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How To Get The Best From Your CFO

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.

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How To Get The Best From Your CFO

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  1. How To Get The Best From Your CFO

  2. 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.),

  3. 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 company’s performance, satisfy them regarding the company’s corporate governance processes etc.), company executives (i.e. heads of other functions and colleagues within the company in connection with the company’s operations), CFO’s of other companies (to share knowledge/information that may be useful to each other) etc..

  4. Many of the areas described above require specialised expertise and act as a powerful magnet attracting the CFO’s 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).

  5. 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 company’s 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.

  6. 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

  7. 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 company’s 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,

  8. 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 department’s performance and also help the CFO to evaluate better asset acquisition/expenditure 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;

  9. 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 company’s requirements. Otherwise the company will be left with unutilised inventory and storage costs;

  10. 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 CFO’s 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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