August 1, 2023
The Modern CFO: The Evolving Role of the CFO Part 2/3
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This is part two of The Modern CFO blog series.
Read part one - The Modern CFO: The Office of the CFO Part 1/3
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The last few decades of the role of Chief Financial Officer can be characterized by three distinct eras:
Phase 1: Controllership and Risk Management
The first wave initially started in the early 2000s and was influenced by the scandals that rocked WorldCom and Enron. Subsequently, these incidents brought about the Sarbanes-Oxley Act, which made mistakes a very costly process. At the time, this new federal law mandated certain practices in financial record keeping and reporting for corporations.
As a result, CFOs were considered the trusted pair of eyes and ears to keep risk at bay; greatly utilizing their CPA background. In this sense, CFOs rose up through the controllership path and began moving away from using an ERP to manage everything. Many began using best-in-breed solutions that automated the core aspects of the finance function. This also ignited a process of decentralization, that would later need to be remedied.
Phase 2: Financial Planning and Analysis
The next wave in the CFO evolution occurred following the great financial crisis of 2008. In this phase, there was a greater emphasis on communication skills, as well as FP&A (financial planning and analysis).
CFOs were now expected to position the business for long-term growth and had to work closely with analysts to accurately forecast the future. They were now in charge of both the Controller (making sure historical numbers are in order, a.k.a. financial accounting) and the FP&A team (making sure forecasts are in order, a.k.a. managerial accounting).
Many of the skills that make FP&A a strategic partner, lead to the skills that make the CFO a trusted financial advisor. That’s why the department of FP&A is often a career stop on the path to CFO.
Phase 3: Crisis Management and Real Data
In recent years, the third phase of the CFO role has begun to crystallize. This has been both as a response to challenges that surfaced during the second wave, as well as to the changing macroeconomic environment.
Modern CFOs must worry about the impact these trends will have on future business, including higher interest rates, inflation, geopolitical unrest, supply chain shortages, a possible recession, and more.
The CFO today is a captain in a troubled sea and must be heavily involved in crisis management. They should have a deep understanding of the business and be able to convert that knowledge into positive financial outcomes, especially when it comes to assessing the potential impact of a crisis.
The critical element in crisis management is real data. Generic ERPs, spreadsheets, and old accounting systems have an inherent lag that does nothing to serve a CFO effectively. The advantage of using next-gen solutions is the ability to produce real-time data that leads to more informed decision-making.
The role of the CFO is clearly evolving. It’s moving from accounting and controlling to something that’s actually relevant, which is cross-functional strategic business partnering. And so, this certainly presents a lot of challenges for finance teams, but also a lot of opportunities.
Top Challenges for Today’s CFO
Given the dynamic business environment and evolving expectations, the CFO of today faces some top challenges, including (but certainly not limited to):
Siloed Finance Teams
Organizations have been changing, and one of the main causes is the proliferation of data. Companies are now using and digesting massive amounts of information.
At times, this leaves finance teams on their own island. They’re uber-focused on the finance side of things. This means, they often fall short of mastering the language of the rest of the business. Including operational KPIs and important metrics.
Balancing Profitability and Growth
CFOs are now dealing with larger volumes of work than what they used to manage. Instead of dealing with a few or a dozen suppliers, now they’re working with hundreds. Each department and team wants to buy their own tools, and that massive workload has been hitting the CFO office for a while.
While some of these tools are helping teams run faster, CFOs are really pressing the brakes. They want to slow things down and make sure they are actually in control. That’s because most companies are not measured on growth but rather, on profitability, unit economics, and KPIs.
CFOs are tasked with finding the right balance between maintaining profitability and driving growth. Yet only an average of 50% of CFOs are confident in their ability to cut costs. Thus, CFOs must allocate resources more effectively, monitor financial performance, and assess investment opportunities, to ensure sustainable growth.
Complex Regulations
Another challenge for modern CFOs is managing a complex regulatory landscape. CFOs must stay up-to-date with rapidly changing regulatory requirements at the local, regional, and global levels. Compliance requires robust internal controls that help a business adhere to:
- Accounting standards
- Tax regulations
- Data privacy laws
- Industry-specific regulations
As more and more CFOs are pulled into the decisioning and purchasing process, they must have the business and regulatory context to make more informed choices.
Adapting to Expectations
CFOs face increasing pressure from investors, stakeholders, regulators, customers, and employees. It’s coming at them from all sides. They must be able to address concerns and adapt to shifting expectations.
Companies want finance teams to access KPIs, master them, and use these metrics to remain in touch with key stakeholders. They want to know about the drivers of revenue, not just the numbers themselves.
Investors are looking at the sales capacity model and are expecting the CFO to delineate what’s coming (through product roadmaps) to impact revenue. This is where strategy really comes into play.
Adoption and Buy-in
Replacing certain technologies and processes can freeze up time and resources for CFOs. This makes some reluctant to change. While most finance teams love to architect the process of automation, they’re usually the last ones in the office fitting the machine. In other words, there’s an enablement issue.
CFOs are at the forefront of leveraging new technology. They need to quickly adopt and integrate emerging software such as cloud-based systems, automation solutions, and data analytics tools. This will help to improve operational efficiency, enable data-driven decision-making, and enhance financial performance.
Navigating these challenges requires the modern CFO to be adaptive, agile, and proactive in embracing new platforms, leveraging data, and collaborating across functions. This involves adopting a strategic mindset that drives financial performance and supports an organization’s overall growth and success.
Top Solutions for Today’s CFO
CFOs are no longer operating in a time when there are no trade-offs. Adopting a more commercial mindset is important to thoroughly understand the go-to market. The tradeoff to growth is profitability.
Therefore, a CFO must really comprehend the economics for each unit of growth, and whether there are levers to change that. This requires working cross-functionally with teams, and employing solutions like the following:
Increase Tech Spending
Now is the time for CFOs to leverage integrated, cloud-based technology that combines multiple functions, such as:
- Accounting
- Financial planning
- Reporting and analysis
- Spend management
According to a recent study, 74% of CFOs are ready to increase tech spending amid the push for automation. This type of technology will streamline processes, enable better decision-making, and provide real-time visibility through integrated analytics.
Cloud-Based Systems
CFOs should seek out cloud-based financial systems that offer flexibility, scalability, and accessibility. This enables CFOs and their teams to access data from anywhere, at any time. Platforms with cloud capability provide a CFO with real-time updates, enhance collaborative workflows, and elevate security measures for financial data.
Process Optimization
CFOs can implement automation to streamline time-consuming and repetitive tasks. This includes automated workflows for:
- Expense management
- Accounts payable
- Financial reporting
Automating these menial jobs will reduce errors, enhance accuracy, and free up resources for more strategic tasks focused on growth.
Data Analytics Tools
Advanced tools for data analytics can be leveraged to gain deeper insight into financial performance, risk management, and operational efficiency. This type of software helps a CFO identify trends, drive decision-making, and forecast future scenarios.
Enhanced Security
As the risks of cybersecurity threats continue to increase, CFOs must prioritize data security. This means, implementing robust measures for cybersecurity, like multi-factor authentication, data encryption, and frequent security audits.
Enhanced security will protect your financial data from unauthorized access. It will also ensure compliance with all data privacy regulations.
Collaborative Leadership
Cross-functional collaboration and collective leadership is the answer. CFOs must be open to fostering a strong culture of working together across all functions within the organization. This also includes building relationships with department heads and other C-suite executives to help align financial goals with broader business objectives.
Collective Forecasting
There are two main methodologies for forecasting. The first is a traditional bottoms-up approach. This is where the CFO speaks to different functional leaders, gets their forecast for the year or quarter, and then bakes that into the budget.
The second method is to leverage an in-house economist who builds models based on macroeconomic data. In many cases, the economist produces more accurate results. Both methods, however, require collaborative leadership.
Finance teams must think about how they can eliminate inherent biases in their processes. This starts with the CFO listening and engaging with the right teams to get the appropriate data.
Strategic Partnerships
CFOs must make a heavy transition into business partnering with external service providers, consultants, tech vendors, etc. The main goal is to leverage specialized expertise and solutions. Partnerships can assist with specific needs like risk management, tech implementation, and tax planning.
Business partnering is key. This means having engaging conversations at the operational level, with departments like sales, HR, and marketing.
CFOs should also prioritize effective engagement and communication with stakeholders, including board members, investors, regulators, and internal teams. Timely and transparent communication builds trust, demonstrates leadership, and aligns expectations.
Sustainability Considerations
CFOs are now responsible for driving Environmental, Social, and Governance (ESG) integration. According to a recent survey, 57% of chief financial officers prioritize investing in ESG efforts.
CFOs must consistently incorporate sustainability considerations into decision-making and financial reporting. This includes assessing ESG opportunities and risks, setting targets related to sustainability, and reporting on ESG performance to stakeholders.
By implementing some of these solutions, CFOs can optimize resource allocation, enhance financial operations, and effectively navigate an ever-evolving economic landscape.