In the early years of the millennium, a typical response from a prospective finance professional to the innocuous interview question, “What is the role of finance function?” would have emanated that the finance function is like driving while looking at rearview mirror as it allows the company to review past performance and understand why performance levels are what they are, as well as ensure compliance with its standard policies and procedures. Fast-forward to the state of affairs in the latter half of the last decade, and this same question would invite an answer likely to include the ad nauseam term “business partnership”.
The coinage ‘business partnership’ itself refers to a CFO working with the CEO to accomplish a series of goals: profitable growth, preparing for future challenges, identifying inherent risks in the company’s current business model and how to minimize those risks, understanding technological changes impacting the industry, and prioritizing investments critical for future growth. These are value-add activities that each CEO wants their CFO to focus on, while supplementing the efforts of other stakeholders to collectively ensure a lean, agile, technologically efficient, and profitable organization. Many CFOs across the world grapple with the challenge of broadening their scope to provide the aforementioned value-add support to their organization. For a CFO to effectively meet this challenge, and develop their identities as front view driver, they must rely on automation of their back-end processes, releasing them from rearview analysis. Unfortunately, this isn’t the reality in the majority of cases; CFO research studies have shown that finance folks are still spending disproportionate amounts of time on their back-end processes—the so-called “hygiene” factors—rather than on value-added activities. A recent research outlines that only 22% of the CFOs interviewed believe that they spend their time on “partnering strategically with business units” while for 86% the top 2 priorities is managing budgets and financial reporting, audit and compliance. And I believe this has led to a race to become true business partners rather than just being gatekeepers of the business. Why?
This leads us to a key question that all CFOs should ask: What is the right balance between a front view driving and a rearview driving mindset? Are today’s CFOs, in order to be true business partners, losing focus on their traditional roles of being the gatekeepers and compliance enthusiasts? I am in now way alluding to indicate that a CFO should not focus on the strategic aspects of the business. In fact, they should be the ones driving it, especially in these unprecedented times, the business implications of which have ravaged the corporate world, leaving almost no industry completely unscathed. However, they cannot carry out this function at the expense of being able to ensure that business activities are being conducted transparently, that there are adequate controls to identify internal risks and fraudulent intent, that all historical data is correctly recorded and warehoused, that the analytical tools are aptly established, etc.
So what exactly does a rearview-driving CFO focus on?
It has been said that history is the gateway to the mysteries of the future, and financials’ performance and analytics is no exception to this. CFOs can never—and should never—lose sight of the fact that the past can bring to light significant and critical insights that shape the strategy or decisions of the future. Analysis of product profitability, geographical investment ROI, capacity expansion and its payback, past M&A integrations, returns on sales investments, sales team productivity, how effectively sales teams have been deployed in the markets from where sales are rolling in, the trends in the organization’s discretionary spending, and whether the head-count pyramid is expanding at the base or getting bloated at the top – these are just some illustrative analytics that a CFO focusses on basis past performance. Unless these data points are made available, it’s impossible for any organization to take informed decisions on how they want to conduct operations in the future. And therefore, the CFO needs to ensure that their rearview skills are sharp enough to combine with strategic visions for the future.
In the recent past, we have seen many strong corporations go bust because of their weak financial controls—or complete lack thereof—and, arguably, corporate greed: Satyam, IL&FS, PNB, Yes Bank, the list goes on. And as a CFO myself, I can’t help but wonder: how accountable is the CFO? Is their proximity to the CEO leading to the loosening of controls—the fundamental ground on which the finance function is built? Audit firms are not a get-out-of-jail-free card; they are only so useful in identifying risks and issues within an organization. An ideal relationship between an auditor and a CFO would be a scenario where both work with a common objective of ensuring the three R’s of controls: Righteous, Robust and Rigorous. The CFO needs to understand that if their financial processes are weak and non-compliant, their forward-driving strategy will never be effective. Sooner or later, it will spell doomsday for the organization.
In conclusion, it’s up to us to decide how we want to balance our focus. Look ahead, look back, or look back AND learn for the road ahead. There is no right or wrong answer. Market dynamics, organizational maturity, growth/profitability equation, and competitive scenarios will ultimately decide how CFOs work with their CEOs. But come what may focus on compliance, control and cost will need to remain key focus areas for any CFO if they want to be a true business partner to their organization.