CFOs must demonstrate that the Finance function is equipped to manage performance through periods of growth, stagnation and contraction.
Market studies, which include Ernst and Young's 2010 report The DNA of the CFO*, have consistently shown that delivering commercial insight to the business is the most significant way in which Finance can add value.
CFOs and the Finance function should act more strategically and more commercially, improving performance by delivering insight to decision-makers. This role has typically been described as “business partnering,” with the CFO acting as a catalyst or value integrator.
Our work with organizations across the globe has taught us that successful business partnering is much sought, but rarely achieved.
Additionally, Finance too often acts as an “observer” of performance during periods of growth and profitability, so that business results are more likely to be driven by market conditions than Finance's ability to help decision-makers optimize market opportunities.
What it means to be a business partner
The heart of business partnering rests in practical economic theory and the effective allocation of scarce resources to achieve financial objectives.
In our view, the essence of a CFO as a good business partner is someone who:
- Facilitates transparency of financial performance across their organization
- Works with commercial leaders to drive improved performance
- Ensures business decisions are grounded in sound financial analysis
- Ensures business decisions endure processes that drive robust financial challenge and accountability
- Provides analysis and insight to prioritize the allocation of scarce resources to areas where value can be generated
- Manages the Finance function in operating from an efficient base, allowing the best resources to focus on analysis to support strategic and commercial operations which adds value
CFOs dealt with belt tightening, but how should they deal with growth?
During the recession, the obvious market effect impacting many organizations was the drop in demand in many sectors. This “belt tightening” effect has forced companies to scramble to make efforts to protect their revenues and margins.
Poor understanding of cost drivers lead to arbitrary cost cuts
It was the poor understanding of cost drivers, cost profiles and what leads to margin contribution that left many organizations arbitrarily cutting costs: either this happened at a rate that was too slow to protect the company's underlying profitability, or the cuts were too indiscriminate and risked compromising future growth; or, worst of all, it may have done both.
With business confidence remaining fragile, organizations will need to be cautious when exploiting growth opportunities and proceed in a sustainable way.
Where should the next dollar of investment be made?
Unfortunately, the same gaps in information and understanding that impeded cost reduction attempts during the recession are also hindering efforts to manage the costs necessary for future growth.
During a period of growth, knowing how to optimize marginal revenue and contribution is more difficult to determine than simply reducing marginal costs while protecting revenues. You need to ask yourself the same question, but in reverse: rather than where should the next unit of money be saved – instead ask “where should the next dollar of investment be made?”
*The DNA of the CFO thought leadership paper, based on research undertaken with 669 senior financial executives in leading companies across Europe, Middle East, Africa and India, aims to provide fresh insight to the agenda of the individual CFO. It explores their changing position within the organization, their priorities and aspirations, and focuses on the skills and relationships a successful CFO will require to master the opportunities and challenges of their role. For more, please visit www.ey.com/cfo.
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