The Role of a Modern CFO
I had written this article earlier and it had been published by caalley.com. Thought of sharing it through my blog.
Through the 1970s, 1980s and into the 1990’s the role of the CFO – nomenclature then was Finance Controller - was more in the nature of arranging bank finance at reasonable costs for business growth, due to scarcity of growth capital due to tight liquidity conditions. It was more in the nature of a tactical, bean counting job. The CFO was primarily responsible for tedious budgeting and various accounting and internal reporting functions. The other expectation in those days was to have decent treasury management skills which helped in raising debt or equity capital and basic cash management. The CFO then was more of a workhorse than a show horse.
The nineties was the decade of economic liberalization with the primary markets becoming an easy source of money for businesses as the regulatory environment was still in the formative stage. At this point in time the role of the CFO was that of a wheeler-dealer who tossed aside traditional notions of balance sheet integrity so as to concoct fascinating numbers to nudge gullible investors to put their hard earned savings into initial public offerings. There were lakhs of investors who burnt large holes in their pockets by investing in these initial public offerings. The Harshad Mehta scam and later the Ketan Parekh scam literally shook the government out of its lethargy to create a decent regulatory environment to protect investors. Through this turbulent period the CFO was just a number cruncher who sought money from banks and institutions for business and managed the cash flow using traditional methods of cash flow management. Some of the unscrupulous people helped in milking the investors of their hard earned money through the public offerings and then disappearing with the money. Companies like Sparkle Foods and Aurriferous Aqua come to mind. These are two of the Companies mentioned in the large “Vanishing Companies” listing on the Ministry of Company Affairs web-site with investigations launched and criminal cases filed against the promoters.
The global financial scams beginning with the Enron meltdown and high profile failures at Global Crossing and Tyco International, companies have started re-visiting what they want from their CFO’s. Nobody wants to be the next Enron, which means that companies are now looking for CFO’s with a renewed emphasis on ethics and hardcore accounting, financial reporting and risk management skills. The environment today is more liberal than earlier and the CFO today is expected to raise capital aggressively, meet their forecasts and make their case to the analysts. At the same time the CFO is expected to keep a vigilant eye and a transparent cover on the books – implying that the job is just getting tougher and more all-encompassing than before.
The financial markets today have become more transactional and exploded on to the global stage with lots of partnerships, strategic joint ventures, mergers and acquisitions leading to consolidation of businesses world wide. Today the role is more strategic with the CFO expected to have a knowledge of complex financial products like mortgage backed securities, derivatives, currency management skills plus having to target companies for M & As and thereby helping the CEO in shaping the direction the company should take.
With capital markets booming and huge fund houses with humungous volumes of money at their disposal for investments in emerging markets are defining the way the CFO should go in the future. The CFO now is expected to and in the foreseeable future will be expected to be a financial superman. The earlier role used to be that of a finance controller which has now evolved into that of dealmaker or a pitch maker for the stock markets. He has started wearing another hat – that of a business expert and forecaster as pressure from analysts increases with tougher and tougher questions being posed. The CFO now has to delve into every aspect of the business, analyze the respective business plans and value them all. With diversification of businesses and with a large geographical spread the job has become a much more difficult task.
As the community of equity research analysts such as the Salomans, Smith Barneys, and Merryl Lynches of the world have over hyped companies they covered in the past leading to investors burning their fingers, they are now compelled to ask tougher and tougher questions to satisfy their investors. In future they will be asking tough questions beyond the financial statements such as how much actual value the company is creating. This will result into more and more companies switching over to value based management techniques such as Enterprise Value Added and the Balanced Scorecard
Now and in the future the business-strategizing aspect is going to be a critical part of the CFOs job. In the past few years, companies got burnt by decisions to enter new markets without bringing the CFO into the loop. Lots of manufacturing companies tried to diversify their product portfolios unsuccessfully without proper studies and inputs from their finance people and have got burnt in the bargain. All such decisions in the past were taken in conjunction with the business development and marketing people without consulting the CFO. The CFOs also used to avoid getting into the loop as they considered that such decisions were outside their domain. Now they are sounding boards for new ideas on growth strategies and whether these make financial sense. Today and in the future the CFO will have to diverse skills to manage complex financial products, leveraging funds to help in business growth plus accounting virtuosity and strategic prowess.
To conclude, the role of the CFO has evolved from that of a finance controller to a sounding board for the CEO/management for taking strategic decisions towards the growth of the busincess.
Through the 1970s, 1980s and into the 1990’s the role of the CFO – nomenclature then was Finance Controller - was more in the nature of arranging bank finance at reasonable costs for business growth, due to scarcity of growth capital due to tight liquidity conditions. It was more in the nature of a tactical, bean counting job. The CFO was primarily responsible for tedious budgeting and various accounting and internal reporting functions. The other expectation in those days was to have decent treasury management skills which helped in raising debt or equity capital and basic cash management. The CFO then was more of a workhorse than a show horse.
The nineties was the decade of economic liberalization with the primary markets becoming an easy source of money for businesses as the regulatory environment was still in the formative stage. At this point in time the role of the CFO was that of a wheeler-dealer who tossed aside traditional notions of balance sheet integrity so as to concoct fascinating numbers to nudge gullible investors to put their hard earned savings into initial public offerings. There were lakhs of investors who burnt large holes in their pockets by investing in these initial public offerings. The Harshad Mehta scam and later the Ketan Parekh scam literally shook the government out of its lethargy to create a decent regulatory environment to protect investors. Through this turbulent period the CFO was just a number cruncher who sought money from banks and institutions for business and managed the cash flow using traditional methods of cash flow management. Some of the unscrupulous people helped in milking the investors of their hard earned money through the public offerings and then disappearing with the money. Companies like Sparkle Foods and Aurriferous Aqua come to mind. These are two of the Companies mentioned in the large “Vanishing Companies” listing on the Ministry of Company Affairs web-site with investigations launched and criminal cases filed against the promoters.
The global financial scams beginning with the Enron meltdown and high profile failures at Global Crossing and Tyco International, companies have started re-visiting what they want from their CFO’s. Nobody wants to be the next Enron, which means that companies are now looking for CFO’s with a renewed emphasis on ethics and hardcore accounting, financial reporting and risk management skills. The environment today is more liberal than earlier and the CFO today is expected to raise capital aggressively, meet their forecasts and make their case to the analysts. At the same time the CFO is expected to keep a vigilant eye and a transparent cover on the books – implying that the job is just getting tougher and more all-encompassing than before.
The financial markets today have become more transactional and exploded on to the global stage with lots of partnerships, strategic joint ventures, mergers and acquisitions leading to consolidation of businesses world wide. Today the role is more strategic with the CFO expected to have a knowledge of complex financial products like mortgage backed securities, derivatives, currency management skills plus having to target companies for M & As and thereby helping the CEO in shaping the direction the company should take.
With capital markets booming and huge fund houses with humungous volumes of money at their disposal for investments in emerging markets are defining the way the CFO should go in the future. The CFO now is expected to and in the foreseeable future will be expected to be a financial superman. The earlier role used to be that of a finance controller which has now evolved into that of dealmaker or a pitch maker for the stock markets. He has started wearing another hat – that of a business expert and forecaster as pressure from analysts increases with tougher and tougher questions being posed. The CFO now has to delve into every aspect of the business, analyze the respective business plans and value them all. With diversification of businesses and with a large geographical spread the job has become a much more difficult task.
As the community of equity research analysts such as the Salomans, Smith Barneys, and Merryl Lynches of the world have over hyped companies they covered in the past leading to investors burning their fingers, they are now compelled to ask tougher and tougher questions to satisfy their investors. In future they will be asking tough questions beyond the financial statements such as how much actual value the company is creating. This will result into more and more companies switching over to value based management techniques such as Enterprise Value Added and the Balanced Scorecard
Now and in the future the business-strategizing aspect is going to be a critical part of the CFOs job. In the past few years, companies got burnt by decisions to enter new markets without bringing the CFO into the loop. Lots of manufacturing companies tried to diversify their product portfolios unsuccessfully without proper studies and inputs from their finance people and have got burnt in the bargain. All such decisions in the past were taken in conjunction with the business development and marketing people without consulting the CFO. The CFOs also used to avoid getting into the loop as they considered that such decisions were outside their domain. Now they are sounding boards for new ideas on growth strategies and whether these make financial sense. Today and in the future the CFO will have to diverse skills to manage complex financial products, leveraging funds to help in business growth plus accounting virtuosity and strategic prowess.
To conclude, the role of the CFO has evolved from that of a finance controller to a sounding board for the CEO/management for taking strategic decisions towards the growth of the busincess.
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