How To Get The Best From Your CFO

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How To Get The Best From Your CFO
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Traditionally, the CFO represents the Finance
function, just as the CMO represents the
Marketing function, the CTO the Technology
function and so on. Within the finance function,
the CFO is expected to deal with accounting,
taxation (both direct and indirect), banking,
auditing, working capital management, risk
management, corporate governance, internal
controls, investor relationships (esp. relevant
in case of a listed company), budgeting, costing.
He has also to deal with various tax authorities
(income tax/service tax/customs/excise/VAT etc.
depts.),
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External stakeholders (customers and vendors for
important commercial negotiations, auditors,
govt. depts., stock exchanges and analysts in
case of a listed company and private equity and
VC investors in case of a private company), Board
members (to explain the companys performance,
satisfy them regarding the companys corporate
governance processes etc.), company executives
(i.e. heads of other functions and colleagues
within the company in connection with the
companys operations), CFOs of other companies
(to share knowledge/information that may be
useful to each other) etc..
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Many of the areas described above require
specialised expertise and act as a powerful
magnet attracting the CFOs time and efforts. The
CFO is required to be a specialist in these areas
and at the same time, a generalist who has to
deal with the variety of people (sample listed
above) and speak their language (i.e. be
comfortable wearing different hats while
interacting with different people at different
times). He has to also visualise the current pace
of the company and whether at the end of the
year, it will achieve the targets it had planned
at the beginning of the year and accordingly,
adjust all the other parameters that will be
impacted by the estimated results (eg. if the
company is likely to achieve/fall short of its
targets, the advance tax payments should
proportionately be increased/decreased).
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In essence, the CFO is required to maximise the
return on capital employed. For this purpose, the
CFO has to maximise the bang for the buck of
all transactions undertaken and in that sense,
can be regarded as the Chief Efficiency Officer
of the company. To illustrate with examples, if
the company is planning to buy high value assets,
the CFO needs to assess whether the assets should
be leased or bought outright, based on various
factors eg. funds availability, cost, impact on
financial ratios etc.. Equally important, if not
more, the CFO needs to be aware of the companys
operational requirements due to which the asset
is being acquired and be satisfied that the
process for justifying the asset purchase has
been complied with. Otherwise, the company may
land up acquiring an asset that was not required
although the asset acquisition was done on the
most efficient financial terms.
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The same principle applies in case of high value
expenditures eg. on training, advertising etc..
The CFO is required to satisfy himself that the
internal control processes proposing such
expenditures are complied with and then assess
whether those expenditures will have the highest
impact before actually incurring the expenditures
eg. before approving spending from the
advertising budget, the CFO should assess the
internal control process followed for selection
of the advertising medium (eg. print, TV, digital
and within each of these, the particular
paper/channel/website) and satisfy himself that
the advertising medium selected will have the
maximum impact for the expenditure incurred
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While the CFO is not responsible for operational
decisions, the CFO is required to satisfy himself
regarding compliance with the internal control
processes on which such operational decisions are
based. Otherwise, a company may incur several
crores on advertising on TV (as an example)
whereas it should have actually used some other
medium which had a higher effectiveness. This
represents an inefficient use of money for which
the CFO is responsible.
What therefore emerges is that for the CFO to be
the Chief Efficiency Officer, the CFO has to be
fully involved in the companys operations and
not confined to an ivory tower within which the
CFO and his team will deal with the various
specialised areas listed above. For this purpose,
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The CFO should be a part of various internal
meetings where the functioning of each department
is reviewed. This will enable the CFO to provide
inputs to increase the financial effectiveness of
that departments performance and also help the
CFO to evaluate better asset acquisition/expenditu
re proposals for that department. The CFO should
not be kept out of such meetings on the logic
that these meetings are for reviewing operations
and do not involve any of the traditional CFO
areas
The CFO should be facilitated to meet decision
makers and his counterpart in key customers, so
that a better bonding and connect is established
with those customers. This helps in having a
little more wriggle room at the time of
negotiating revision in commercial terms and
discussing opportunities for future collaboration
either in the growth plans or resolving pain
points of the customer. The same principle
applies for meeting key vendors
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The CFO should be involved in the legal
negotiations or at least be made aware of the key
issues in any long term contract with a
vendor/customer before the agreement is signed.
This is to avoid committing to any transaction
regarding which the CFO may have some objection
eg. if a contract with a vendor is assuring a
particular quantity of purchases every quarter in
order to avail lower purchase rates (which may
enable the purchase department to lower the cost
of procurement), before signing that contract,
the CFO needs to be satisfied that the quantity
assured to be purchased will not be in excess of
the companys requirements. Otherwise the company
will be left with unutilised inventory and
storage costs
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As a principle, the CFO should not be looked upon
as a problem solver but as a problem avoider.
Thus, rather than involving the CFO after the
transaction has resulted in a problem that
requires to be solved, the CFO should be involved
at the early stage/before finally signing the
contract in case of all transactions above a
particular value.
The company will truly obtain the benefit of the
CFOs role if he plays the role of the Chief
Efficiency Officer and for that, the CFO needs to
be involved in key operational decisions also in
addition to handling the traditional elements of
the finance function.
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