The role of finance in growing companies has never been more critical. Whether your business is seeking venture capital, has plans to go public, or just needs a bank loan, your financials will be under scrutiny like never before.
As a result, the role of the chief financial officer (CFO) has grown in importance and influence across the business world—especially among small to midsize companies.
The scope of a CFO’s responsibilities has broadened over the past 15 years, with more and more operational responsibilities being added to the job. Back in 2000, almost half of S&P 500 and Fortune 500 firms had a chief operating officer (COO). Today, that number is less than 30 percent.
When even enterprise-level companies are doing away with the COO role, what are the chances that it will be a priority for small to midsize businesses?
In the absence of a COO, the CFO is being asked to oversee the supply chain, information technology, and a host of areas that have not, traditionally, been a part of the finance function.
In today’s ever-changing economy, where digital technologies are spawning new business models almost overnight, expectations on finance leaders are higher. Traditional accounting skills are seen as merely the cost of entry for a CFO. According to Crist|Kolder Associates, a C-suite recruitment firm, about 80% of the CFO searches they conduct are for executives who can, potentially, be a successor to the CEO.
A few decades ago, most finance executives began their careers as accountants. Some might have a CPA (Chartered Public Accountant) designation. Finance was traditionally about control, compliance and reporting. The team’s main duties were to manage profit and loss, mitigate risk, and provide the CEO with reports required to make informed decisions.
Yet when you look at the CFO ranks of today’s Fortune 500 and S&P 500, only a minority—27 percent—have public accounting backgrounds. Today’s boards of directors are looking for a new type of CFO, one who can be a co-pilot of the business.
Boards are looking for strategic thinking, leadership, business partnering, investor relations and Wall Street experience. They want a CFO who can evaluate the company’s strengths and opportunities, formulate a strategy, and implement it. Today’s finance leaders are moving from governing the business to guiding it.
The shift in the role of finance is happening against a backdrop of unprecedented business upheaval, the likes of which haven’t been seen since the Industrial Revolution. Digital technologies such as big data, social, mobile, and cloud are combining to radically disrupt entire industries. Today, the average tenure of an S&P 500 company is 18 years, compared to 61 years back in the 1950s. And the new S&P 500 entrants, such as Netflix, Facebook and eBay are valued very differently from their predecessors such as Texaco, Maytag or Radio Shack.
If your growing company has ambitions to be one of the new S&P 500 entrants, you’ll need a CFO who can evaluate the business based on a new set of criteria.
Companies used to be measured primarily on “tangible assets”: the value of their goods and property. Today, they are are valued primarily on intangible assets—the customer data they possess, their intellectual property, the technology they’ve developed and the services they provide with it. During the 1980s, intangible assets accounted for about 30 percent of the market value of S&P 500 companies; today, that number is closer to 80 percent.
Against such a backdrop, it’s incumbent upon finance to take the lead in identifying new metrics for success. Traditional accounting metrics, such as return on invested capital, will of course remain relevant; but new key performance indicators will also play an important role—especially at fast-growing companies looking to attract investment.
So what should a CEO or board of directors look for in a CFO/successor?
Research from MIT, Oxford University and other institutions has indicated that accounting and auditing functions are among the most likely to be automated by computers in the near future. History has shown that wherever automation is possible, it will eventually happen—so it makes sense for finance teams to embrace and lead the change, rather than resist it. This is especially important for SMBs, which often don't have the resources for a large finance staff.
According to Ventana Research, many rapidly-growing companies spend too much time on the transactional side of the business. For example, less than half of the companies they studied could close the quarter within six days—mainly due to a lack of automation.
CFOs should be focused on modernizing finance systems, including enterprise resource planning (ERP) and enterprise performance management (EPM), as a critical step along the path to automation. With modern cloud services, traditional delays between transaction processing and multi-dimensional analysis are all but eliminated; zero-based budgeting can be harnessed to reduce SG&A costs by 10-25 percent; new lines of business can be spun up or defunct ones spun off—all within the space of months instead of years.
The lack of technology automation also negatively impacts a finance team’s ability to provide key reporting metrics to the business. 67 percent of the companies Ventana surveyed said that the proliferation of spreadsheets makes it difficult to perform analysis. Companies should consider adopting new predictive planning and analytics tools, including visualization technology. Cloud-based models make it easier and more cost-efficient to roll out these tools to a wider group of people across the organization.
With the automation of manual, time-consuming tasks, SMBs can devote more time to business strategy. CFOs are well positioned for this because of their business acumen: they understand business models and market dynamics, they are skilled at analyzing and interpreting data, and they are accustomed to making decisions based on data rather than solely on intuition.
The role of finance is now that of a partner in the business. Partnering can come in many forms, but one approach we’ve seen is embedding finance advisors into individual business units, such as sales and marketing teams. The finance leader has access to real-time reports on the team’s success, and can provide them with high-touch advice and guidance on when to change course, or where to re-focus their efforts.
The skills required to automate, partner, guide, and build teams are very different from traditional accounting proficiencies. Look for a CFO with the “soft skills” required to build relationships, drive performance, and manage change. CGMA outlines a competency framework including communication skills, collaboration, team building, coaching and mentoring.
Christ | Kolder advises aspiring CFOs to adopt a “talent investment” approach—including gaining operational experience as a business unit leader. A stint in investor relations is also an excellent career step on the road to becoming a CFO; you can’t overestimate the value of providing guidance to Wall Street.
It’s no longer enough for a CFO to tell the business where it’s been. Finance leaders must be able to provide a clear forecast into the future, and give advice and guidance on where the business needs to go next. The role of the CFO should be to partner with the CEO so that, if and when the time comes, the CFO can slide easily into the CEO’s chair.
With a focus on business strategy, partnering, forecasting and analysis, CEOs and investors can rest easy that they have a solid succession plan in place—so that when it comes time for you to move onto your next business venture, you can be certain that the one you’re leaving behind is in good hands.
For more on how to build a winning finance team, please download the WSJ Custom Studios paper, "Winning the War for Finance Talent."