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How the progressive CFO validates plans and persuades peers

(Image credit: Image Credit: Geralt / Pixabay)

We are all living in vastly changed times and many organizations will be re-engineering and transforming to deal with the new realities of the world. Shops who hadn’t previously considered an online strategy are having to embrace e-commerce, restaurants have become delivery experts and offices have become virtualized. All these activities have had a jarring impact on revenues, cost bases and profitability but one thing has not changed: the need for planning to establish a balance between risk and reward.

Ever since trade has existed, people have sought to apply a delicate formula that favors the latter over the former. Sometimes they have stood accused of being too cautious but the pandemic, rapid digitization, the rise of start-ups and demand for omnichannel sales and service have sparked investments in change. But if the instinct to cut first, invest second has been curbed, weighing risk/reward to optimize for success has not.

Look at a finance report. See a negative deviation and you are observing an issue and a risk; take no action and the risk continues and grows. So, companies seek to address root causes and fix issues through cost management or other actions. That is the defensive posture for any finance department, but the other side of the coin is just as important for progressive CFOs: looking for positive change. A CFO needs to know causation here too: is the uptick the result of a new product, service offer or other investment and does it merit further funding to scale? 

The old wisdom that you need to speculate to accumulate needs refining. Investing in areas of the business or new fields should never be simply a roll of the dice. Speculation today must be accompanied by modeling and take advantage of technology tools and dashboards that build in controls and add granular ‘what if’ analysis to help the strategic CFO dig deeper. This is particularly important when the future is, as it is today, so liquid and there are many unknowns and imponderables.

Here more than ever, the CFO must take up the role of storyteller, conjuring compelling narratives that are buttressed by significant detail in BUD (budget utilization and development), forecasting and financial controls and then tallying these dynamically against actual outcomes. CFOs must be the trusted voice of reason, speaking confidently and in a language that non-financial peers understand but always backed up with detailed attribution and sources. (The IBCS standard for business communications is a useful resource for achieving cut-through here).

Only then can the CFO sniff out the positive and negative signals, building on the former and shutting down the latter. A SKU, country or a sales team might be outperforming, there may be an uptick in consulting services: spot these rising stars early and you have a great chance of applying lessons and scaling successful operations and areas of activity. Other, less obvious data sources, may be significant too. Supermarkets have long known that if the English football team is knocked out early in the World Cup or the summer is a dud, they will sell less beer and fewer snacks. And if a star TV chef recommends a kitchen utensil, demand for that previously obscure product will go through the roof. So, it’s appropriate to think about relevant internal and external phenomena, as well as the bread-and-butter data points. 

Building a house 

Sub-plans for investment need to be built on the foundations of forensic understanding of profit and loss, balance sheet and cash flow in a house of planning. But fundamentals apply and companies always have to know their business drivers, the old and the new. A leading European retailer provides an illustrative example. Store managers need to know about three factors to plan properly: sales, personnel costs and personnel hours. That requires some good math and if that is missing then the delicate balance between staffing and demand leads to lost opportunities to sell or wasted payment for an oversupply of employees. By deploying tools for centralized insight into how many people were needed, where and what time, took out the guesswork and made life easier for its managers.

Emerging technologies can help and we are all excited about AI and Machine Learning to automate much of the heavy lifting of identifying signs of opportunity and danger. AI experts are thin on the ground today but companies should at least be developing their knowledge of this area. There are some concerns that adopting AI will lead to the technology taking over tasks and roles that finance professionals have historically undertaken. Although AI will make suggestions, users still control the outcome with the final checks and approvals carried out by people. And AI presents an opportunity to focus on the strategic aspects of the role and add value, by providing the business with actionable insights and greater understanding of the story behind the numbers. The AI technology that takes away the most mundane aspects of your job is friend, not foe.

In business conferences today there is often talk of the need to “fail fast”, due largely to models seen in Silicon Valley where technological change and the chance to win the jackpot in emerging fields encourages a lot of projects, most of which will not be successful. In reality, few can afford the “moonshots” of a Google or Amazon. But we can all take approaches that strengthen our chances of success with minimized risk-taking. And the modern CFO, both storyteller and eagle-eyed observer of the numbers, needs to lead the charge.

Michael Lengenfelder, Head of FP&A Product Management, Unit4

Michael Lengenfelder, Head of FP&A Product Management, Unit4.