CFOs roles are being redefined. The modern CFOs are expected to be much more dynamic than the traditional roles that they played.
CFO roles are being redefined. The modernistic CFO is no longer engaged in being a part of the executive committee of the organization but is instrumental in re-engineering the Finance Team of the organization. The abbreviation CFO immediately transcended into the realm of compliance and issues surrounding accounting. The modern CFO is expected to be much more dynamic than the traditional roles that CFO’s played. To bring things in perspective, come Financial Year closure and the CFO has to deliver results for the year to the board and the approval to be sought for the budget and growth requirements of the next year. In the decade before 2000 this phenomenon saw a gradual fade and the rolling budgets were the order of the day. Come 2000, the industry saw tremendous change in the perception and the CFO shifted from being a cost center to a ‘Hedge Center’- being the center which is responsible for mitigation of risks but the industry was wary of branding the CFO office as a ‘profit center’ . What changed in the last decade?
The internet boom past 2000 and the emergence of stronger standards and the establishment of new grounds in the area of reporting saw the CFO shifting the primordial ground from ‘hedge center’ to again a ‘reporting center’. Reporting again took the spotlight in the minds of the CFO and this emergence led to a series of structured mindset amongst the CFO’s. By falling into silos of reporting, the CEO’s relied on the CFO’s to closely monitor the reporting norms and to bring things in the light of regulations with utmost diligence and care. This not only mounted pressure on the CFO to even triple check every single number that is reported but also imposed immense responsibility in the areas of reporting & regulatory norms mainly on account of Sarbanes Oxley Act 2002, more importantly in the area of Sec 404
Come 2009, the markets all over the world saw the biggest crash, and a majority of CFO’s came under fire for unfair practices. Unfair need not necessarily be unethical. In India too, we have had our fair share of CFO ‘stripdowns’. This being said what makes the CFO’s different in India?
While a large amount of literature has gone into the analysis of the effect of CFO decision making in the recent past, one area has been ignored while talking about CFO’s. The silent area which in subtle terms is the tectonic plates of the CFO industry (Yes, There exists an industry for CFO’s) is the MSME’s or widely known as the Micro, Small and Medium Enterprises.
1. CFO, The Alternate Chief Executive Officer
From 2010 we have been seeing a tremendous change in the role of CFO’s. CFO’s are not the regulatory whip within the organization but the ‘shape shifters’ in many sense. They don the hat of Fund raisers in a quarter and with ease shifting to the role of Makeshift CEO when the CEO moves on to a competitor in another quarter. Such ‘Shape Shifting’ effect has been seen more often in the recent past, with the CFO being involved more in the strategy and sales side of the business. To quote an example, the start-up companies in India neither have the time nor the patience to attend to the technical details of accounting and it is all about
the ‘big picture’. The CFO is seen as a person who manages the ‘smaller pictures’ which builds up to the big picture and gains his/her position into the big leagues by managing the smaller , intricate pictures. So in that sense, the CFO is the one person that the company relies on building the organization
2. CFO, The Chief Process Officer
Moving away from the role of Financial Officer, the CFO ‘s role has also changed to imbibe the qualities of a Process Officer. A new term has been gaining momentum in the Startup sector and which requires skilled professionals who can change the way the businesses work. Chief Process Officer is the new dimension that the CFO is expected to cater to. This involves building the processes within the organization and ensuring that every process results in optimization as the organization moves through the economies of scale and moves from micro to medium sized. At this level the processes are key to determining the growth and most importantly the sustainability of the firm. In a company that I would not want to quote, the establishment of processes was key to helping the company initiate a sell off. To put things in perspective, the company was experiencing tremendous growth and the promoters did not expect the company to experience such hyperbolic growth and it was too much and too mature to invest in re-engineering. The task cut out to the Consultant CFO was to clearly map the future strategies of the company and make a presentation to the angel investors listing the future strategies of the firm and the potential client base and the sales plan. While the CEO and the executive committee were the brain behind the strategies of the firm, the thumbs up from the CFO was a crucial deciding factor for the buy out to take place: whether the Strategies made sense financially!
3. CFO: The Super Woman/ Superman
Much of the arguments posed against the CFO is that the decisions delay the growth of the organization. In a recent survey it has been found that the CFO is relied upon by 74 % of the workforce to make important decisions with regards to the future of the company after the CEO. In another survey of the start-up companies in India it was found that the critical resource that the CEO hunts for is the CFO at par with the Chief Technology Officer (CTO). What make the CFO such a sought after resource in a startup industry? Knowledge and Process Understanding. It has been increasingly and repetitively established that the CFO is the person driving the business angle from a finance side. I personally have accompanied many CEO’s in deciding a range of scenarios. It would be a bitter irony and bit perplexing to note that one of the scenarios involved deciding on a real estate situation and the CFO was asked to mediate between a legal tangle and what is more appealing for the Modern CFO is also veto power on the crucial decisions that the CEO makes. It is evident that the CFO is the sounding board for the Venture capitalist for strategies to be imbibed into the company.
4. CFO: The One Man/Woman Organisation
In another survey on the future of CFO, 67 % were positive about the future of the companies.The sample range was top 500 companies listed in the BSE. But the survey ignored the fact that the positivity has been higher in smaller organisations where there have been reported more than 90% satisfaction as the Job horizon expands for the CFO. It is also worthy to note that in many of the smaller organization or to be better called as start-ups, the CFO office is promulgated as a one man/woman army. Why? The reason being the smaller the firm the greater the CFO’s responsibility to attract like-minded people into his/her organization based on the growth needs of the company. In a company where I was a Consultant CFO, the team consisted of only 4 other People, CEO, CTO, HR-Rep, Venture capital representative. There was no person to set up the processes, policies, ayscale. The HR resorted to the CFO to make informed decisions on the payscale as the man power plan was to adhered to strictly. The venture capitalist had many other organisations that they had invested in and relied heavily on the CFO to make a choice of policies which befit the growing needs of the organization. So in all probabilities the CFO qualifies to be called a super CFO as they cater to every little detail of the organization growth story.
5 .CFO: The Consigliere
The advisor, the principal officer, what ever the name may be, the CFO is in all elements the confidant of the CEO. Be it the charting the growth story or be it the decision maker of the sell off plans. As per the Deloitte Quarterly Survey, the risk appetite of CFO’s is increasing steadily and is at an all time high. This translates to increasing appetite for data analytics and the need for a balance of gut feeling decisions and informed decisions.
6. CFO: The Data Analytics Person
Data analytics has been a sector that has been growing at a rapid scale in the recent past. In my experience as an outsourced CFO, the role was dynamic to imbibe the new business models that the businesses employ. To take an instance, A client who was a growing startup in the HR sector was grappling with penetrating the market and was exploring various business models and models was the one of those modes was the Freemium model of Sale.To bring this model to the forefront it required tremendous amount of analysis and for that analysis to take place there required a tremendous amount of data. Data Analytics which has long been forgotten as a domain is gathering firm ground of late. There is a basis for proclaiming this. The data analytics has been stronger than ever to enable the start-up CEO’s take split second decision when it comes to a price war.
Start-ups invariably face a price war at the beginning of their growth cycle. This price war can be won only if the leadership team and most importantly the CFO has a strong data to back the discounts that the sales team intends to offer. More so ever the data analytics dimension of the CFO is expected to take a new turn in the days to come with more business structures emerging and new models which rely heavily on the primary
data to optimize the models. For eg, a trimming of prices and pyramid discounting model can work only if the life cycle costs are considered and to consider the life cycle costs, the relationship with the customer has to be established and that can be done only if the sales analytics team has a well co-ordinated plan with the finance team. The Modern CFO cannot silo himself/herself from the data analytics which drive the modern start-ups.
7. CFO : The Driver of the Roadshow
IPO or no IPO is the question that haunts the modern CEO’s. The timing, the resources, the evangelists etc , there is a lot on the plate of the CEO to consider in the modern environment. Studies have shown a correlation between growth and the time taken to roadshow an IPO.Studies have shown that if the company is experiencing or likely to achieve 3X growth after the first year, the IPO option is likely within 18 months from then. This
statistic is a straight target for the CFO to achieve as every Start-up CEO would like to achieve this growth after the first year of operation. Another study has revealed that if the company experiences 3X growth after the first year the odds are in favor of a sell off. Mathematically the probability increases by 17 % in favor of a sell off.
To piece together these two statistics and to make a ground shifting change in the future of the company is what the modern CFO is grappling with. Roadshows are not easy for the CFO, nor the sell-off strategies. The takeover imposes tremendous pressure on the CFO to also put a valuation on the emotional factor that the CEO has built into his/her small idea which blossomed into something big.
8. CFO: The CFO is Gone, Long Live the CFO
Hiring a CFO is increasingly difficult these days. For one, there is a dearth of talent pool where the CFO can be sourced; for another, the old rules of hiring do not apply to the modern CFO’s. CFO’s are expected to deliver value right from the beginning. With a company that offers a Freemium model of service, they expect the CFO to be working on a freemium model. The CFO is expected to take a pay cut in the beginning and undergo a trial period within the start-up and then move on to become a full time deliverer of value within the organization. This makes the CFO a product that can be tried, tested and brought with a warranty period, however ridiculous it may sound. This brought the emergence of a new industry of the outsourced CFO services, where the CFO is expected to bring something to the table first and then the Management evaluates the need for inviting them onboard as a permanent member. The old rules of the game don’t apply to the CFO anymore as the new game of the start-ups have given rise to a new sector and a new set of demands.
New CFO: Boon or a Bumper?
The emergence of the start-ups have given rise to a question of whether the sector is a boon or a bumper. There seems to be no question of whether it is a bane and so we ignore that aspect of the statement. For the profession of CA which thrives solely through the needs of the companies, we have maneuvered through difficult scenarios in financial management of companies to the rich times of boom that the companies have experienced. It is evident that the growth of companies is heavily dependent on the analysis brought out by the CFO office. The businesses don’t rely on profitability anymore but want to stretch beyond the analysis of
profitability but enter the domain of business analytics and business intelligence. Business intelligence is the new domain that the CFO has to be updated with. There are new tools available in the market which requires the modern CA to be updated with. These tools not only slice and dice the information required but also provide the required support to the entire CFO office to conduct the much needed quick strategic analysis.
To sum up, it is evident that start-up’s cannot afford to lose out on a good CFO albeit that the CFO salary range is something that the businesses consider. But for a moment let’s think, if someone is offered a chance to be in a strategic position that transforms the future of the company and offered a role to move up the ladder to work close with the Venture capitalists and present models, why wouldn’t a CFO take this job which places him or her with at the helm of the company alongside the CEO.
This is one of the many what-if scenarios that the Chartered Accountants need to consider, considering the need to move out of the silo of regulatory compliance to a more predictive analysis that the modern business set-ups require. The potential to tap in this sector is huge and it is a matter of potential and the intent that can fill the gap between the need and skill sought.
(The author is Virtual CFO, Chakra Venture Partner LLP)