The evolution of the CFO role

The evolution of the CFO role

Digital technologies… have created a business environment in which decision-makers can more readily acquire data to inform decisions and then shrink bottlenecks between knowing and doing. In this way, digital technologies are accelerating the pace of business. Advises Jeanne Ross in her June 27, 2018 article in the Sloan MIT Review.

Digital technologies are driving business processes—e-commerce platforms, automating purchasing, collecting and maintaining databases of personal information and preferences, emails, logistics, and so much more. It is little wonder that major Australian retailers are rapidly investing heavily in digitisation. Other companies are doing the same.

Digitisation and the CFO
Digitisation and business and financial analytics in a fast-paced world are transforming the traditional Chief Financial Officer role and adding more responsibility, often outside of the financial domain. David Dillon, a virtual CFO running Custodian Back Office, adds that all roles across the business are changing, especially in the SME sector, causing the CFO role to evolve. 

 A McKinsey and Company biannual research report on the evolving role of finance and the CFO published December 2018, based on responses of four hundred C-Level executives including 212 CFO’s.

Comments on this McKinsey research reported below, contains some of my thoughts and those from several members of the Virtual CFO Association of Australia. At the 3S CFO Group, we believe that these changes affect the services the virtual CFO provides the SME market. With digitisation, SME’s require a broader range of services that CFO’s are now taking responsibility for.

Increased roles
The McKinsey survey noted that the role of the CFO is becoming more cross-functional. Such change requires soft skills to influence organisational change. The focus, in larger public companies is often driven by activist shareholders to drive long term performance rather than the short term. The CFO is often considered to be the steward of company resources. 

McKinsey points out that the CFO role can be a mix of risk management, corporate strategy, investor relations, regulatory compliance, enterprise transformation, pricing of products/services, board engagement, mergers and acquisitions strategy, transactions and executions, post-merger integration, IT, procurement, digital and cyber-security. 

Managing talent
Changing functions now require talented and capable employees. The CFO works closely with the CEO and CHRM to attract and retain such talent to drive value in the company. 

It includes broadening the experience of the finance staff across the organisation, introducing new technology, building capability and financial literacy throughout the business and improving ways of working and collaborating across the enterprise. 

Training permanent accounting, along with non-finance staff, adds value to the business says Robin Snelling of CEEFO. An understanding of the data assists in developing long-term strategy, leading to better decisions, according to Robin.

McKinsey notes that technology has led to digitalisation, automation, advanced analytics in finance and the overall business operations, robotics and data visualisation. The challenges of this transformation include measuring the performance change initiatives, overseeing margin and cash-flow improvements. Before the transformation process begins they suggest that performance base-lines are required.

David Dillon believes that enabled by technology, businesses can, almost in real-time now communicate, delegate and collaborate across the enterprise more than ever.

Long term vs short term
The pressure on companies from boards and investors for short-term results means the CFO has to take responsibility to tell the story of how value is created long term, and provide both proof and metrics that show value creation.

David Thomas, Figure 8 Finance, says the CFO is the conduit for the translation of financial information, metrics and analysis to ‘common speak’ for the rest of the C-Suite team and beyond. Not that they admit it, but some don’t often understand basic financials, leading to reports being disregarded by management if not communicated clearly. David says today’s CFO requires superior communication skills to be able to translate and relate the data to allow effective decision-making.

Decision-making tools
McKinsey remarks that finance and beyond: data analytics and data visualisation, are required to make better-informed decisions about business processes. The CFO needs to be able to provide guidelines to evaluate decisions, investments and spending options— the long term value-adding processes, while steering the company to react to change in the external market proactively.

Making the shift
McKinsey continues: the CFO is involved in where to start automating the finances from excel spreadsheets to using analytics and data visualisation. Using the analytics to gain insights across the functions, including pricing, operations, supply, CRM —difficulties include understanding where the opportunities lay and financial resources to implement the changes. A talented workforce is better able to undertake the responsibilities of using the data collected. At its simplest, it can be the difference between operating profitably or losing money and not knowing where the problems are.

The benefit of digitisation, according to Robin Snelling, allows access to relevant databases to provide meaningful reports using a variety of tools. The danger of too many reports is that it may overwhelm SME’s—a failing of the forecasting and reporting tools available to accountants today. He expects that an experienced virtual CFO will be selective in presenting the most relevant reports and using analytics to get to the heart of their client’s business operations. Then use these to get to the specific explanation of any problem.

My own view is that for the small to medium business sector, virtual CFOs are less likely to get caught up in the reactive day-to-day needs of the business. Meaning they are better placed to focus on essential, longer-term planning. They base their planning and forecasting activities around the business drivers and report performance against these drivers. Mentoring and developing the finance teams while ensuring the balance between management demands and finance capabilities results in more productive outcomes. Moreover, by necessity, virtual CFOs are leading the way on digital solutions and data analytics. Their investment in the development of these capabilities is affordable because they can be spread across many clients.

To find out more about what a virtual CFO can do for you, please contact Colin Wright 0409 355 944 or via our contact page.

Business growth funding for small to medium enterprises in Australia

Business growth funding for small to medium enterprises in Australia

The Business Securitisation Fund

Small to medium businesses require capital for growth to be able to invest in things like new production equipment and new market development. To assist the SME sector, the Business Securitisation Fund was passed by Parliament in April this year and the Federal Government is also proposing to set up a Business Growth Fund. 

The Business Securitisation Fund is designed to improve access by SMEs to loans, at a lower interest rate than has been the recent experience. It plans to provide funding to innovative Australian businesses across the economy and would be similar to the United Kingdom’s Growth Fund, which has invested over $2.7 billion in a range of sectors.

Such funding would support innovative Australian businesses helping to diversify the Australian economy.

“The major banks are dominant in the SME market, yet they are constrained by the regulations to insist on some form of asset backing, whether that is a property or a bank deposit by a third party. 

That is just not viable in an economy where younger business owners cannot afford to own homes, or have limited equity, especially when the value of their homes is falling. In some cases, I have seen viable businesses needing funding to grow where the owner will not provide a private residence as equity for a loan. 

There is a need for banks to start looking again at the value of the business as an alternative to the amount of solid asset backing.

The Business Securitisation Fund will also bring the smaller banks and non-bank lenders more into the market, which will reduce interest rates charged to SMEs. These rates have been up to four percentage points higher than the rates charged to larger businesses.

The improved availability of funding has the potential to have a substantial benefit to many areas of the Australian economy. 

Businesses which are battling to survive will find it more comfortable with lower interest rates on their loans. Innovative companies will find it easier to get credit, which is necessary to fund product development. Businesses moving into new markets, or adding new product items, will be provided with the funding required to increase their stock levels.” Robin Snelling, VCFO

 

“This initiative is a very big positive for SME businesses. The prudential regulations make it difficult for banks to adequately address this sector so the Business Securitisation Fund will provide a productive impetus for the economy. 

We also need to encourage the SME sector to be “investment ready” so that they can qualify for this funding. 

The fund will place a high value on how well the applicants manage their businesses. This will include the quality of their planning and performance reporting. The members of the Association of Virtual CFOs are well placed to support these businesses and ensure they have high-quality planning and reporting practices in place.” Colin Wright, VCFO

“Funding is challenging to get unless you have security (bricks and mortar behind you) and trading history. Both of which are difficult or impossible when you are young and have a great new idea or product. 

So, you either need to have some wealthy investor or parent to support you during the startup phase. Not everyone has this, but this does not preclude you from having a good idea.

So there has to be a way to support new business ideas to give our entrepreneurial people a chance to have a go. 

This type of funding is much needed. I recently met a young business owner with a new non-sugar based food and drink alternative, a great idea with the obesity issues that our society faces. He needs to get finance to fund and expand his operation but can’t get bank funding, so is hoping family and friends can support his venture. 

This new type of funding would allow him to go forward with his business and tackle one of the more significant health issues/challenges our kids face. Without it, he may not get the chance.” Peter Mclean, VCFO

 

Private capital allows companies to grow, according to a 2018 Deloitte Study. They found that Companies, with private equity investment, grew annual revenue by 20% and their workforce by 24%. Equity funding may help SME’s avoid debt without giving up control of their business.

“All finance comes with a cost: not just the fees and interest but the responsibility to report back to lenders on the business performance.

To do the reporting, it will create a need for small business to engage suitably skilled accountants, most likely a virtual CFO to do this. 

A Virtual CFO will ensure that the business has the right financial structures, disciplines and reporting to not only meet the financier’s needs but to grow and expand the company into the future successfully. A handy person to have around to help in the success of an up and coming business.”  Peter Mclean, VCFO

 

“The Small Business Ombudsman stated in November 2018 that the Securitisation Fund would not mean that riskier small businesses will get access to more bank funding. SMEs will have to be able to demonstrate their achievements to date and that they have sound plans for the future. The best way to do this is to provide detailed financial reporting and strategic plans.

SME owners must demonstrate to potential lenders that they make decisions which are supported by facts, which in turn will give confidence to the lender that their investment is not unduly risky. 

Financial reporting may demonstrate the profitability of products and services, and give a breakdown of customers by market segment. 

Financial reporting will also be based on sound accounting principles and clearly show trends in revenue, cost of sales, overheads and profit. 

All too often, businesses which lack a finance manager will have profit reports which show high profits one month and a loss the next month, because they fail to match revenues with the associated costs.

These reports are not helpful to lenders assessing a business. Reliable financial reporting like that above will provide an excellent foundation to construct plans for the future. The profitability of planned sales growth, or an investment in plant and equipment, will be based on known revenue trends, or properly calculated costs. This will give lenders security that repayment of their loan can be achieved.”  Robin Snelling, VCFO

How CFOs can help your business

CFO’s can assist the SME sector by analysing the financial health of a business and provide the owner with a range of advice and options for managing growth. They can also help the owner apply for equity funding if the opportunity arises, and demonstrate their client’s capability to repay the equity.

When your company needs to finance growth through the purchase of productive assets or workers, then your first step is to engage the help of a CFO. 

The virtual CFO or outsourced CFO is a contracted service provider who can provide critical financial management skills for SME businesses at a cost that enables significant benefits to be delivered to the business. 

Typically, your virtual CFO has a number of strengths and focuses on:

  • Analysis through financial reports and interpretation
  • Oversight of the business’ finance function
  • Offers insights into business operations which allow well-informed decisions to be made
  • Behaves with a broader view of the client’s ethical and social responsibilities
  • Heavy focus on budgeting and forecasting
  • Provides performance management support
  • Reviews risk exposures

Use the VCFO site to find a Virtual CFO to assist you with your business

Further reading:

https://treasury.gov.au/small-business/absf

https://www.smartcompany.com.au/finance/funding/uk-growth-fund-government-sme-finance/

https://www.smartcompany.com.au/finance/game-changing-government-plan-pledges-2-billion-for-capital-starved-smes/