At the time of writing, the European Central Bank (ECB) has put forward proposals for a package to support any eurozone countries that get into trouble, and in the UK a coalition government has been formed that is promising an emergency budget within 50 days that will address its own deficit problems, both of which have lead to a recovery in the markets. Market confidence is however still quite shaky and, no doubt, by the time this article appears the recent roller coaster will have continued with further peaks and troughs. Three central facts are emerging though:
- What was a crisis centred on bank debt and countered by national bailouts, has simply transferred the debt problem to one centered on the sovereign debts of a number of developed economies that were already indebted and already running deficits even before they need to bail out their banks. Any fiscal recovery is reliant on an economic recovery that in turn is reliant on the performance of the private sector where all wealth is created.
- In a difficult economic environment, such as this, the survival or failure of most small businesses will depend largely on their ability to manage their cash flow. At the opposite end of the spectrum, large multi-nationals, which operate across borders, are able to move resources between economies depending on their comparative attractiveness. In between these two extremes, it is mid-market businesses that are at the heart of any economy, which will be responsible for fuelling any economic recovery.
- The chief executive officers that are seeking to drive their enterprises through these choppy waters are becoming ever more reliant on accurate forecasts, risk management and business insight and are looking to a new breed of chief financial officer (CFO) for this.
The global economic downturn has put a spotlight on CFOs and the finance organisations they preside over. Amid all the world’s volatility and uncertainty they have been drawn ever more often into the boardroom discussions where decisions are made. Their bosses, chief executive officers (CEOs), no longer want mere number crunchers; they want them to provide forecasts, manage risks and provide insight into issues ranging from pricing to production. As a result, CFOs are emerging with far greater clout and responsibilities than before.
Changing Role of the CFO
IBM’s new 2010 Global CFO Study, based on input from more than 1,900 CFOs and senior finance leaders worldwide, attests to this shift. Although the importance of core finance tasks hasn’t diminished in any way, CFOs have had to sharply increase their focus on company-wide concerns. The IBM study indicates that they are seriously struggling to come to terms with the dramatically altered economic landscape, and only half of those surveyed said they feel they’re effective in giving their CEOs adequate business insight. An overwhelming majority are planning big changes.
When we interviewed the CFOs last summer it was clear that the downturn had already had an impact in how they operated. Aside from the inevitable cost reduction exercise, most organisations had taken steps to sort out their working capital issues. In effect, going back to basics in financial control as they ‘shored up the balance sheet’. Many had also reviewed and taken action to ensure their lines of credit and availability of capital. This focus on working capital looks sets to continue with cash being a major part.
CEOs and boards of directors are counting on their CFOs to be fact-based voices of reason and insight, but those expectations are rising faster than the ability to deliver. However, the study identified one group of finance organisations that have a particular combination of capabilities that buck this trend. We call them the value integrators. Value integrators’ businesses have outperformed their peers on every common financial measure we examined. These leaders have stepped up to their new roles helping their businesses make all manner of enterprise-wide decisions better, faster and with more certainty about end results.
How have they done it? First, through efficiency. They have reduced complexity by sticking with common processes, for example using the same definitions across the organisation for financial terms like gross margin and revenue. That may sound like a small, obvious thing, but it’s huge. Many organisations use multiple terms to describe a single financial function, making reconciliation across the business a nightmare. Common terms make it far easier to consolidate data from the local to the regional and global levels, allowing more time for analysis. Less efficient companies consider it a victory merely to reconcile all their information at all.
Value integrators also have far greater analytical capabilities, enabling them to generate business insights that can help them spot market opportunities, react faster and ultimately predict changes in the business environment. They’ve even figured out how to drive sustained business outcomes in times of market instability.
This has happened, for example, at Banco Bradesco, one of Brazil’s largest private banks, which has total assets of US$253.5bn. Bradesco provides a wide range of banking and financial products and services both in Brazil and abroad. Its leaders recently recognised the importance of more effective financial management and went to work standardising its accounting processes and revamping its governance model to ensure that all departments had clearly articulated responsibilities. It also built a performance management system that allows it to evaluate risks and view profitability in many different ways, for instance by geography, customer or branch. The system also allows managers to build forecasts into their planning processes. As a result, Bradesco is now much faster at gathering, compiling and reconciling data. It has the time for sophisticated analysis and is better able to provide decision support for its undertakings.
Checklist for Financial Management Efficiency
That’s the kind of commitment and vision it takes to become a value integrator. How can a CFO get started on the journey? There’s no one-size-fits-all method; it varies from organisation to organisation. But you can start by asking these few key questions:
- Do I have all the information I need from all parts of the enterprise at all times?
- Is the company focused on the right business metrics, the ones that truly drive business performance?
- How accurate are our crucial forecasts, such as the ones for customer demand and unit costs?
- Does the organisation have sufficient analytical skills?
The answers to these questions will start to point a CFO to gaps in his or her finance organisation, and awareness of those gaps will guide the creation of an action plan – an absolutely crucial activity that must be undertaken with great care, as the decisions made for it will have great ramifications down the road.
Again, working capital will play a crucial part and the CFOs ability to forecast and predict cash requirements paramount to their ongoing success and not only the ability to influence and make decisions but also to implement them whilst ensuring that risks are managed.
One thing is certain: CFOs cannot return to the pre-crisis days when they were little more than information clearinghouses. The era of the CFO as a key influencer in the C-Suite has arrived, and those who are ready for it will reap the rewards for their organisations -increased competitiveness and greater profits.