LDM | Risk Management

Background

Introduction

The role of a chief financial officer (CFO) has changed a lot over the years. Every CFO these days wishes to become a model CFO.

Traditionally, the primary function of CFOs was that of finance wherein their responsibility was to ensure that the company stayed financially healthy and could meet its obligations at any time. They were primarily engaged in financial planning, raising funds and utilizing such funds in a proper way. They were expected to keep financial order and enforce management control in the company. However, as a result of corporate world moving towards globalization, customer satisfaction and rapid changes in the business environment, the companies have realized that the CFO will have to undertake additional responsibilities. Therefore, the corporate sector calls for a dynamic and professional model CFO, in which chartered accountants would be able to take advantage and capitalize on their skills and expertise. 

Fraudulent actions by managers

The financial markets across the globe were recently shocked and hurt by the fraudulent actions of a few high profile business managers. Manipulation of accounts caused a huge loss to the investors who traded shares in the capital market relying on the accounts published by companies. And even if a company is not listed in the stock exchange, being able to have confidence in the financial information is essential for making effective business decisions. Hence the role of the CFO is becoming more important in this respect. But it is becoming important not just because of recent problems. A talented CFO adds much more to a company than providing basic accurate reporting of historical financial performance.

Increased role of CFOs

The role of the CFO is probably a pretty interesting one in most companies at the moment. The recent trends of financial restructuring, mergers and acquisitions and maintaining relationships with investors call for increasing amounts of time and attention of CFOs in the company. Recently, value based management (VBM), economic value added (EVA) and balanced scorecard have gained CFOs’ attention and time. It is now usual for the CEO to manage a company in an effective leadership combination with the CFO. The CFO’s role is seen as not merely a superior book keeping position, but as providing operational skills that complement those of the CEO, intimately involving the CFO in management.

Roles of Model CFO

To become a model CFO, one has to accomplish various tasks such as re-establishment of corporate trust and business integrity; creating value to the company; increasing the efficiency and quality of financial operations; and providing feedback for business decisions. These tasks are deal with in the following paragraphs:

Re-establishment of corporate trust and business integrity

There has been a sharp decline in the confidence of investors in the corporate sector after a series of corporate scandals such as Enron, WorldCom etc. A model CFO can play a leading role in restoring corporate trust and business integrity. Assuring tight financial integration and accountability to enable the company to meet the new corporate governance requirements and establishing compliance with new regulations represent major tasks for CFOs today. It requires them to improve and extend the corporate financial infrastructure.

Globalization, volatile capital markets, ever-increasing shareholder expectations, and in the wake of the Enron and WorldCom debacles, growing demands for greater corporate accountability and improved governance procedures are remaking today’s businesses. But while the CEO remains a key player in the corporate equation, another player is now beginning to assume unprecedented importance: the CFO.

Creating value to the company

Management of every business organisation is facing the challenge of enhancing their performance. Value based measures are gaining popularity in measuring the performance these days. An alternative approach to managing an organisation has been developed in recent years as value based management. This approach of management assumes that maximising the value of a company to its shareholders also maximises the value of the company to the society at large. The concept of shareholders value as an objective appears to be widely accepted within the accounting community.

Value based Management

Value based management involves a shift away from the use of traditional accounting measures such as earnings per share and net profit earned by the company. There are numbers of different approaches for measuring the value created by the company, e.g., economic value added, shareholder value added, and cash flow return on investment. For most companies, shareholder value today comes from internally generated growth and/or resource and cost efficiencies. But, efforts in both areas work out only, if applied continuously.

Managing internal growth

The ability to manage for internal growth requires the CFOs to understand the economics of their businesses in order to create profits and value. Resource and cost efficiency is usually the result of continuous optimization work rather than of a one off event. CFOs have to establish and implement the procedures and systems to make that happen, e.g., through continuous benchmarking as part of the performance management process. Finally CFOs have to make sure, that created value is properly communicated to the financial community so that it can be recognized by outsiders and is reflected in the company’s share price.

Increasing the efficiency and quality of financial operations

Many companies have focused their investments for business process and systems improvements/innovation in recent years on business operations. In this process, most companies have found significant weaknesses in their financial operations such as less confidence in their ability to predict future financials performance and liquidity, use of outdated, inefficient and not integrated budgeting tools, poor working capital management, high processing and service costs, etc. A dynamic CFO has to overcome such deficiencies in the financial operations.

Introducing the performance measurement system by integrating financial and operational measures helps in enhancing the efficiency and quality of operations of the company. With such a system in place, managers can understand what drives financial results and have access to leading indicators that help them understand where the business is going.

Providing feedback for business decisions

However, the CFO’s role has now expanded beyond “number crunching” and shoring up cash flow to include responsibilities for shaping corporate strategy, ensuring the credibility and competence of the senior management team, and bolstering the company’s position in the market. A better performance measurement system will give the senior management a better understanding of the business units they oversee and help them to understand the overall business and achieve their targets. It will also help them to understand why there is a variation in the achievement of targets by the business units and what coarse of action needs to be taken for their correction.

A dynamic CFO must play a leading role in restoring business integrity, serving both as a company’s fiduciary steward and a key corporate strategist. To perform such a role a person should possess not only sound financial knowledge but business knowledge as well. Integration of financial expertise with the business knowledge will have a synergy effect in the company. A chartered accountant will be able to establish himself as a successful CFO in the corporate world.