The role of Finance departments and specifically CFOs in companies large and small is evolving. Based on my extensive experience with corporations across Latin America and the US, in this article I will look at the role of a modern CFO.

In today’s business environment, Boards of Directors and CEOs expect the CFO to be a business partner who contributes to maximizing shareholder value. CFOs can – and should – achieve this by operating in three different broad areas:

  1. Improving Profitability
  2. Providing Meaningful and Timely Information for Decision Making
  3. Minimizing Risk and Securing Assets

The weight and significance of each component varies according to the stage of the business cycle that the specific company is in.

Improving Profitability

  1. While it is clear from a business and controls perspective that the CFO is not responsible for the top line, he/she should be tenacious in identifying opportunities to increase revenue, for example by proposing and participating in business development initiatives and constructive involvement in pricing and product mix.
  2. The second area is one of the “traditional” strengths of Finance, that is,reduce/optimize expenses. Pushing for higher levels of efficiency is a key component of a CFO’s priorities. What is relatively new is the positive significant impact of advances in finance technology. As CFOs start taking on a more strategic role in this respect, research shows only 6% of CFOs really understand the technologies available to them and only 37% know what is available in the market (Gary Simon/FSN). Of course, while percentages differ significantly depending on the size of the business and the activity, taking advantage of technology needs to be addressed.
  3. Third, CFOs are in a privileged position to enhance working capital by optimizing inventories (sales forecast accuracy plays a key role), accounts receivable (improving collection times through adequate follow-up and other tools), and cash and accounts payable.

Providing Meaningful and Timely Information for Decision Making

In this area, the starting point is the “traditional” accounting and reporting function to issue financial information on a timely and consistent basis.

Having that in place, it is crucial to conduct strategic and proactive Financial Planning and Analysis in order to monitor performance, not only P&L for sales and expenses, but also balance sheet and cash flow compared to budget/forecast guidance while also keeping track of the evolution of key performance indicators (KPIs) that are relevant for the operation.

Despite the significant importance and all the effort that goes into budgeting and forecasting (B&F), research shows that only 40% of organizations characterize their B&F process as insightful, that is, enabling them to tap into unexpected insights and pathways to better performance (Gary Simon/FSN). This also needs to be addressed.

Minimizing Risk and Securing Assets

Risk is inherent in all businesses and change (not only external such as regulatory, tax, legal, but also internal) is a factor that increases it. Conducting multinational operations also increases risks, given the unique business environments and regulations in each country.

While risk cannot be eliminated, companies should install an integrated set of tools to manage and mitigate it in order to achieve business objectives, addressing uncertainty and acting with integrity.

It is important to note this should be a companywide effort, where all areas can and must cooperate. Finance is one of the governance, risk and compliance professional areas and plays a significant role in defining and implementing sound internal controls to manage and mitigate risk. Even smaller companies should have basic capabilities in this area.

What This Means for the CFO

In the preceding paragraphs, I have addressed the three areas where Finance as a business partner can be leveraged to maximize shareholder value. However, something more is needed.

In the past I have seen financial professionals become involved in critical business decisions very late, their roles limited to explaining the consequences of what has already been decided.

In my opinion, and this is the modern approach, financial professionals and especially the CFO should take the opportunity and be expected to be proactive. CFOs should perform as coaches to the business units and support them in making better commercial decisions. Proactive communication with the CEO and the rest of management team is key to aligning priorities and activities and monitoring their evolution and outcome on a regular periodic basis.

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