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.
How a part-time CFO will help to boost your profits
The CFO Centre will provide you with a highly experienced senior CFO with ‘big business experience’ for a fraction of the cost of a full-time CFO.
This means you will have:
One of Canada’s leading CFOs, working with you on a part-time basis
A local support team of the highest calibre CFOs
A national and international collaborative team of the top CFOs sharing best practices (the power of hundreds)
Access to our national and international network of clients and partners.
With all that support and expertise at your fingertips, you will achieve better results, faster. It means you’ll have more confidence and clarity when it comes to decision-making. After all, you’ll have access to expert help and advice whenever you need it.
There are four things you can do to increase your company’s profitability:
If you can do all four at once, your profits will increase dramatically. Even changing one of these four factors will boost your profits.
Your CFO will help you to identify the ways in which you can sell more, sell more frequently, increase margins (without losing customers) and cut your costs.
Selling more and selling more frequently
Driven by a need to make more sales, most business owners will chase new customers.
This can be a costly exercise since it will often involve more expenditure on marketing and advertising. Acquiring new customers can cost as much as fivetimesmorethansatisfying and retaining current customers, according to Management Consultants Emmett Murphy and MarkMurphy.
That’s because convincing people to buy from you for the first time is difficult. Prospective clients are scared of making a mistake: of choosing the wrong supplier and wasting their money.
If your sales are low, it’s better to focus attention on your existing and previous customers and find ways to encourage those people or companies to buy more and to do so more often.
Your existing and previous clients do not have the prospective clients’ fears and objections to doing business with you. You’ve already demonstrated that you can deliver the benefits they want from your products or services.
On average, loyal customers are worth up to 10 times as much as their first purchase.1
There are other benefits to selling to existing and past clients too: it cuts your refund rate, raises the likelihood of positive word-of-mouth, and lessens the risk of your clients buying from your competitors.
A 2% increase in customer retention has the same effect as decreasing costs by 10%.
Even better, a 2% increase in customer retention has the same effect as decreasing costs by 10%, according to Emmett and Mark Murphy. Cutting your customer defection rate by 5% can raise your profitability by between 25% and 125% depending on the industry.2
Customer profitability tends to increase over the life of a retained customer. Inother words, the longer your clients are with you, the more they will spend.
When working with you and your management team, your part-time CFO will investigate ways to get customers to return to you more often and buy more when they do make a purchase. The methods include:
Using a strong follow-upsequence.
Leveraging scarcity by using time-limited or limited availability offers.
Using up-sells, down-sells and cross-sells.
All too often, business owners believe their prices must be lower than their competition. They also believe if they increase their prices, they will lose customers. Both assumptions are false.
It all comes down to the perception of value. People will happily pay more for a product or service they perceive as having added value.
If your products or services are on par with your competitors, your prices should be similar or higher.
Even a small price rise will have a positive impact on your profit margins. After all, the larger the difference between the cost of a product or service and the price it sells for, the higher the profit.
Companies that fail to control their costs are often forced to borrow but then find that servicing that debt erodes their profits still further.
The benefit of cutting your costs is that it will have a direct short-term impact on your bottom line since a dollar saved in expenses might mean an extra dollar in profit.
Your CFO will encourage you to consider the likely impact of any cost cutting on the quality of the products or services you provide before you take any action.
Your CFO will also help you to identify the major cost centres in your company. These might be:
Your CFO will also help you to identify the profit drivers in your company.
Typically, profit drivers will be to increase sales, reduce the cost of sales and to reduce overhead expenses but they could be any of the following:
Financial drivers (which have a direct impact on your finances)
Variable costs (cost of sales)
Sales volume (for example, generate more prospects, convert more prospects to customers, retain current customers, increase the size of each purchase, increase the sales price, etc.)
Fixed costs (for example, overhead expenses)
Cost of debt (for example, interest rates on debt)
Analyze every area of gross profit to understand where the biggest opportunities lie and to determine how to reduce less profitable activities.
Find your most profitable customers (those who consistently spend more with you).
Find the customers who you are currently serving but who are not profitable.
Analyze return on investment on capital and product development expenditure.
Ensure your management information is up to date and in a format that is useful and reliable.
Educate theseniorteamabouttheimportance of Critical Success Factors(CSFs). These are the activities that your business must do to survive. You can determine your CSFs by answering the following questions:
How is our business better than our competitors?
What do our customers like about our products or service and the way in which we operate?
What don’t our customers like?
What would make our customers stop buying from us?
You measure your CSFs by using Key Performance Indicators (KPIs)
Systematically analyze relevant KPIs and trends to identify potentialhazardsbeforetheybecome aproblem.
Review arrangements with your main customers to see if there is a more profitable way to supply them.
Review pricing arrangements with existingsuppliers.
Research alternative suppliers across all areas of the business.
Determine your company’s eligibility for Research and Development (R&D) tax credits.The tax relief will either reduce your tax bill or provide a cash sum. To receive R&D tax credits, you must show that your company is carrying on a project that seeks an advance in science or technology and how it will achieve it. The advance being sought must constitute an advance in the overallknowledge or capability in a field of science or technology, not just your company’sown state ofknowledge or capability.
Develop effectiveincentiveschemesforstaff to encourage productivity and to manage risk.
Prepare customer surveys to understand whatthe marketreally wants (and then sell it to them).
Analyze competitorstofindoutwhatisworkingwell and what isn’t and course correctaccordingly.
Review significant overheads and isolateopportunities to reduceexpenditure.
Investigate exchange rate hedging andplanning.
Create arealisticandachievableactionplanthen communicate it to all your employees.
Explore more cost-effective ways of marketing by forming strategic alliances and joint ventures with companies that deal with your prospective clients.
Arrange forbusinessmentorstogiveadviceand share experiences with you.
Review organizational structure anddelegation procedures to maximizeefficiency.
Develop customer retention strategies toprevent loss of revenue.
Evaluate business location and determine possible alternatives (to save costs on production, delivery, etc.).
Outsource some functions (and so save on wages) or employ someone on a part-time rather than full-time basis.
Look at the viability of redundancies. If you’re making people redundant, you will need to fund redundancy payments. You will also need to ensure you meet current legislation and standards regarding consultations with employees, the grounds for redundancy and the selection of employees.
Introduce anexpensecontrolprogram.YourCFO will challenge expenses in all categories, large and small. Besides cost-cutting measures, your CFO will also ensure you tighten your control on costs. If you don’t already have a purchase order approval policy, for example, you’ll be encouraged to introduce one.
Look atyourbankcharges.YourCFOwillquestionall bank fees on your statements and compare them with what other banks charge.
Check invoices from suppliers for overcharging (incorrect charges, missing discounts, double billing, etc.).
Get ridofinefficientsystems(forexample,paper-based systems).
Measure thereturnonallyouradvertisingandstopusing whatever hasn’t worked in the past
As you can see from this, profit improvement is not an emergency fix. It’s something you and your organization need to plan for and follow consistently. If you don’t, there’s a very real danger that once you return to growth, you’ll get swept up with the day-to-day demands of running your business. That increases the risk you’ll find yourself back in an unprofitable position.
As with many challenges facing growth businesses, the solution lies in good planning for profit improvement on the one hand and an ability to stick to the plan, month in and month out, on the other.
Profit improvement should be seen as an ongoing project. It takes some time to establish systems, which enable your business to maximize its profitability, and then it takes focus and resources to maintain the monitoring process.
That’s where part-time CFOs can help. They can take care of the finance function and the support systems within your business, which frees up your time to focus on growing your business.
Profit improvement should be seen as an ongoing project. It takes some time to establish systems, which enable your business to maximize its profitability, and then it takes focus and resources to maintain themonitoring process.
Most business owners say making a profit is the number one reason they are in business. Everything else (passion, purpose, mission) is subordinate.
Profit is an expression of getting the most out of your business for the least amount of effort. It is a reflection of your efficiency.
Building a large company and being able to cite impressive revenue figures are often the wrong drivers for business owners. Again, this is not to say that increasing sales is the wrong approach – on the contrary – it is merely to point out that selling lots of product without a full understanding of the profitability of the product can be a waste of valuable resource.
A compact, efficient business which operates under tight management procedures is nearly always a happier place to work than a chaotic business which is able to boast significant revenue figures.
Expanding overseas, taking on more staff and resourcing up may well be the right way for you to take your business. It could equally be the case that you may be able to enjoyincreasedprofitability(and an improved lifestyle if this is an important driver) without expanding rapidly, but merely by improvingprofitability.
The path you follow will be determined by your objectives for the business and that’s something your CFO will help you to clarify and then achieve.