By Cheranka Mendis
A Chief Financial Officer, most commonly identified as a CFO, has many roles to play within an organisation. From heading and managing a more conventional financing and accounting function, the role of a CFO has today expanded to fit in to a more strategic one, handing over multitude responsibilities and various caps for a CFO to wear.
With a CFO being held accountable for many aspects of an organisation, his/her role is now being challenged to detect if his role should be more of an astrologer or a coroner – a predictor with insight in to the future or a coroner ready to hold the post-mortem after the death of a operation.
Challenging a CFO’s role with intent to discover the challenges faced by CFOs in the present context in terms of current practices and effectiveness, the MTI CFO Forum organised recently by MTI Corporate Finance looked to improve some of the best practices of our time to help face these ordeals better in the future.
The forum captured eight areas – starting from role of the CFO, to economic impact, capital structuring and funding, mergers and acquisitions, working capital, cost management, risk and compliance and to end with links to the board in discussing the role and challenges of a CFO.
MTI Consulting CEO Hilmy Cader presented research carried out by MTI on all key aspects in order to facilitate dialogue under two panel discussions through which the issues and roles were deliberated.
To gain insight in to the topic at hand, MTI had used a threefold methodology – primary research, best practices and fair amount of learning from the consultant projects carried out by MTI both in Sri Lanka and internationally.
In terms of the primary research, a survey was carried out with 100 CFOs of which 78% were from mid to large cap industries from eight key economic sectors. Percentage of females as CFOs during this was discovered to be 14%. A survey was also carried out with 50 CEOs trying to understand how they look at the CFO function. Best practices from MTI associates in different parts of the world was also brought in, in order to understand some of the cross boarder challenges in CFO role as well as the learning from projects conducted both here and abroad under corporate financing projects handled by MTI.
Role of the CFO
One of the questions asked from CFOs during the survey was in which ways do the CFOs feel their role is changing, Cader said. Out of the responses 57% had stated that they are now called upon to play a far more strategic role away from the conventional financing and accounting function so. The expectation on a CEO level was found to be the same.
CFO had also noted that in their changing role, there is a need to integrate in to business a lot more and be part of the entire business. For that, CFOs identified that they need a better cross functional appreciation, not just passing judgment or the controller but be more integrated and that they needed to get in to more ‘value added’ finance – essentially ensuring the analytics will help solve a business problem.
Cader also listed trends anticipated by CFOs in the future. “Interestingly in industries such as apparel and large scale manufacturing CFOs are increasingly getting involved in the operational areas. In certain cases on enabling marketing and distribution, the aspects of proactive financials are coming out very clear, not playing the part of a post-mortem but being clear.”
From the point of a CEO, the clear theme was that they want CFOs to appreciate business, to integrate and be a ‘partner’ of the mainstream business. “They also feel that there is a need to move away from accounting to a bigger picture; enabling business and not just enforcing.”
Quoting a comment of a CEO, he said: “I want my CFO to be like an astrologer. A CFO who can predict things for me; not a coroner who’ll come and do the post-mortem”
Economic impact
MTI also asked CFOs what they feel are the economic factors that impact their business most. Three key reasons that came out were (not surprisingly) exchange rate, interest rate and inflation. Over the last ten years rupee deprecation in the four major export currencies of Sri Lanka was by 23% whereas the four major import currencies of Sri Lanka, rupee depreciated by 34%.
Capital structuring and funding
“We looked at whether CFOs feel their capital structuring is optimum, and if there are changes required to their current structure.” Response of 73% was that they do not have an issue with the capital structure; while few other changes that were noted were low percentages where challenges related to cost of funding, sourcing, gearing, undercapitalisation, etc.
Cader commented: “Interestingly if you look at the market reality – taking the top 100 CSE listed companies and looking at all seven categories excluding financial services and picking the top three-four of the seven categories and looking at the gearing ratio – 60% have a ratio of over 50%.” This shows that although CFOs feel there is not much to be done; the reality in gearing aspect clearly shows that there is perhaps a need for that. Looking further in terms of IPOs and debentures issued, the need to look at capital structuring becomes even more important.
Mergers and acquisitions
Of the CFOs interviewed 73% were noted to be quite happy with organic growth. There were no major plans in terms of looking at M&A on a very active basis, despite the fact that a lot of local industries/sectors are highly fragmented and do not have economies of scale in some sectors.
“Is this the sign of the time or a state of play to be happy with organic growth?” Cader questioned.
When asked what the challenges are looking at M&A and what is holding them back CFOs comments showed transparency as number one (30%), inability to get the actual picture of a situation, finding the right fit, valuation (25%) and difficulties of doing proper due diligence, feasibilities, etc.
“The question to ask is if you are really serious about M&A, should it not be a dedicated responsibility in an organisation vs. the part-time responsibility of a CFO,” he noted. “They must also see if looking at M&As is only a financial capability or if they need multidisciplinary aspects to look at.”
Working capital
The number one challenge that came up here was data management. In terms of what non-banking companies are doing, 53% said there is a lot more data management discipline over the last 12/18 months that the companies have installed, which Cader reflected as the overall business sentiment in the country.
Interestingly, 54% said there is a lot more push for cash sales. “Whether it is the most cost effective way of doing it, I am not really sure. In some cases if you look at the percentage of discounts given and the cycle it is given, it may be cheaper to borrow, but there seems to be a push for cash sales in many manufacturing and trading companies.”
In terms of companies that say working capital is not a challenge, up to 23% said it is not a challenge because all they do is squeeze the suppliers, while 19% said it is not a challenge because they squeeze the customers. In reality the percentage is much higher than noted.
When asked how banks and financial institutions respond to working capital challenges, 45% CFOs had acknowledged that they cannot do much with the existing products they have.
The question here is if financial institutions and bank really understand the actual working capital challenges or are we just responding with our plain vanilla standard products we have, Cader emphasised. “Have banks really done deep customer research, understood the customers’ value chain, looked at the challenges and come up with products? Or are we coming up with more straight-jacketed products – take it or leave it?”
He noted that the solutions offered must have both the forward integration as well as the backward integration parts of the value chain.
Cost management
Here, CFOs noted that compared to three years ago, cost is a much bigger concern today.
At the end of every year MTI hold a CEO Business Outlook survey and from 2012 records 52% of CEOs had responded that2012 was below their expectation. To this, when CFOs were asked the question on what aspect of cost concerns them the most, 73% said staff cost, energy 49%, rent 29%, while interestingly, interest was noted as 13%. (This was a multiple response question)
At a Head of HR survey MTI concluded few months ago, the main challenge identified in recruitment and selection was noted as finding the right talent while only 9% mentioned cost as an issue. Yet, they noted that they are not happy with the talent pool they have.
Lot of the companies cost structures are fixed costs perhaps with the exception of companies like insurance lot are fixed cost driven. This puts a lot of pressure particularly in trading and manufacturing companies.
“Having done a lot of cost reengineering side across the region we see two major pitfalls when it comes to cost management,” Cader said – vertical and horizontal cost.
Vertical costs refer to looking at cutting HR, training, advertising and promotion, R&D and travel immediately when pushed. The danger here is that in the process of chopping these areas, companies are going to chop a few veins and arteries off as well as it is just a top line cost cut. Cader asserted that many organisations do not look ‘horizontal cost.’
“Many of the financial statements that are generated today are based on the distribution, finance, selling costs which make no sense even for compliance. In many of our assignments we get a lot of our companies to take conventional profit and loss and recast it along the value chain. It forces you to look at where in the value chain and how much are you spending.”
The second challenge seen in cost is the immediate reaction to go for a headcount and then do the cuts there. While on the face it may seem to be the best option as one can immediately cut costs, the danger is that there is a lot more slack in strategy, in products launched, unproductive acquisitions, etc.
Risk and compliance
On major risks identified by CFOs the primary concern was the inadequate focus on business risks (lot of compliance risks but not enough focus on business risks) and the amount of energy CFOs have to spend with the increasing protocol of risk, compliance and governance that is required. “This is sapping up a lot of energy.”
The survey also showed that for various reasons when looking at organisational structures, under finance admin, IT, operational aspects are also added on. “We are already saying we have a strategic role to play, look at compliance and we have to integrate and in some cases there are added aspects which only take the energy away.” The underlying question is if the whole finance role be reviewed and whether compliance needs to be separated out.
Link to the board
When questioned if CFOs have a direct independent line to the board 65% had replied with a yes, 27% with no, while 8% remained neutral. When the 65% were asked for the reason for their choice, the answers were based on independence and control. The CFOs had also mentioned that with the power they will then hold, they will be able to challenge commercially unviable projects suggested by CEOs and marketing.
“We asked this because globally, (not in Sri Lanka) the amount of white collar crime taking place is immense. This is why globally the trend is looking at independent direct reporting lines to the board,” Cader explained.
When requested to mark the practical challenges in implementing this (in multiple responses), 48% said (corporate) culture is a major issue, 30% said CEOs powerbase is an issue, and 35% said it is all about relationship. It can also get very political organisation-wise. Cader suggested that one way to handle this is perhaps having a dual reporting line and dual evaluation, and separating strategic from operational aspect.
Future of the CFO
Referring to a model developed for Charted Accountants in Sri Lanka and used in Gulf – a value chain for the entire network – Cader reflected that some of the functions that are listed as responsibilities of a CFO can be delegated to another party in an organisation.
The likes of capital structuring, capital raising, working capital and enabling transactions can be looked over by a smart financial provider. “You don’t necessarily need a CFO to manage that.”
Technology can play a major role in areas such as system and control and enabling transactions; while legal can play a role in closure and bankruptcy. Even areas such as capital structuring, capital raising, budgeting, governance, and dividend decisions does not have to be made by a CFO or a charted accountant – a smart manager with good analytics can make these decisions.
“While we have challenges, there are other converging functions for some of the functions handled by CFOs that can be delegated.”
Cader also listed four key points for future CFOs to remember – cut across functions and do not be confined to one area, come up with bold analytics and innovation, force the organisation to make decisions, and keep the pressure on the CEO however unpopular you may be.