Critical Analysis of the Changing Role of the Chief Financial Officer - Coursework Example

INTERNATIONAL BUSINESS MANAGEMENT (CRITICAL ANALYSIS OF THE CHANGING ROLE OF THE CHIEF FINANCIAL OFFICER (CFO by of the Name of the Professor Name of the School City, State 25 January 2014 Introduction to CFO Role Chief Financial officers (CFO) occupy a unique position in the organizations. They are part of the top executives whose view on the business activities is very crucial, besides the organization’s CEO. A CFO is a senior manager responsible for directing a company’s finances and overseeing its financial activities. However, this is the traditional perspective and more responsibilities are being added to them in line with the different strategic plans of the businesses. Initially, the great necessity was the skills in accounting for their financial function. The traditional role of CFOs was exclusively limited to organization’s finances, where they had the powers to approve or disapprove the undertakings of specific projects that would affect the company’s strategy. According to Sharma and Jones descriptions, a CFOs role has previously been associated to that of “‘a bean counter,’ whose primary responsibility was to prepare the books and report back to higher level management on the overall financial risk and performance of the enterprise” (2010, p.1). The finance department is a tricky one and sensitive and requires an executive to ratify the financial statement and reports prepared from the accounting sector. CFOs roles are well founded in accounting and as the top executives in the department; they had been placed in charge of the preparation of the books of account, responsibility in signing them, and making their accounting judgments to assist the company in evaluating the viability of their projects. Restricted to dealing with numbers, they also develop budget for the companies and in other cases deal with investors and banks in issues of finances. It is vital that CFOs provide the management with efficient and factual budgetary items, which expose their expenditure and income to inform them of the performance of their firm, and establish the problematic areas based on the monitoring and auditing of the finances flow. That confirms their custodian responsibility of the business financial stability by ensuring organization’s financial health and governance. Preparation of books and reports After preparation of the books and reports, CFOs are required to present them to the higher authority in rank (CEO). Some companies recommend they report back to the board of directors, which CEOs and CFOs are part of. From the books they present the financial position of the organization with respect to the past period and make company’s financial projections of the new successive term to be encountered. It is traditionally in their capacities to provide sufficient and classified information to the executives they report to, after analysis of the books and reports prepared to aid in suggesting the best direction forward in investment and use of the company financial resources. Considering that the finance department interacts with other functional areas, the CFOs have access to accurate information recorded based on what amount of finances have been channelled out to and from these departments or functional areas. Hence the CFO has been acting as a communicator of the financial impact of the organization based on the exchanged information or facts stemming from other functional areas. They communicate the potential for failure or success as per the standing of the company’s financial accounts. Financial planning and analysis In the past, CFOs engaged in organizations’ financial planning and analysis (FP&A) though restricted to one dimension. Companies’ finances are their valuable asset, which different departments need to be allocated to further their operations in line with the business objectives and vision. Budgeting and projections are part of financial planning. Considering the financial function which was restricted to financial data, CFOs did not have the opportunity to use the wide array of non-financial data and information open to the external system for financial planning. According to Bacani, FP&A produced by the team working on it were mainly data driven and limited in scope, like use of sales analysis, historical pricing data, and profitability variances (2012). CFOs together with the other financial teams had previously been engaged in preparing budgets for the various business units. Once the finances got allocated, they were also responsible for monitoring expenditures of the operations in the units as their supportive function, to ensure the organizations’ finances are consumed efficiently and effectively. Analytics of finances were one of the difficult roles to establish financial accuracy and close the financial gaps for the CFOs. Some companies had to outsource the task for efficiency purposes, but a great number are those who CFOs were mandated with the complete set of role for strategic FP&A. As a result, most CFOs had sort to retain this function, but on the other part limited broad information and knowledge from the outside world. The effect was that even their business forecast and insights were limited. Raising debt or equity capital Relevant to cash management, the CFOs have been responsible for monitoring the capital structure of the organizations, meaning they have a better view of how companies’ assets are depleting or growing. CFOs have the duty to establish the funding options based on the generated companies’ budgets and forecasts. They can evaluate the debt proposals available (whether venture or convertible debt) and decide on the best option to raise the capital needed by the company when their cash balances fluctuate (Raoufs, n.d.). It has then been CFOs role to access funds and talk into the cash or equity investors to invest in the companies. However, the limitation in the past has been inability to access all or relevant information outside the finance docket relevant to convince the investors. The potential wider role of CFO in a company (Expanding responsibilities to be more strategic) With the increasing globalization, external pressures to the organization, technological advancement and changes in global business environment, the roles of the CFOs are changing and responsibilities are increasing to better financial management and organization’s progress. However, the financial function still remains central to CFOs responsibilities. Enhancing investors’ relations Due to unexpected financial crisis and their consequences to the companies, investors need to have a clear picture of the companies’ capabilities before they invest. Over the last recession in 2007 to 2009 that affected most organizations across the globe, CFOs treasury related functions were challenged by the fact that investors needed more assurance and clarity of the organizations’ sustainability. CFOs have had to look further beyond the financial data and acquire information, which they can use to communicate the financial performance of the companies and answer arising queries from investors. It is essential that modern CFOs keep their communication open with the investors or shareholders and inform them of what is going on. The contemporary CFOs are spending significant amount of time interacting with the investment community, which enhances their understanding of the companies’ performances and builds trusts with them (Tapestry networks, 2013). It is no longer left to the CEOs or investors relation (IR) teams to forge good relations with investors of the company, but CFOs have had to cut across the working practices as globalization of businesses intensifies, and use available communication channels to strengthen IR. As a CFO of large company, one needs to develop an IR program, communicate the importance to the financial team and more so, ensure that the plan is effectively implemented. It is quite clear that while the CFOs are given the responsibilities of accessing finances for the company, they also need to keep the shareholders or investors updated. Meaning come a time they require finances again, they would have a complete idea of the organizations and take less time to convince. Issues of exploring for other investors could be eradicated. A CFO should be able to identify who their investors are and understand their priorities and interest reflecting on those of the company. If the CFOs get the views of the investors, they can guide their investment decisions since they meet their interests by discussing the financial prospects of the organization. They are able to indicate “the potential for growth in shareholder value relative to the riskiness of investment” (ICAEW, 2011, p. 28). However, they need effective communication skills to convey the integrated reports and financial results, specifically to their external investors or shareholders. Strategic decision making and support They hold a central role in the organizations concerning resource allocation decisions. Unlike before, where their suggestions only took centre stage, today’s CFOs are unquestionably welcomed in setting strategic decisions for the company. The CEOs and the Board needs them more than ever, so that they guide how the limited resources would be effectively distributed, focusing on the strategic priorities of the companies. Past surveys of CFOs role revealed that finance chiefs work with CEOs when it comes to strategic decision making for the company; 97 percent confirmed to nowadays been invited to discuss on corporate strategy, while 87 confessed that their CEOs consider them as major decision strategists in their board (Wall street Journal, 2013). Their view and facts they bring at the table in the board discussion enable the executives to make smart resource allocation decisions. They work side by side with the CEOs and contribute to the decisions of the company. This shows that decision making power they had is not limited to books of accounts but stretches further into the company wide decision making. In the recent past, most companies are calling upon CFOs to assess the emerging markets and determine their viability upon investment. Dealing with divergent markets whose growth rates quite differ, CFOs need to optimize resource allocations and manage contradictory forces to benefit from the growth opportunities of the emerging markets and protect the returns from the matured markets (EYGM, 2013). CFOs have been considered an enemy to almost all heads of departments in most companies, because of their critical decision making dynamics that are used to counter the former’s decisions, hence biasing some departments’ requirements over the others based on priorities. Using hard financial and non-financial data, they can alter the dynamics but also improve the quality of decision making in effort to advice the companies’ executives. This is why today they can engage in global financial markets on behalf of the company in issues of risk hedges and structuring other financial tools for the sake of companies’ related financial and corporate decisions. As this role is expanding, small and medium sized companies coming up could greatly benefit from CFO’s involvement in the strategic decision making process, most essentially leading the process if not as a business partner. Operational decisions The other aspect of decision making contributes to companies’ operations. Every firm is one time or the other confronted by myriad decisions arising from the non-financial sector. Hence, CFOs who make decisions or bring their advice on the board meeting, solely dependent on financial aspects could be delivering inaccurate or half-truths. CFOs are nowadays engaged in making diverse operational decisions in the quest of driving value for the company, while using the financial and strategic insights. Growing the companies’ existing businesses takes the centre stage of CFOs involvement in operational decisions. They are not only part of the team that evaluates the emerging markets, but also assesses the feasibility of a firm to venture into the existing markets with new products. Whether a product is to be launched or the business is to be expanded, they all interact and affect the financial function. The decisions to be made are critical and could either reap benefits or bring a major loss for the companies. The CFOs engagement in these decisions is to ensure the additional value to the company is created. By understanding the entire business or the various operations in a functional area, they make strategic operational decisions after considering the opportunities and threats in the targeted area. By employing activity based management (ABM), chief finance officers are able “to make strategic and operational decisions that maximize profits, reduce costs and streamline processes” (SAS, n.d., p. 6). For example, the pricing of products and services in large companies determine its profits and volume of sales: CFOs are moving forward to negotiate prices not only for the products moving out of the company, but also for those which the firm require. Companies are requiring that CFOs negotiate on their behalf and work together with other assigned marketing officers when it comes to sale, pricing, and in contracts to close a deal, which eliminates key financial related mistakes. Responding to rapid technology changes Looking at the case of Gale Sommers, CFO of professional Warranty service Corporation in Virginia, he demonstrates how finance chiefs have been involved in the wider decision making in companies. Since the beginning of the 2007/2008 recession, his function evolved to be an overseer of the Human Resource, IT, underwriting and once in charge of firm’s sales staff, not to mention the persistent role he took to negotiate prices beside his financial responsibilities (Dill, 2013). These roles had been unfamiliar for the CFOs before. It has become a common practice for them to be part of innovation plans enabled by information and technology in the business world. As the businesses expand, CFOs expertise becomes a necessity especially in acquiring technology enabled tools (software and hardware) to enable firms’ realize greater profits, enhance productivity, and secure their valuable data, information, and systems. Change agents In line with technology development, during the turbulent moments of the company, CFOs have acted as the change agents. The last global recession saw numerous CFOs exposed to this function, and some have smoothly and actively led failing companies to recovery. Because of the strong finance function they handle, they guide firms in challenging times so they realize smooth transition across the enterprises. Change and innovation supplement each other and since the former is a continuous process, CFOs availability is currently crucial to justify the firms’ investment in various departments and stimulate transformation. The increasing use of technology has contributed majorly in their change implementation role and overcoming the barriers to change. This new role requires them to use complex but flexible investment option to easily manoeuvre through the difficult times and ensure firms rapidly get to adjust and establish in new environments and achieve the competitive advantage. Their communication and leadership skills are more than ever requirements in their job. A research report by Accenture that investigated CFOs engagement in change management showed that a good number of them developed the rationale for business transformation, while others managed the change process; however, they would require critical skills and more than financial insights to lead organization in this transformation and overcoming the resistance (n.d.). To effectively succeed in this role, CFOs need to work closely with other financial experts so that quality investment solutions can be achieved to bring around change. By reviewing the trends in business performances, they can determine where potential in not being fully utilized and bring change towards people, technology, and processes where there is a need through pushing for investments in such areas. Strategic business partners Traditionally, finance had been isolated in function from the rest of the departments. Though they were still interactive, some element of being independent was associated with the finance. Things have changed and the evolving CFOs roles are enhancing the department’s cooperation and engagement with the overall business functional areas. However, CFOs and the senior finance team members stand out to be different by the fact that they are expected to bring value to the entire company and that CFOs hold an ideal position, with proper visibility of the whole company. Modern CFOs have widened their business perspective to influence other areas using their financial expertise, think strategically, and contribute in their best capacity to the larger organization. For example, Frank Friedman, CFO of Deloitte LLP state and the finance people have been at the upfront in assessing targets in acquiring new businesses, accessing data differently in data analytics, changing organization’s portfolio for consultancy purposes, and assisted in addressing the change environment as the larger strategic business partner role (The Wall street journal, 2013). They develop comprehensive understanding and knowledge beyond finance into firms’ strategies, their functional areas, their customers and supplies of the organizations, and their output (products/services). The expanded role in IR and exposure to the operations of the organizations functional areas provides them with an accessible platform, for them to understand what creates value for the company and shareholders, and the risks involved while working towards the set goals. As strategic partners, they need to collaborate with commercial leaders and direct organizations to better overall performances. They have to balance on the core CFOs duties and overcome the posing challenges in this new role as strategic partners. This role cannot be complete without them playing the part of the differentiator for the leadership, finance team, and entire organization to give sufficient and accurate insights while advising or guiding decisions. Enterprise risk management Establishing of the enterprise risks has been one of the reasons why companies currently feel the need to outsource companies’ data, and financial auditing or analysis. Risks can propagate into business’ instabilities and crisis, hence a functional area that CFOs need to manage as early as possible to prevent any future uncertainties and loss for the business. CFOs should hence come up with well-designed ERM procedures to manage strategic risks and allow the business to compete with confidence in the market as efficient plans are in place and implemented to monitor risk development and counter crisis occurrence. Conclusion By CFOs handling investors’ relations, they engage in strategic management of the company to poll resources towards the company. It is a way for targeting to the companies’ specific investors and aligning both parties’ goals. It’s of benefit to the companies, because the CFOs are leading figures where investors can deal with a specific individual rather than the diverse IR officers. CFOs would provide actual financial performance crucial for investors and discuss issues at hand with them with gravity to secure their trust and confidence in the company. In case things go wrong, they are aware and the trust built would provide an opportunity to rectify the situation, simply because they are made aware of the companies’ progress, though it does not go without critics. On the other hand, it is a cost saving measure to the company and provides a win-win situation for the businesses and its investors, but more so is a good strategy of corporate governance. Modern CFOs should be accustomed to addressing the diverse change needs and fuelling the transformation strategies. Some companies have been left behind in terms of technology development, innovation and implementation, because there was a bias placed when it came to finance power to prioritize activities for the company. Until CFOs became part of the broader innovation and drivers of change in the organization, they have actively participated in acquiring new sets of technology tools for the operations of the company, long term cost saving, and channels of smooth transition. Organizations have eliminated most of the opportunities that would lead them to crisis or failure by allowing the CFOs to be part of the broad strategic decision making in areas of investment, finances, and operations at the organizations’ functional level. Their voice at the boards and CEOs meeting gives the impact of the situation on ground, acting as the strategic business partners in advising based on sound financial and integrated data, internal and external to the organizations to guide or lead in decision making. The expanded role of the CFOs have enabled them to establish close relations with other executives, especially the CEOs whom they work alongside in developing corporate strategy, vision, goals and objectives, the investors and department heads for efficient exchange of information. Besides all that, the tasks may be tiresome and time consuming, but though being complex and demanding, CFOs have an opportunity to grow in skills and professionally. Some are taking CEOs roles after they leave and are being rewarded for good performances. Thanks to the last economic downturns in the past decade and especially the 2007/2008 crisis, because it was wake up call for reluctant CFOs to actively engage in the wider role rather than the finance function alone. The expanded role is producing current and future CFOs with a combination of knowledge and competencies effective for companies’ progress. Reference list Accenture, n.d. The CFO as a Catalyst for Change: How Finance Can Take the Lead in Business Transformation. [online] Available at: http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-CFO-Catalyst-Change.pdf/>[Accessed 27 January 2014]. Bacani, C., 2012. Financial Planning and Analysis: How to fix the problem. [online] Available at: [Accessed 25 January 2014]. Dill, K., 2013. CFOs have Bigger Roles than Ever Before: And they Like it that way. [online] Available at: [Accessed 27 January 2014]. EYGM, 2013. A tale of Two Markets: Telling the story of investment Across Developed and Rapid Growth Market. [online] Available at: [Accessed 25 January 2014]. ICAEW, 2011. The Finance Function: A Framework of Analysis. [online] Available at: [Accessed 25 January 2014]. Raouf, F., n.d. Raising More Debts Before you Raise Venture Capital. [online] Available at: [Accessed 24 January 2014]. SAS, n.d. SAS for CFOs: Helping CFO’s adjust to an expanding role. [online] Available at: [Accessed 26 January 2014]. Sharma, R. and Jones, S. (2010). CFO of the Future: Strategic Contributor or Value Adder. [online] Available at [Accessed 24 January 2014]. Tapestry networks, 2013. The audit committee’s relationship with the CFO and finance organization. [online] Available at: [Accessed 24 January 2014]. The Wall street Journal, 2013. CFOs Expand Their Strategic Role, But Not All Want the CEO Sport. CFO Journal. [online]Available at:[Accessed 26 January 2014]. The Wall Street Journal, 2013. What it Takes to be a Business partner: From CFO to CFO. CFO Journal. [online] Available at:[Accessed 27 January 2014]. 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