Deepak Narayanan (Practus) on the pivotal role of the CFO

In any company, the Chief Financial Officer (CFO) plays an important role, safeguarding financials and its link with the company strategy. The CFO also has a number of other hats, including serving as the linking pin with key stakeholders, writes Deepak Narayanan, Founder and CEO of management consultancy Practus.

With insights into every business unit, CFOs have visibility into both, opportunities and challenges. On the one hand, it is about unlocking new opportunities, guiding business growth, building digital organizations. On the other hand, it is about proactively identifying and mitigating risks related to financial aspects, compliance, governance, investor relations, talent, technology, and more.

If you look at the current set of superstar CFOs, you will see high-performing individuals who are digital-oriented, stakeholder-focused, strategic partners who act as long-term value architects of the business.

Closely partnering with all the stakeholders, the CFO typically sits in on critical sales calls, product roadmap meetings, as well as key hire interviews. Besides driving profit & loss growth, the CFO contributes significantly towards building the products/services, people, brand, and goodwill of the organizations they serve.

In a framework developed by Deloitte (‘Four Faces of the CFO’), the modern day CFO is outlined as a leader that is expected to ensure cost control, nurture stakeholder relationships, and propel revenue growth for the organization. The framework differentiates between four roles:

• A “Steward” who focuses on the company’s health, ensuring compliance and managing risks
• An “Operator” who actively engages in resource allocation, ensuring efficiency of financial operations
• A “Strategist” who charts the financial direction of the company to drive innovation and growth
• A “Catalyst” who fosters open and transparent communication and collaboration with stakeholders, building trust and lasting relationships

The way I see it, the role of the CFO can be divided into two broad categories.

Role towards the company

The primary role of CFOs is to effectively manage and safeguard the company’s finances through responsible fiscal management.

Capital Allocation and Investment Decisions: As custodians of the company finances, CFOs need to strategically allocate capital and efficiently distribute resources to drive maximum returns and ensure long-term, as well as short-term organizational growth.

Raising Funds Responsibly: CFOs must raise funds that align with the company's growth goals and short-term needs. In addition to acquiring capital for expansion or innovation, well-planned funding rounds can solidify market position, help attract and retain talent, and significantly boost organizational value and revenue growth.

Maintaining Healthy Cashflows: Cash flow management is a core responsibility of the CFO for sustaining business operations, as well as seizing opportunities for growth. As the old business adage goes “Revenue is vanity, profit is sanity, but cash is king.”

Data shows that 82% of small or mid-sized businesses fail due to poor cash flow management, but no matter how small or large the organization, today, CFOs have the responsibility to cultivate a cash culture and move from a “just in time” to a “just in case” approach.

Regular Financial Forecasting: Whether it is traditional forecasting or zero-based budgeting combined with rolling forecasting, CFOs that conduct regular financial forecasting are better prepared for both, the best and worse-case scenarios.

However, even in the age of hyper digitalization, almost 60% of all mid and large-sized companies still rely on spreadsheets for financial planning and budgeting says IBM research, instead of employing powerful, artificial intelligence (AI)-led financial forecasting tools. CFOs are in a position to drive this digital transformation and make significant contributions towards creating truly data-driven organizations.

Maintaining Financial Hygiene: Upholding financial integrity and compliance is another core responsibility of the CFOs towards their organizations. Inaccurate financial reporting can have far-reaching consequences, including cash flow problems, reputational damage, legal actions and penalties, and in extreme situations, even bankruptcy.

Effectively Managing Risks: Proactively identifying and mitigating risks is an imperative for long-term organizational success. Ineffective risk management can result in fines and regulatory actions, product or project failures, employee turnover, and customer dissatisfaction. However, CFOs who wear their risk management hat successfully can positively impact organizational reputation, market share, and profitability.

Essentially, whether it is credit risk, ESG, cybersecurity concerns, third-party risks, or other non-financial risks, CFOs play a critical role in strengthening the governance practices and improving the organizations’ agility to respond to the morphing profile of risks in a volatile business landscape.

Role towards the stakeholders

From maintaining financial transparency and ensuring regulatory compliance, to supporting strategic decision-making, and fostering trust and confidence in the organization, effective stakeholder management is an essential aspect of the CFO’s role in ensuring long-term success and sustainability of the company.

Whether it is managing the Board of Directors, senior leadership, creditors and lenders, suppliers and vendors, employees, customers, regulatory authorities, or investors and shareholders, today’s CFOs are expected to be stewards, operators, catalysts and strategists – all at the same time.

Bridging Strategy and Performance: Effective communication between the strategic goals and actual performance is an important aspect of well-designed and properly executed change management initiatives that are crucial for business success. In this context, CFOs need to translate strategic objectives into actionable plans and measurable outcomes to connect vision with reality.

In fact, as per a WTW survey, companies with highly effective communication practices were 1.7 times more likely to outperform their peers in terms of financial performance.

Leading and Executing Company Strategy: A McKinsey & Company study found that on average, five functions other than finance now report to the CFO. This included not just functions such as compliance, risk, M&A, or investor relations, but also in many instances IT, Information Security, and digitization.

From Chief Financial Officer and Chief Risk Officer, to Chief Confidence Officer and Chief Conscience Officer, today’s CFOs don several key roles while shaping and executing the company's strategic direction, ensuring it stays on course.

Building and Nurturing Relationships: There are many studies about how building trust can significantly increase the likelihood of stakeholder support and cooperation. With modern day CFOs wearing multiple hats and managing several functions beyond finance and accounting, CFOs play a pivotal role in fostering trust and transparency to ensure lasting relationships with all the stakeholders.

CFOs are also responsible mentoring and coaching the teams they lead or manage, and encouraging clear and transparent communication throughout the broader organization.

Leading and Collaborating Cross-Functional Teams: Projects with strong cross-functional collaboration or executive support have a 76% success rate, yet 75% of cross-functional teams are dysfunctional due to unclear goals or direction, lack of governance, or inadequate accountability. CFOs are responsible for not just leading the functions that report into them, but also collaborating and driving business performance along with other functional leaders.

In summary

From developing new business models and driving digital transformations, to retaining talent and planning for contingencies, the role of a CFO has moved from accounting to accountability. Amidst the current economic uncertainties, fragile supply chains, complex regulatory environment, and digitization and talent challenges, the CFO’s responsibilities towards their company and stakeholders will continue to evolve further.

Most stakeholders expect CFOs to anticipate market change, drive digital transformation, accelerate business growth, drive and deliver ROI, and most importantly, inspire trust. Emerging priorities indicate that CFOs will need to become even more digitally-savvy and adaptable, as they will be measured on their ability to enable an agile, resilient, and digital-enabled, future-ready organization.