Date : 09-02-2015 Platform/Online Media:: Your Story Source
Regular engagement with the market/investors and with the analysts is crucial in building investor confidence
In recent years, CFOs have assumed increasingly complex, strategic roles focused on driving value creation across the business. Growing shareholder expectations and activism, more intense M&A, mounting regulatory scrutiny over corporate conduct and evolving expectations from the finance function have put CFOs in the middle of corporate decisions. While financial performance is what it is, the CFO’s role in helping stakeholders interpret the numbers in the context of the business environment is critical. This article signifies the role that CFO’s have to play in managing investors, communicating with customers, suppliers and internal teams, bridging cultures in M&A situations, without dropping the ball on day-to-day finance functions.
Smart performance + good communications = Better valuations
In a changing business environment, the CFO is charged with creating economic value through smart performance. It is also his responsibility to ensure that the value thus created is visible and an easy to understand parameter for investors and other stakeholders to gain their confidence and trust.
Businesses today are rapidly undergoing a metamorphosis in India. From the traditionally managed family run businesses with traditional/ informal performance measurement mechanism, traditional modes of raising capital and a certain lack of permeance of transparency through the organisation about the future, we are beginning to see increasing number of existing, as well as new age, companies with a professional outlook living in an environment which is increasingly inter – connected and inter – dependent. The one key element that has changed in the way of doing business in this modern landscape is the flow of information.
The new age CFO, therefore must now realise that he is no longer expected to linger in the background and surface every time the results are to be announced. As the one person in the organisation that has intimate knowledge of both the past performance and the expected future growth it becomes his responsibilty, not only to steer the company towards a better future through smart performance but also be able to provide a transparent, big picture view of the future, to internal stakeholders, customers and investors.
What is smart performance?
A CFO today understands that the word ‘performance’ has a broader meaning than just the underlying numbers. There has been a shift in focus in measuring performance from profits to profitability, earnings to economic value and so on. The focus is on creating ‘value’ which comes from both increased sales, driving better margins, increase efficiencies in operations amongst others which improves stakeholder confidence and builds company valuations. Smart performance would, therefore, mean looking constantly for opportunities to improve economic profits for the company both inside (operational productivity) and outside (sales). Smart performing companies and their CFOs are serially identifying, recording, measuring, comparing and finding ways to improve scores on the short and long term value and growth metrics. by working on:
Processes and Systems
One of the challenges that companies face is for them to constantly look at improving each of their key processes, be it the sales, operations, HR etc. The CFO plays an extremely important role in defining the key metrics and more importantly tracking them on a consistent bais which not just helps in measuring business performance but also bring out possible areas where process improvements are possible. The need to evaluate and implement systems particularly IT systems that cut across functions and intgrate them is a role that most CFO’s are involved with. The CFO’s input in the selection, design and implementation of an integrated system (ERP) which involves massive amount of change management cannot be emphasized more. In that sense, the CFO is only next to the CEO in terms of importance within the organisation.
Vision Alignment and relentless execution
Being a leadership role, it is essential for the CFO to have alignment with the CEO/Company’s vision. Let me illustrate this with an example - We recently had an opportunity to work with this company, which was on a high growth trajectory and was looking to grow its revenues to 2x in the next 3 years. The CFO and the Finance leadership team needed to be ready to support this aggressive growth path by providing the CEO decision making support and putting in place performance management systems. The company struggled with multiple “versions of the truth” and a lack of standard performance measures, resulting in management discussions that were all too often spent on reconciling differences in assumptions.
Sponsored by the CFO, a project was created to focus on transforming the finance function into a highly valued partner in the business. The CFO set out to lead a strategic change in the business by establishing and modeling a high-performance culture in finance and then transferring it to the rest of the organization with the help of HR. Alignment of thought process and being able to articulate the company’s vision is paramount for a good CFO. The CFO also needs to have a strong buy in to the CEO/Company’s strategy and should also play the role as an implementer of the thought process/ strategy to the hilt. Increasingly, CFOs are playing a key role in developing and implementing strategy within their company, partnering with CEOs to creatively design growth opportunities for the future. Successful CFO leadership requires a deeper understanding of strategy, increased leadership skills, and an ability to effectively communicate financial acumen and knowledge to non-financial colleagues. A CFO cannot wait for things to happen, having an entrepreneurial bent of mind to get things done is the key.
A number of CFOs that we meet today spend a considerable part of their time in communicating with investors and analysts. The CFO needs to communicate on an ongoing basis and also provide an assurance on the direction and pace of growth. It is important for the CFO to be seen as ‘independent’, to be able to provide insights on all aspects of business and be transparent. A CFO has got to do the communication himself/herself as far as possible so that the intent of what is being communicated is not lost or misinterpreted. Any kind of misinterpretation can have significant implications on the company concerned. Larger organizations build investor relations teams who work closely with the CFO and who feed information or analysis relating to the company or the industry which could be of importance to analysts who track the company's shares closely. Regular engagement with the market/investors and with the analysts is crucial in building investor confidence.
A CFO needs to work closely with multiple stakeholders. A CFO probably needs to work hard on influencing others, improving his/her diplomatic and people management skills. It helps a great deal if the CFO is seen as someone who participates and contributes to strategic discussions, which helps in building influence particularly with the board of directors and investors. A CFO needs to be a leader, understand the business dynamics and be familiar with all the elements of the business as well as the operating model in order to be able to be the ‘Quasi CEO’ or the ‘next in command’. In today’s economic scenario, CFO’s are increasingly seen as natural contenders to the CEO position. And then the magic happens.
CFO’s find themselves assuming greater leadership and responsibility while also asserting more influence on strategy. Outstanding CFOs with all of these skills and the right personal chemistry with the CEO have the ability to become his/her right-hand person. Ultimately, such CFOs become agents of change, creating smarter work patterns throughout their organization with insights that drive performance and help achieve better results. Improvement in company valuations is a result of doing the right things consistently over a period of time. As they say, Rome was not built in a day.