
  5. Increase business value

To enhance the value of your business and grow successfully, follow the 7 Keys and Plan for Profitable Growth.

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