CFO v. 2.0

A different type of CFO is arising. From a macro perspective, this may represent an evolution of the marketplace desiring improvement in the CFO role due to lackluster growth and company performance. Or, it may be more specifically causal, due to a greater amount of institutional capital entering a given industry and requiring institutional-grade management — from my perspective, the senior living industry. Based on what I have seen, the new iteration of CFO requires collaboration, strategy and data dependency.

Collaboration

Inter-departmental collaboration is essential for companies - and especially - from a Finance viewpoint. Consider your company’s budgeting process for example. How is your budget created? Do you include input from folks in the field, both in operations and sales? Do you undertake multiple budget iterations, considering cross-functional perspectives? Does your process include tests of the impact of various levers, since stakeholders collectively carry competing visions (e.g. ownership wants cashflow, while employees desire higher wages)? How do you consider and integrate the various stakeholders’ interests? If, for example, the ownership perspective is frequently favored, then paying employees less than market wages in order to boost cashflow will likely lead to higher turnover and lower product quality, damaging the company reputation. This in turn could cause reduction to cashflow in subsequent years, which will obviously disappoint company owners.

Strategy

CEOs need support in the area of Strategy because it is blurry and vague. Ray Dalio, in his book Principles, writes about the need to bring problems to the forefront of the discussion, whereas most managers want solutions instead. A good CFO must be willing to go all the way in providing honest feedback to senior management, to the CEO, and to the board, even to the point of being fired as a consequence. This highlights that managing people is not accomplished by using a binary “on/off” switch but management is rather a grey area constituting respectful debate, honest feedback, and objective assessment of the problem. This will trend toward and ultimately lead to a more productive solution.

Strategy doesn’t attempt to answer the question - it tries to find the right question. A “right question” approach stimulates innovative thinking, and efforts become redirected toward creating higher quality products, which creates a more engaged workforce. The upshot of this is lower turnover, concretized branding, and hence richer cashflow – this achieves all stakeholders’ goals. 

Data Dependency

Asking the right question is impossible without clear and transparent data. CFOs must apply consistent, standardized KPIs so strengths and weaknesses can be clearly assessed across the portfolio. This is analogous to what statisticians call in-sample analysis. It’s one thing to benchmark a single holding within your portfolio against your entire portfolio. But, it’s another thing to benchmark those portfolio averages against the industry, as an out-of-sample analysis. This exposes how the company is performing against the industry comp-set which has valuation implications impacting the ability to acquire, develop, divest, sell, etc.

Outperformance

The fundamental skills and behaviors of a typical CFO are must-haves. These core building block competencies are like a super-controller: financial reporting, tax, revenue cycle management, internal controls, expense auditing process, etc. But mastering these basics only allows a company to reach “basic”, average performance. To outperform, CFOs need to exhibit a collaborative nature, strategic mindset and KPI measurement excellence born from data dependency, importing into their jobs the skills and expertise they have mastered both within and - more importantly - outside their industry and roles.

Therefore, the question is: what type of CFO are you?