Role of the Chief Financial Officer in Contributing to the Strategy of a Company - Essay Example

? Role of the Chief Financial Officer in contributing to the strategy of a company. If you were in a CFO position at your chosen company, how would you expand your responsibilities to be more strategic? Show how the company will be benefited? Contents Contents 2 Introduction 3 Role of CFO to meet strategy of a company 3 Treasury function 4 Control function 5 Strategy based forecasting function 6 Strategic expansion of responsibilities of CFO 7 Investor Relations 8 Sustainability and reporting programs 8 Sustainability report: transparency and consistency 9 Non-traditional performance metrics 9 Benefits to the company 9 Conclusion 12 References 13 Introduction The Chief Financial Officer (CFO) of a company is one of the senior corporate officers in the management who reports to the Board of Directors and the Chief Executive Officer. The main roles and responsibilities of the Chief Financial Officer include managing the financial risks of the company in various areas of its operation. The supervision of the financial functions of the department is an integral part of the responsibilities of the CFO. In cases of public statements to be given on behalf of the company in the areas of financial performance, the Chief Financial Officer is the designated person to perform this task. A study of the roles and responsibilities of the Chief Financial Officer of the organization in detail would reveal that the Chief Financial Officer needs to supervise the activities of record keeping, financial planning and reporting the financial performance to the top management that includes Chief Executive Officer and the Board of Directors. The Chief Financial Officer reports to the top management and supports the company in various strategic business areas of cost-benefit analysis of the business process, forecasting of financial performance of the company, managing the budget in terms of revenue target and planned expenditures, managing various sources of funds for expansion of the business (Khatta, 2008, p.46). Role of CFO to meet strategy of a company The roles and responsibilities of a Chief Financial Officer contribute to the strategic growth of the company. The Chief Financial Officer assists the Chief Executive Officer and the Board of Directors in providing essential inputs on the formation, evaluation and implementation of the strategy of the company that could be driven by the financial resources by the organization. After the strategy is formed with due consultation among the senior corporate officers of the top management, the Chief Financial Officer plays the vital role in supervising the financial performance of the company in order to meet the strategic objectives. Based on the strategic objectives of the organization, the role of the Chief Financial Officer could be broadly divided into the three areas as explained below. These could be named as the treasury function, control function and the strategy based forecasting function performed by the Chief Financial Officer. The effectiveness of the Chief Financial Officer in these areas helps in meeting the strategic objectives of the company (Handlechner, 2008, p.73). Thus the contribution of the Chief Financial Officer is extremely important in the strategic growth of the company. Treasury function The treasury management of the company is one of the main financial areas based on which the financial performance of the organization is determined. The treasury management of the organization deals with the managements of funds available with the organization in order to satisfy the areas if interests like investments, credit, debts, etc. so that the short term and long term goals of the company could be fulfilled. The treasury function of the Chief Financial Officer involves supervision of the performance of the treasury management, plan initiatives to address the identified gaps in the management of funds of the organization so that optimum return could be achieved in the areas of investments, and finally reporting the financial performance of the treasury management to the CEO and the Board of Directors of the company. The Chief Financial Officer is responsible to undertake a cost-benefit analysis of the company based on the outflow of funds expected in the business investment in the form of expenditures or loans or any form of liability which is to be repaid with interest and the expected inflow of funds in the form of investments (Conrow, 2003, p.94). The cost-benefits analysis directed and supervised by the Chief Financial Officer helps in better understanding of the feasibility of the investments of the company. The records for the cost benefit analysis in obtained from the employees of the treasury function who have obtained the information on the various risks involved in the investments and the prospects of the potential return on investments. At the time of examining the records, the Chief Financial Officer takes into account the amount of available liquidity with the company and the impacts of the risk involved on the future liquidity position of the company. The expertise of the CFO in this role helps the company to make investments decisions and obtain net positive return on the investments which contributes to the strategic growth of the company (Jolly, 2003, p.95). The Chief Financial Officer also plays the role of the approval authority for choosing the various sources of funds required for the purpose of investments. The CFO is accountable for the decisions made over raising funds through debt, equity or appropriate proportions of debt-equity mix as found suitable according to the strategy of the company. The various risks in the financial performance in terms of liquidity, debt-equity are taken into consideration are taken into consideration with the aim of maximizing the wealth of the shareholders. The advantages of the debt funds and the equity funds are estimated in terms of strategic goals and the risk appetite of the organization. The decisions made over the capital structure for improving the financial performance are then reported by the CFO to the Board of Directors for final approval. Control function The controllership functions of the Chief Financial Officer is aimed at meeting the strategic objective of the company in the areas of corporate governance in accounting, financial reporting on a timely basis to the stakeholders of the company. The Chief Financial is responsible for the supervision of functions of the accountants. It is one of the main duties of the CFO to foresee that the statement of accounts and the financial statements are prepared in accordance to the generally accepted accounting principles. The Chief Financial Officer obtain the records on the authenticity of the statements of accounts prepared in accordance with the accounting principles to ensure that the code of ethics in accounting and financial reporting is done as per the code of ethics of the organization. The CFO, therefore, ensures that there are no lapses in the activities of accounting and financial statement preparation which falls in line with the strategic policies of the organization. Thus the role of the CFO helps the company to protect the interests of its shareholders. The effective controllership functions of the CFO enforce the strategy of the company to prioritize the interests of its shareholders. The CFO also ensures that the financial statements of the company are reported to its shareholders in a timely manner. The correct and timely reporting of the financial statements allows the shareholders to take right decisions on investment (Tarantino, 2010, p.45). Thus the role of the CFO fulfils the strategy of the company to maintain transparency with the shareholders over the aspects of investments, capital structure, liability and assets, cash flows and profitability. Strategy based forecasting function The roles and responsibilities of the CFO contribute to the strategic areas of financial forecasting and budget management of the company. Since the Chief Financial Officer reports directly to the CEO and also additional seat in the meeting of the Board of the Directors, the CFO is well aware of the strategies planned for the organizational growth in future. The risk appetite of the company and financial targets in terms of liquidity, profitability and returns to the shareholders are planned as strategic path for growth of the company. The Chief Financial Officer has the responsibility to weigh the various avenues of investments in terms of the risk and the return expected from the investments. The forecasting of the returns on investments is done by the CFO by taking into consideration the various risks associated to the investments (Mayo, 2010, p.64). The investments which are forecasted to be favourable in terms of risk-return trade-off are recommended by the CFO. The decision on the selecting the investments of the company also take into consideration the available funds with the company, the forecasted cash inflows and the cash outflows. The budget management is also supervised by the CFO with an aim to service the liabilities and the debt acquires with the help of available assets in the short term as well as long term. Thus forecasting of the future returns with the consideration of business risks and the management of budgeted cash inflows and the cash outflows help the company to strategically proceed to towards taking up investments decisions that increases the profitability of the company. Strategic expansion of responsibilities of CFO The strategic expansion of the roles and responsibilities of the CFO have been in line with the changing trends in the business environment and its relationship with the shareholders and the society in which it exists. The changing trend in the behaviour of the shareholders and the society has been observed towards linking the financial performance of the companies to its impacts on the society and the environment. The shareholders and the consumers of the companies have started to value the brand image of the organization that is not only providing superior products at competitive prices but are also engaged in activities of corporate social responsibilities. The role of Chief Financial Officers have thus expanded beyond their traditional roles of supervising, financial planning and implementation, reporting which were aimed at maximizing the financial performance of the companies. The Chief Financial Officers have considered the aspect of Environmental, Social and Governance (ESG) arena in order to attain sustainability of the business (Gossling, 2011, p.86). The expansion of the role of the CFO after taking into account the ESG arena has led to increase in reporting activities of the CFO that are not just confined to the financial performance of the organization. The CFOs have started to produce sustainability reports of the companies aimed at informing the shareholders on a timely basis about the social and environmental activities performed by the organization. The rationale behind the expansion of the role of CFO lay in the fact that the companies have come to understand the changes in the behaviour of their shareholders and the consumers in interpreting the social roles of the companies that have consequences on the business and the financial performance. Investor Relations The changes in the ESG arena have led the CFOs to attach more importance to the aspect of investor relations and informing them on the social, environmental and sustainability activities performed by the organizations. The CFOs have taken active steps to engage into discussion with the shareholders to exchange information on the impacts of the business performance of the company on the society and the environment (Schwartz, 2011, p.78). The information provided to the investors and the shareholders by the CFO has led to providing timely information on the activities of the company aimed at welfare of the society and the environment. Sustainability and reporting programs The CFO has taken up additional responsibilities for conducting the sustainability and reporting programs as an active step to adapt to the changes in the behaviour of the society and the investors. The sustainability programs are designed in such a way that it could be conducted with the help of the budgeted expenditures of the company and at the same time optimally use the resources to attain future benefits with the development of the brand image of the company. The reporting programs are equally crucial to inform the investors, customers and the society of the positive impacts of the social activities performed by the companies in order to maintain a sustainable environment. Sustainability report: transparency and consistency The CFO has attached due importance to the aspects of transparency and the consistency of the information provided in the sustainability reports published by the company. The transparency on the amount to resources allocated by the company towards the social and environmental activities is maintained while informing the users of the report. The companies use several channels and media for publication of the sustainability reports. The Chief Financial Officers ensure that there is consistency in the data and information provided in the sustainability reports in order to avoid confusion among the investors. Non-traditional performance metrics Looking at the changing nature of finance functions in the industry, the CFOs have taken an additional step to propose introduction of non-traditional performance metrics in the areas of financial performance of the organization. This led to the linkage of the financial performance of the company with the activities of social and environmental sustainability. Due to the introduction of the social and environment parameters, sustainability parameters in the performance metrics, the balance of fund allocation in order to achieve the economic and social goals of the companies have been established. Benefits to the company The role of the Chief Financial Officer and the expansion of the roles and responsibilities in line with the changing behaviour of the investors, shareholders, customers and the society have been beneficial for the companies. The roles and the responsibilities of the CFO with the respect to the environmental, social and governance arena in addition to the traditional set of functions have contributed to the attainment of strategic goals of the company. The companies have realized that there have been changes in the voting pattern of the shareholders and that they have started to evaluate the business performance on the degree of its impacts on the society and the environment in which its exists and they themselves exist. The attention of the CFOs in the business activities of the companies that contribute to the social and environmental sustainability have led to balanced allocation of the funds of the company in the areas of business investments as well as investments aimed at welfare of the society and the environment. Thus the company could implement its strategy in attaching appropriate weight-age to the areas of financial performance as well as the social performance. While evaluating investments proposals, the effects on the society and environment was also evaluated apart from the economic profits and the business profitability expected. Thus, the companies looked into the areas of social, environmental risk factors in making investment decisions. Apart from the financial risks, the weight-age to the social and environmental risks became important as the perceptions of the investors changes and they started to value business performance by taking the impacts on the society and the environment (Lemieux, 2013, p.53). The consideration of these risks allowed the companies to mitigate the social and environmental risks and attain feasibility of the investments. The social and environmental risks of the business were mitigated through activities for protecting the society and the environment which was strategically implemented by the measures of the CFO. The engagement of the investor relations by the CFOs that symbolised the expansion of the roles of CFO had been beneficial for the companies to a great extent. Due to the engagement in the interaction with the investors and the shareholders, the company has been able to inform their stakeholders of the activities that have been undertaken by the company for sustainable development of the business and the environment and the society in which it exists. By engagement with the shareholders and the investors, the company has been able to address their concerns and explain the goals of the organization and the long term goals for overall sustainable development. The meetings and conferences have allowed the companies to develop an image of a corporate citizen that led to the increasing acceptability in the market among the shareholders, investors and the customers (Rugman and Collinson, p.37). The sustainability programs and the reporting procedures implemented by the CFO to address the social and environmental impacts of the company have led to the tightening of governance procedures in the company. The non-traditional metrics introduced for measuring the performance of the employees has laid importance in the activities and initiatives of the organization in allocating funds and performing activities in the areas of social and environmental welfare (Idowu, 2011, p.39). The increase in acceptability among the investors and the consumers has been advantageous for the companies as it allowed them to raise funds through issuance of IPOs when required. By leveraging on the brand image, the companies have been able to sell their products and services on a higher a higher due to the increasing demands of the customers. The preference of the customers in using the products and services of the company has generated increasing revenues for the companies due to which the profits of the companies have also increased. Thus the expansion of the role of CFO in the areas of social and environmental governance has enabled the companies to achieve sustainability of the business in future. This has been attained by addressing the demands of the customers, investors and the society through activities that promote the welfare and sustainability of the environment in which the business exists. Conclusion The Chief Financial Officer is the spokes person of the company on issues related to the financial performance of the organization. The role and responsibilities of the CFO takes into account the various forms of business and financial risk that affect the financial performance of the companies and then implement suitable measures to improve the financial performance in order to meet the strategic goals of the organization. The companies have observed the latest trends in the industry which revealed that the investors and the shareholders have started to take decisions not only based on the financial performance of the companies but also based on the impacts of the financial performance on the society. In order to adapt to these changes in the behaviour of the investors and the shareholders, the CFO have taken up additional responsibilities of that balances the financial performance and the social and environmental contributions of the company in order to secure a sustainable future. The non-traditional performance metrics were implemented in the companies that gave due weight-age to the environmental and social activities of the company. The investor relation was one of the important areas which were maintained through frequent meetings to the shareholders and providing them with transparent and consistent information on the commitment of the company towards the society. The companies have benefited from the expansion of the role of the CFOs as the perceptions of the investors, shareholders and the society helped to achieve sustainable financial performance of the company. References Conrow, E. H. 2003. Effective Risk Management: Some Keys to Success. New York: AIAA. Gossling, T. 2011. Corporate Social Responsibility and Business Performance. Birmingham: Edward Elgar Publishing ltd. Handlechner, M. 2008. Risk Management. Berlin: GRIN Verlag. Idowu, S. 2011. Theory and Practices of Corporate Social Responsibility. Berlin: Springer. Jolly, A. 2003. Managing Business Risk. New York: Kogan Page Publishers. Khatta, R. S. 2008. Risk Management. New Delhi: Global India Publications. Lemieux, V. 2013. Financial Analysis and Risk Management: Data Governance, Analytics and Life Cycle Management. Toronto: Springer. Mayo, H. B. 2010. Investments: An Introduction. Stamford: Cengage Learning. Rugman, A. M. and Collinson, S. 2012. International Business. Ottawa: Pearson Education. Schwartz, M. 2011. Corporate social responsibility, an ethical approach. London: Broadview Press. Tarantino, A. 2010. Essentials of Risk Management in Finance. New Jersey: John Wiley & Sons. Read More