Question

Based upon a bit of research, what you've learned in your prior coursework, or any observations from your industry experiences, what are some of the key strategic functions of the CFO in the current world of business? How does the role of the CFO differ from that of a company controller? Does every company require a full-time CFO? Be sure to include support or examples in your comments.

Answer 1

Significance of a CFO :

1. A chief financial officer (CFO) is the senior executive in a company responsible for managing its financial actions. The CFO's duties include tracking cash flows and financial planning as well as analyzing the company's financial strengths and weaknesses and proposing corrective actions.
2. The CFO reports to the chief executive officer (CEO) but has significant input in the company's investments, capital structure and how the company manages its income and expenses. The CFO works with other senior managers and plays a key role in a company's overall success in the long run.
   For example, when the marketing department wants to launch a new product or advertisement campaign, the CFO may help to ensure the campaign is economically feasible or give input on the funds available for the campaign.
3. In the financial industry, a CFO is the highest-ranking financial position within a company. and in other industries, it is usually the third-highest position in a company. A CFO can become a CEO, chief operating officer or president of a company.

4. The CFO role has emerged from focusing on financial compliance and quality control to business planning and process changes, and now they are a strategic partner to the CEO. The CFO plays a vital role in influencing the company strategy.
   The United States is an international financial hub and global economic growth increases the employment growth in the U.S. financial industry. Hence, there is an increasing demand for CFOs. The U.S. Bureau of Labor Statistics predicts the job outlook for financial managers to grow 7% between 2014 and 2024.

5. The CFO is responsible for managing the financial activities of a company and adhering to generally accepted accounting principles (GAAP) established by the Securities and Exchange Commission (SEC) and other regulatory entities. CFOs must also adhere to regulations such as the Sarbanes-Oxley Act that include provisions such as fraud prevention and disclosing financial information.

6. Local, state, and federal governments hire CFOs to oversee taxation issues. The CFO is the liaison between local residents and elected officials on accounting and other spending matters. The CFO sets financial policy and is responsible for managing government funds.

Key Strategic Functions of a CFO in the current world of business

Earlier people used to think that a CFO is only there to tell the co. executive that there is'nt enough budget when he/ she needed something or report only the financial results to the co. board of directors. But today's CFO must break away from the number cruncher stereotype & think of himself/herself as a key strategic player in the co. CFOs today need to be creative, understand the best practices, and know how to create more value for the company. There will always be a need for someone to balance the books, crunch the numbers, and perform critical routine tasks but the CFO role is much more dynamic today.

There’s no doubt that the primary tasks of the finance function such as books and records, financial reporting and statutory compliance are still of fundamental importance & they continue to the responsibility of the finance team, and consequently, of the CFO that leads the team. But the CFO has to now emerge over & above these tasks.

What has significantly changed, is that the CFO of today and of the future must be able to take financial data and use it to influence the operational decision-making and strategy of the co. CFOs must possess many more skills than just the technical accounting background. Today’s CFOs are also effectively the Chief Operating Officers (COO) in addition to their finance role. They are business partners to the CEO, who help guide and influence decision making using the financial parameters as the main drivers behind the available alternatives.

The changing role of the CFO

Earlier role of a CFO used to be :-

1. Management reporting.
2. Controllership & financial Compliance.
3. Maintaining healthy relationship with the investors.

Modern day roles of a CFO :-

1. A business partner with strategic & operational focus leading a low cost finance organization.
2. Using the financial data to challenge the business & contribute to operational decision making.
3. A catalyst for driving business transformation.
4. Link strategic objectives with the financial goals of the business.

Key Skill of a modern CFO :-

1. Leadership – To be an effective business partner, today’s CFO must have the necessary leadership and communication skills. They must give advice and counsel. They are often asked to lead group-wide transformation programs and must be able to translate detailed information into clear, concise, and accessible feedback. It is equally important to place the right people with leadership skills within the finance function also.
2. Operations – They should possess a strong understanding of the company’s business model and industry and be able to use this knowledge to provide an independent perspective and to guide the commercial and operations teams, ensuring that business decisions are based on solid financial criteria. The CFO should also identify opportunities for growth and profit improvement, not just through the traditional methods of cost control, but through examples such as product line/regional profitability analysis and benchmarking against industry peers.
3. Controls – In an increasingly global and volatile environment with additional regulatory burdens, it is mainly the responsibility of a CFO to ensure adequate assessment and mitigation of risk, and compliance with applicable regulatory or other legal requirements. Therefore, they need to manage risk as the co. executes its strategies as well as maintain a strong internal control environment and financial reporting processes.
4. Strategy – supporting strategy development and helping to enable its execution. The CFO also plays a role in prioritizing and ensuring the strategy can be funded. The CFO also communicates the strategy & its progress to the external stakeholders and investors.

What makes a modern day CFO successful

1. A CFO needs to be a visible leader in the business, an excellent communicator, and an influencer.
2. Providing decision support to the key functions such as commercial, operations, manufacturing. It’s just not enough for finance manager to produce static snapshots of the company’s financial health. The CFO must show the entire picture for the business and translate the financial data into meaningful commentary, trends, and actions.
3. Automation & technology are critical. Access to timely, accurate data is a key enabler to finance productivity and decision support. Automated reporting and analytics allow more time to be dedicated to forecasting and predictive analysis. Hence CFOs will have to champion for the cause of installing digital technology in the co. CFOs must adapt to new technology and be at the forefront of ERP implementations and cloud-based solutions.
4. Needs to focus on Results & not efficiency. The finance function is now increasingly being assessed in terms of its effectiveness (its ability to deliver what the business needs) rather than a narrower focus on its efficiency (its cost in serving the business).
5. Needs to develop a global perspective through international exposure, especially in emerging markets. This experience can help manage through the volatility and complexity often associated with different international regions.
6. The increased expectations on the CFO mean increased demands on the whole finance function. Hence, the very best CFOs are those who surrounded themselves with the best talent they could recruit and made a big effort to retain them.

Difference between a CFO & a company controller

• A Controller is responsible for the accounting and record keeping of an organization. Additional responsibilities can include management of insurance, sales tax reporting, federal income tax reporting, outside CPA audits and human resources. Controllers are in essence responsible for the financial and regulatory compliance of the company.
  Though a CFO is ultimately responsible for the financial management of a company, the role of the CFO is more encompassing. They will often review the financial statements, but, that is only to get a prospective of past performance. The CFO will take then those numbers and analyze them to improve future performance working closely with operations and management. CFO’s are key in developing and implementing strategy for the company to achieve it’s goals.
• The difference between a controller vs CFO is primarily one of perspective. A controller focuses on compliance and historical record keeping while a CFO focus on planning and future performance (i.e. strategy). Although controllers typically come from an accounting background, the same cannot be said for CFOs. Because of the automation of the accounting process more and more CFO’s are coming from a financial or banking background.

• How do you determine the value of a controller vs CFO? Maintaining the financial records of a company, while important, often is not perceived as a high value added function. Due the historical nature of the job closing the books is necessary to planning and strategy, but is often not the key driver of future performance. One should note, however, that a CFO can not do their job without a good financial information bank.

  A good CFO should be able to influence how prices are set, efficiently use labor and assets and ensure the optimum allocation of resources. As a result, a CFO should be able to improve profitability 1% to 2% of sales. Depending on the revenue of an organization this amount can be equal to hundreds of thousands of equity. Hence the salary of a CFO vs Controller is often 45% to 50% higher.

• A financial controller is an individual in a company that is the head of the accounting division within the company. The Chief Financial Officer has a much larger role in an organization than does a financial controller. The CFO is responsible for, and has to observe every financial and operative function of the organization.

• A controller looks after the accounts, while the CFO has to be aware of all the business operations in a company that relates to the controller’s accounts. In addition to understanding the interrelation of the financial systems.

• The Chief Financial Officer must be able to identify heavy business risks and make appropriate business decisions regarding those risks.

• Because the CFO vs Controller has more responsibilities assigned to the job, the pay is also better as well. According to different payscale related source the salary of a CFO is often double that of a controller.

• The rank of a CFO just comes below the rank of CEO in a co. The controller ranks below CFO in the hierarchy of organization. The controller makes sure that the day to day operations related to finance are executed & run properly.

• There are 3 important divisions that report directly to the CFO. They are controller, treasurer & tax manager. Under the controller there are 4 important divisions :- accounting manager, financial planning manager, a/c receivable & a/c payable manager.

• The rank of a CFO is similar to that of a Chief Operating Officer (COO), Chief Information Officer (CIO) &Chief Marketing Officer (CMO). A controller's rank is similar to the ranks of treasurer & tax manager of a co.

• The main function of a CFO is to make future projections of cash flow and make financial strategies and make estimates to decide which project to undertake. A controller is responsible for the smooth functioning of the day to day finance-related operations. Those involve approving transactions to create weekly and monthly reports and also look after accounts receivables and accounts payable.

Does every company require a full time CFO

In India, the Companies Act 2013. has for the first time defined the CFO under section 2(19) as " a person appointed as the chief financial officer of a company" & as discussed in subsequent paras, every listed co. & every public co. having a paid up share capital of 10 crores or more is mandatory required to appoint a CFO on whole time basis. The CFO is regarded as the key managerial personnel in the companies act. Key managerial personnel is a particular class of officers in the co. which include any manager, director or any person in accordance with hose directions or instructions the board of directors or any or more of the directors are accustomed to act.

The Companies Act, 2013 has prescribed the role of a CFO which entails lots of responsibilities :

1. The CFO is liable for penalty and/or prosecution for non- compliance with various provisions such as maintenance of books of accounts, preparation of and filling of final accounts, disclosure of financial info. in document, risk management, internal control etc.
2. CFO is mandatorily required to sign audited financial statements of the co. along with those authorized by the board.
3. CFO is also responsible for providing various inputs for meeting the enhanced board report requirements.

Necessity of a CFO for the co.

There is no one better positioned inside a company than the CFO to develop structure from a complex process, and create sustainable financial success in the business. The CFO takes their financial expertise and channels it into a strategic leadership role to create financial success for the company and its stakeholders.

A CFO has a deep understanding of the business model of a co. and its banking relationships, he/she works with the board of directors, prepares detailed financial and management reports, works with auditors, oversees tax planning, and sets policies around controls and payroll. Their responsibilities include: budgeting and forecasting, managing mergers or acquisitions, and compliance issues.

The CFO is forward-thinking as they consider economic, industry, tax, government regulation and social issues. A CFO is especially valuable for a company that is growing quickly, has a large number of employees, and complex product lines.

A CFO helps the co. to raise the funding form outside sources. For companies experiencing more rapid growth, a common requirement for hiring a CFO may be related to a decision to acquire investment capital. In this case, the finance chief often becomes the liaison charged with keeping investors updated on how the company is performing.

The shifting markets, advancements in technology, and globalization have stretched the CFO role.

CFOs perform a number of essential tasks.

• Act as a right hand to the CEO to grow the business.
• Ensure timely collection of revenue. CFOs play a key role in keeping a business funded.
• Nurture relationships with sources of capital and help relieve the CEO of the burden of managing relationships with investors, lenders, and key partners.
• Business is more data-driven than ever. CFOs provide analysis into that data and offer key insights.

A CFO may be needed during rapid growth, to develop new products, markets or offerings, for merger & acquisitions, outside investors or debt facilitation,

When profitability is not at a desirable level, and you don’t know why. By Controlling costs, improving productivity, and analyzing pricing strategies are three ways the CFO can improve profitability.

As tax planning has become complex. A business’s integrity is based on its ability to prepare and disclose accurate financial results and uphold its tax obligations. It may be time to hire a CFO when a company is unable to do so.

Real life example of CFO of a successful co. like Tata Consultancy Sevices in India

S. Mahalingam, CFO/ TCS
overall winner for enhancing competitiveness through merger & acquisition.

• background: chartered accountant, has worked with tcs since 1970.
• winning move in 2008-09: steered tcs during tough times, helped the company make its largest ever acquisition (cgsl).
• challenge ahead: mahalingam will have to ensure that tcs holds onto some of the cost efficiencies it has achieved in the last financial year, even as it grows in a reviving IT market.

V. Balakrishnan, CFO/ Infosys (IT MNC in India)

Background: B.Sc. degree from the university of Madras. He also holds ACA, ACS and AICWA degrees. Has spent 19 years in Infosys; was at AMCO batteries earlier
Winning move: Repaying investor confidence with four one-time dividends
Challenge ahead: To put Infosys back on the fast-growth path