Chief Financial Officers (CFOs) are responsible for the financial direction and health of their respective companies. Of course, every company is different. Tech companies operate in different industry conditions from retail, and hospitality from healthcare. Every CFO’s decisions should be appropriate for their industry. However, all industries are facing shifting trends in the world economy and business practices, meaning CFOs need to adapt. Business school may have taught today’s standard practices and procedures, but what role do those play when looking toward the future? Read on to learn how today’s CFOs can see the most success.
Understanding the CFO Role
Leading CFOs shared in a Business Insider article their tips for success in the CFO role. Their answers, while varied, revealed that CFOs handle the most important financial decisions at a company. They determine how to finance big projects and are held to financial health factors like revenue growth and cash flow. Often, the CFO presents earnings at quarterly calls, which can influence company stock prices. CFOs weigh in on making huge, strategic decisions such as selling parts of the business, diversification, and mergers.
Of course, analyzing numbers is only one aspect of the CFO’s role in today’s business climate. CFOs also need a proper understanding of consumers and employees, and how to communicate with them. Consumers can shed light on attitudes toward products and services and help leaders spot emerging trends. For example, why are they drawn to a particular product? What associations do they make when they see your brand? After all, as GE Oil & Gas CFO Brian Worrell puts it, consumers are who make your company money. Understanding them can help CFOs predict how they’ll impact future financial decisions. Employees can shed a similar light on company morale, which can have implications for company health. Today, companies are taking intangible factors like employee satisfaction into consideration when determining the value of investments (more on this later).
Know When to Break Tradition
There are arguments against CFOs relying on traditional benchmarks and metrics for sharing performance to shareholders. Rita Gunther McGrath, Associate Professor at Columbia University, explains in the Wall Street Journal that metrics like net present value, rates of return, and financial ratios only look at the company’s health today. Furthermore, they assume businesses won’t change in the future, which is hardly ever the case.
Suzanne Hopgood, President and CEO of Hopgood Group, explains that earnings calls and projections pressure executive leadership to do what it takes to meet those earnings. Companies in the past have gone from borrowing future quarterly earnings to outright manipulation of financial reports. Yet revenue isn’t always consistent across the entire year, especially for industries like retail. CFOs need to consider their industry and see whether earnings are putting a priority on short-term results that can hurt the company long-term. According to Hopgood, these reports aren’t always necessary.
Focus on the Long-Term
If the thoughts above have anything in common, it’s that today’s CFOs need to shift their focus to the long-term. London School of Economics Professor Alex Edmans advises avoiding earnings guidance so companies can focus on investments with long-term value. He explains that some of the most valuable investments, such as those in corporate culture, don’t reap immediate quantitative returns. Instead, CFOs should focus on communicating these intangible benefits to investors (Edmans also argues against earnings calls and guidance).
CFOs shouldn’t focus on the future just for proper investing, but also to ensure their relevance in an ever-changing business landscape. Uber and Lyft have transformed transportation. Amazon and Netflix have transformed television. CFOs and executive leadership need to stay focused on the future to find new ways to compete with rising startups and technology. University of Miami Associate Professor Robert Plant explains that for companies to stay “relevant,” they need to create a brand that customers can believe in. There’s a reason why Google and Apple have such fervent consumer bases.
Align Today’s Challenges with Tomorrow’s Vision
CFOs need to keep the future in mind, though this doesn’t change the present challenges their businesses face. Let’s take the example of the recent labor laws such as the raising of the minimum wage. The goal is that employees who are well-paid will be more productive, and therefore bring in more profit for the company. Yet this means CFOs need to account for these added labor costs and discover how to absorb these costs without sacrificing much profit. CFOs today are also facing new challenges such as cybersecurity and big data. These are all relatively new concepts that companies need to prioritize. What are the costs and risks for these investments? How will they be implemented and what value will they bring?
Answering these questions often involves more than financial analysis. David Axson of Accenture explains that today’s CFOs work closely with CEOs and are responsible for operational efficiencies. This means realigning operations, creating cost flexibility, and identifying areas for cost reduction. In other words, CFOs are responsible for ensuring the company moves forward in a fiscally responsible way.
So what do CFOs need to do in order to provide valuable insight? They need to understand their consumers, employees, and industry. They need to be forward-thinking and have a future vision for their company. They need to understand that today’s financial metrics, while valuable, don’t tell the whole story.
Know When to Ask for Help
With the combination of financial savviness and leadership, CFOs are in the unique position to influence company direction unlike anyone else. While excellent CFOs tackle challenges head-on, they also understand when it’s time to ask for help. Fortunately, CFOs are never alone. They work with directors and other senior leadership to make informed decisions.
Every CFO needs to surround themselves with the right team, one that excels at communicating accurate reporting and financial analysis. For smaller businesses, this may mean working directly with accountants. For medium to large-size businesses, this may mean working with department directors who bring the most relevant information from their individual teams. While the above tips should be helpful, remember that no CFO is alone. It’s when a leader is supported by superior team members that they and the company can achieve success.