The coronavirus has increased the need for effective business leadership. These days, the stakes are higher, so decisions are more challenging to make.
Managers must address declines in revenue and sort through the new government relief programs like the Paycheck Protection Program. Leaders have to create plans to get through the crisis. And they have to communicate plans with employees who may be anxious about where the business is headed.
A chief financial officer (CFO) is responsible for financial planning and management primarily. The role of a CFO in 2020 is changing. And so are the critical skills, focus areas, and duties, and key metrics CFOs need to be effective in 2020 and beyond.
What skills should a CFO have?
The CFO is responsible for supervising the business’s accounting functions and using insights from financial reports to guide critical business decisions. CFOs must be detail-oriented, understand accounting standards, and have the ability to manage staff. But the CFO role is evolving. Increasingly, these managers need broader non-financial skills to succeed.
1. They have strong problem-solving skills
A CFO must be able to analyze data and create plans that solve problems. Today, thousands of CFOs are working to solve the problem of lower revenue and cash flows due to the coronavirus. Let’s look at an example.
Julie is the CFO of Riverside Restaurants. Riverside operates five restaurants that generated $4,000,000 in sales last year. The business has seen an 80% drop in monthly revenue due to the coronavirus. And now, the restaurants can only serve carryout customers. To lower costs, Riverside has furloughed half of its staff but continues to make lease payments and incur other costs to operate five locations.
Julie has applied for a loan through the Paycheck Protection Program. She must plan her cash flow by making assumptions about monthly revenue and when Riverside could receive a PPP loan. Finally, Julie must manage the cost of bringing back staff when customers are allowed to start dining in at each location again.
CFOs must plan by using industry knowledge and past company performance and making assumptions about when the economy may reopen.
2. They’re highly organized in their work ethic
CFOs have to manage daily accounting operations and analyze information to make strategic decisions. CFOs must meet deadlines for providing reports and generating financial statements. As a result, CFOs work long hours and need the ability to focus, stay organized, and make good decisions under pressure.
3. They have strong managerial skills
A CFO must be a good manager. CFOs manage the accounting staff and must monitor the accounting work, so they can generate financial statements in a timely manner. As companies grow, they need people with industry-specific accounting knowledge, so CFOs must hire and recruit people with that knowledge. Once they create a financial plan, a CFO must communicate the plan to the staff and manage the implementation of the plan.
4. They practice effective communication
CFOs must explain critical data and provide meaningful context to multiple stakeholders, many of whom don’t have finance backgrounds. Stakeholders include employees, contractors, investors, creditors, regulators, and vendors.
Lei Lu is the owner of Advisori Finance, a firm that provides CFO services to early-stage tech startups (firms with Seed or Series A funding). She closes the books, posts adjusting entries, and puts together a financial package for both new investors and current funders.
Lei points out that she must speak the language of the company and its funders. These people are busy, and they need direction from a CFO to know which financial data is most important.
“Having my clients see what I see from financial statements is the number one thing when I work with clients. Graph, charts, and short explanations on financial statements all can guide clients to understand what to look for and what the takeaways are.”
Data has to be analyzed and used for decision making in every area of the business.
5. They can explain data across the organization
CFOs must be able to explain data and collaborate with other departments to make informed decisions. Consider these examples:
- The sales department wants to reduce prices on a product line, in order to increase sales and compete in a crowded marketplace. The CFO uses breakeven analysis reports to explain that prices can only be reduced by 10%, not the 15% requested by the sales area.
- Supply chain issues are making it difficult to produce product A, and the operations manager is trying to decide if finding a new supplier is needed. The CFO provides a revenue streams report, which shows that product A’s revenue is trending up. The operations manager uses the report to support the need for a new supplier.
- A manager of 15 retail shops wants to spend $500,000 to change each store’s design. The CFO uses a cash flow forecast to explain that the money can’t be spent until after cash is collected during the busy holiday season.
In each case, the CFO must discuss both financial and non-financial issues with another manager. These skills are important for CFOs in 2020.
6. They have the ability to adapt
Business conditions change constantly. Companies add product lines and close down business units that aren’t performing. Competition may force the company to cut prices on a group of products, and industry trends may require a reassessment of the firm’s direction.
The budget a firm uses to start operations on January 1st may require changes over time. The CFO must be able to make adjustments that maintain company sales and profits.
The coronavirus pandemic has raised the stakes for CFOs, and focusing on the right metrics is critically important.
What should a CFO focus on?
The most important areas of focus are cash flow, profits, and capital expenditures.
Cash flow management
No business can operate without sufficient cash flow. If a firm can’t generate enough cash inflows from operations, the company may have to borrow money and incur interest costs.
CFOs should constantly update the firm’s cash flow forecast. This analysis considers cash inflows from customer sales, and cash outflows for materials, labor, overhead, and other costs.
Lynda Artesani owns Artesani Bookkeeping, a company that provides CFO services primarily to law firms. She provides insight on cash flow planning.
Law firms have a unique cash flow issue. In many cases, dollars must be posted to trust accounts, and then transferred out as revenue to the law firm. Lynda helps the firms track where the dollars are located, and if the funds can be transferred.
As Lynda explains: “It is vital for attorneys, especially the managing partners, to understand cash flow and how to maintain a steady influx of money coming into the firm. Open accounts receivable is always a sticky point for most law firms. When I see books with open aged receivables in the over 90-day column, I encourage firms to take credit cards to speed up collections.”
Profit and loss management
Profit margin is defined as the amount of profit each dollar of sales generates, and a CFO must know the profit margin for each product sold. Sales mix, on the other hand, is the percentage of total sales that each product represents.
CFOs can change the sales mix to increase company-wide profit. Firms can change their marketing efforts to promote products that generate a higher profit margin.
Company owners must also decide how profits are allocated to each owner, and the discussions can be tense.
Lynda Artesani explains that law firm compensation issues are complex, because a particular client’s revenue may be shared by a number of different lawyers. Lawyers within a firm share common expenses, such as administrative costs and technology. Lynda uses industry-specific software and other tools to determine revenue and profit per attorney.
Capital expenditures management
Businesses must replace expensive assets over time, and buy new assets that increase sales and profitability. The CFO should maintain a capital spending plan, and update the plan as the company needs change.
The plan should include the cost of each asset, and the asset’s remaining useful life. The annual budget must include a plan to spend cash on asset purchases, or a plan to borrow and repay funds to make purchases.
CFOs must operate as managers, analysts, and decision makers.
Duties and responsibilities of the modern CFO
The CFO manages the entire accounting operation. A CFO must ensure that all transactions are correctly posted, and that accurate financial statements are generated each month and year. CFOs also oversee firm compliance with federal, state, and local regulatory bodies.
The CFO’s duties, however, extend beyond the daily accounting function.
CFOs must focus on threats that may change the firm’s business model. The threat may be a change in technology, or a shift in customer preferences. Once the threat is identified, the CFO must help senior management plan a response to the threat.
Risk management also means protecting the intellectual property (patents, copyrights, trademarks) that a company owns, and how external threats impact the value of intellectual property.
Assess technology opportunities
Using new technology allows a business to perform more work in less time. Successful firms make the investment needed to purchase hardware and software that allows the firm to grow. These purchases can be expensive, and the CFO must provide a cost and benefit analysis for every major IT purchase.
Use and interpret analytics
CFOs should allocate most of their time to reviewing analytics, and using the data to make more informed decisions. As this article points out, CFOs must sharply reduce the time they spend on accounting and delegate work to staff, because CFOs add more value by using analytics.
Lei Lu’s tech clients value KPIs (key performance indicators) that can be presented using charts and graphics. Her client data includes cash flow forecasts, burn rate, and the current pipeline of business.
In addition to financial analytics, CFOs are increasing using big data to assess business productivity and customer behavior. Lu also provides marketing information, such as the number of daily active users on a site, and customer acquisition costs. Many of her clients use data from external platforms, and need the data transferred into the accounting system.
Lynda Artesnai also helps firms analyze marketing information. She includes data on leads generated, lead conversion, and the revenue generated per customer. She also calculates a net promoter score, which measures the customer experience and predicts business growth.
Technology can provide the CFO with hundreds of metrics and dozens of reports. Successful CFOs know which metrics are most important, and use tools to access the data quickly and easily.
3 key metrics for CFOs
Both CFOs mentioned above provide a dashboard of financial data to company management. The clients rely on the CFOs to tell them which information is most important, and how to access the information.
The metrics for a particular firm will differ, based on the industry and the size of the organization. However, here are some metrics that all CFOs use to manage a business.
1. Liquidity data
Liquidity measures a firm’s ability to generate sufficient current assets to pay all current liabilities.
Current assets include cash, accounts receivable, and inventory. A business must collect receivables and sell inventory to increase cash inflows. Current liabilities include accounts payable and long-term debt payments that are due within 12 months.
CFOs use working capital and other metrics to monitor liquidity, along with cash flow forecasting.
2. Solvency ratios
Solvency has a long-term focus. This term refers to a company’s ability to purchase expensive assets and repay long-term debt over a period of years. Businesses must invest to add a new product line, or to add physical store locations, and that requires capital.
Debt to assets and debt to equity are two ratios that CFOs use to analyze a firm’s use of debt.
3. Profitability ratios
Profit is important, but how well a firm uses resources to generate a profit is just as critical. In addition to profit margin and sales mix discussed above, CFOs assess return on equity, which is the profit generated for each dollar of company equity. Return on assets is also a key metric for profitability.
The best CFOs communicate financial data so that all stakeholders can understand where the company is headed.
Meeting the challenge
CFOs must manage the accounting function, identify the analytics that are most important, and create plans to address business threats. A skilled CFO can create a plan to get through the pandemic, and deliver information that answers questions and gives the firm confidence moving forward.
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