With increasing complexity in the business environment, CFOs need to work closely with key stakeholders in drawing up risk mitigation plans
Every finance department and CFO aspires that the function that he/she leads adds value to the business. Finance and the role of a CFO in being a driver rather than just being a record keeper is now a part of virtually every finance transformation session. Most of us are aware of the role of a CFO in being able to contribute to the company’s strategy, growth, work with cross functional teams, manage and lead board discussions and investor relations and build robust systems. While these are part of the daily discourse on the role of a CFO and also a part of their job descriptions, there are areas where CFOs and finance teams are doing interesting work to improve the effectiveness of the finance function and contribute to the business. Here are my three picks:
Distributor linkages: Organisations which have a complex supply chain mechanism particularly those in pharma, FMCG, chemicals, which sell through a distributor/dealer network, require market related data to be able to do their production planning and manage their inventory levels. Market information relating to the regions, product type, SKU’s, discount schemes etc is used to predict customer behaviour. Most of the times this information at the level of the end consumer is not available to the company as the tracking stops at the level of the distributor. The other issue is the lack of linkages between the distributors’ data and the data available with the company, resulting in loss of time in reconciliations. This makes it difficult to set credit limits for distributors, track inventory and receivable levels, track the benefit of the discount schemes thereby putting strain on working capital levels in the business. Some large companies and CFOs have realised the importance of this exercise and have integrated the distributor systems to their ERP’s or rolled out the S&D module of their ERP’s to the distributors to allow them real time tracking.
The other area where CFO are bringing in efficiency is in on boarding new distributors or evaluating existing ones particularly in assessment of return on investment (ROI) of the distributor. CFO’s have also partnered with the distributors and helped them negotiate with banks to extend ‘channel finance’ which allows them to leverage the company’s ‘balance sheet’ to avail working capital facility with banks.
Enterprise risk management: It is an area that has gained more significance in the recent months because of its inclusion in the Companies Act, 2013. However, managing and mitigating risks in the business has always been an inherent part of the CFO’s role for a very long time. With increasing complexity in the business environment, the need to understand the environment around is even more important. Companies and leaders are spending more time than ever in identifying these risks. Now CFOs are working closely with the key stakeholders in drawing up risk mitigation plans. The really good CFOs are also ensuring that these plans are being reviewed periodically; and not just because regulations require them to do so.
Internal audit findings implementation: Most often than not, the findings of the internal audit department or an external firm are not acted upon or not acted upon fully. This is not to suggest that companies do not view this seriously; in most cases the requirement to have an internal audit itself is viewed as one that is required since it is ‘prescribed’ and not one that can have a telling impact on the business if done well. We also come across situations where the brief given to internal audit teams is fairly restrictive and these are viewed by other functions as an ‘extension’ to what the finance department does without having an impact on what they do. CFOs today are spending time in communicating the importance of the internal audit function to stakeholders in other functions, involving them in defining the scope and the outcomes out of this exercise and helping them evaluate whether the exercise has truly added value to the business as a whole. The gap often lies in the implementation. As the popular saying goes ‘the devil often lies in the detail’. If this is not implemented well, this often blows up in the face at some point in time in the future and more often than not the CFO bears the brunt.
There are many other areas CFOs can have a direct impact on the business. But businesses should first need to accommodate and embrace the finance function as a partner. Remember better the quality of the finance function, higher the business growth.