In recent decades, business within the San Francisco Bay Area and Silicon Valley has transformed to be faster, more digital, and experience-driven. Market changes are affecting not only the ways we do business, but the working relationships we form within them.
Executive partnerships are deepening across the C-Suite, one of the most influential being the relationship between the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Strategic and financial necessities have reshaped the role of the CFO. No longer a glorified number cruncher, the CFO has adopted a far deeper analytic and broader strategic responsibility.
The interdependency between the CEO and CFO is critical, however, many companies are failing to bridge the gap between these positions. Oftentimes, the CEO continues to fly blind in respect to the financial state of business operations.
The CEO and CFO must partner more effectively for long-term business success. To get the ball rolling, below are a few pivotal questions CEOs should ask their CFOs to ensure they’re sitting up front as the strategy’s co-pilot.
How are we measuring our strategy?
Former CEO of IBM Lou Gerstner stated, “People do what you inspect. Not what you expect.” At the heart of strategic execution is accountability. Metrics instill responsibility by serving as a mirror, reflecting organizational performance back to the employees charged with implementing the strategy. Therefore, Key Performance Indicators (KPIs) or metrics must be in place to assess progress and determine when to stay or change course.
While the conventional job description requires a CFO to track and produce accurate financial metrics, the responsibilities have greatly expanded to include helping the CEO craft the company’s entire strategy as well. Leveraging their expert insights into each organizational function and how they interact, the strategic CFO builds out comprehensive analyses that measure progress on key organizational initiatives, as well as connecting operational metrics to financial metrics. They should incorporate qualitative and quantitative measures while focusing on trending metrics to eliminate seasonality. The CFO can then provide actionable insights to the CEO who in partnership with the CFO, can integrate this information into a data-driven strategy.
What is the short-term and long-term plan to maximize cash flow?
While CFOs are responsible for maximizing profit, they should also understand how to optimize cash flow over time as well as the Return on. Cash is the fuel for strategy. To ensure that strategic plans are reinforced with bountiful capital, CEOs should understand CFOs’ short- and long-term cash flow agendas.
The CFO should design a strategy to optimize operating, investing, and financing activities to drive greater value capture. For example, to improve operating cash flow, the CFO might form an overarching initiative to improve working capital management. In proposing near-term actions, the CFO could advocate lengthening the time to pay bills, shortening the collection period, or delaying large inventory purchases.
For large-scale investments, the CFO should keep a pulse on the market, referencing economic indicators such as the Consumer Price Index (CPI). Integrating insights from a macro view offers a more holistic perspective for CFOs when advising on investment activities. An informed CFO should continuously answer the question: Are we making strategic investments that will produce returns higher than our cost of capital?
Imagine the business has failed. What went wrong?
Known as “premortem,” this technique calls employees to envision their organization failing and work backwards to understand what went wrong. In Gary Klein’s Harvard Business Review article, “Performing a Project Premortem”, he shows that prospective hindsight, imagining an occurrence as it has already past, increases the ability to accurately pinpoint the reasons for future outcomes by up to 30 percent.
A CEO needs the CFO to embrace a premortem mindset and ask what could go wrong. In doing so, the CFO can play devil’s advocate by identifying potential challenges early on. Rather than just supplying the data to support or reject a strategy, the modern CFO is called to examine a myriad of possibilities that could impact a proposed plan. The CFO should perform a detailed risk analysis and endorse plans that pass the test while questioning those that give pause.
Premortem also draws out honest conversation. The most crucial aspect of the CEO-CFO dynamic is candor. Many organizations have too many internal points of vulnerability. Fraud and misconduct often occur due to a lack of corporate oversight or failure to speak up. Consider the corporate scandals that have erupted in recent years. Had CEO John Stumpf and CFO John Shrewsberry discussed the unintended consequences of Wells Fargo’s incentive structure or the loopholes in the system, the company could likely have prevented the account fraud controversy that cost the company $185 million and numerous customers. By imagining the demise of the business before it happens, the CFO can pinpoint what could go wrong and save a company from itself.
Once you start the conversation, the CEO-CFO collaboration is a two-way street. As management consultant and author Peter Drucker stated, “The CEO is the link between the Inside that is ‘the organization’ and the Outside of society, economy, technology, markets, and customers. Inside there are only Costs. Results are only on the outside.” For the strategy to be data-driven, pertinent and actionable, the CEO must support the CFO in defining the key initiatives and determining how to move to results. The CFO has insights into the “inside,” but it is the duty of the CEO to help translate the outside.
If you are a business owner or CEO within the San Francisco Bay Area or Silicon Valley, in need of an experienced part-time CFO to help your company improve operational processes, cash flow, as well as profit margins, our highly skilled outsourced CFO services provide direct access to high-quality expertise in a cost-effective manner.
CFO Growth Advisors (CGA) specializes in unique and highly effective growth strategies that are tailored to help companies in the San Francisco Bay Area grow more quickly and efficiently while improving sales & profit growth. Contact us to learn more.