Today’s chief financial officers are key strategic advisers to their CEOs and boards of directors. As trusted partners, they are uniquely positioned to offer innovative solutions toward helping a business thrive in this complex, fluid global economy.
A resourceful CFO can do many innovative things, both inside his or her organization, and in terms of communicating to external stakeholders, says Michael Conway, FCPA, FCA, president and CEO of FEI Canada in Toronto.
“They can present all the merits of a business case to help business units clearly communicate the benefits of their particular project. The CFO is often the arbiter between competing projects, figuring out which one gets to go forward in a capital budgeting scenario. On the external side, the CFO’s ability to cut through all of the data and present convincing information on the merits of a business case is precisely what those who provide financing for the project are looking for,” he adds.
One key responsibility the CFO has is to help encourage healthy innovation, including making a financial commitment to research and development (R&D) that will benefit a firm over the long term.
“The CFO, being a critical leader, plays a dual role – making sure the tone at the top of the organization truly allows for a culture of innovation, and then making sure enough financial resources are set aside to facilitate that innovation,” says David King, director of Robert Half in Toronto.
Philip Grosch, a management and technology consultant, and partner with PwC in Toronto, says his firm’s research shows that “organizations see the fundamental pillar of growth has to come from innovation [and] typically the CEO is viewed as the innovation champion.”
However, the finance function, under the purview of the CFO, is increasingly being viewed as a critical component of innovation in terms of its ability to measure results such as return on investment.
‘The CFO’s ability to cut through all of the data and present convincing information on the merits of a business case is precisely what those who provide financing for the project are looking for.’
President and CEO, FEI Canada
The CFO can therefore drive innovation throughout the organization because they are responsible for assessing financing viability. “The numbers in innovation programs are ultimately [what] get organizations to fully buy in and say ‘we get it. This is really helping us drive and grow,’ ” says Mr. Grosch.
One of the important elements of the CFO’s innovation-related analysis, including endeavours related to R&D, is an ability to look toward the longer term and ascertain when projects might begin to provide a financial payoff. While it is important for original thinking to permeate the corporation, it is also critical to be able to translate that into commercial gain.
“The CFO would basically be supporting the development of a one, three or five-year plan,” says Mr. Grosch. “Included in that plan are longer-term investments around some foundational capabilities, one of which is the investment in enabling technologies that drive innovation. Then there’s operational funding, because the foundational core of innovation is [to] experiment, fail and learn, and this requires investment.”
From that, the CFO needs to build a robust framework for return on investment in order to start measuring and realizing the value from innovation, adds Mr. Grosch.
An initial step for the CFO is to recognize the need to allocate funds for investment in R&D, says Mr. King. After identifying which projects to fund, the CFO needs to continue to monitor and support them financially. As time passes it may be necessary to allocate additional funding to allow a seed idea to grow in order to determine its long-term viability, he adds.
For example, CFOs can show innovation by embracing and utilizing new technology to determine whether it is efficient and can help provide a good return on investment. “The CFO plays a significant role in making sure that investments in technology ultimately pay off by ensuring proper implementation and utilization of new products and software,” says Mr. King.
Software or technology being used might not stay with the organization for a long time, but there is often a need to experiment in order to determine its viability. “The CFO is absolutely critical to allowing them to do that. It’s a very different investment philosophy around buying technology than changing your GL or the supply chains,” Mr. Grosch says.
A CFO’s expertise can also be instrumental in helping to attract the right investors who are willing to take into account the firm’s long-term financial prospects, as communicated by the CFO, when making their investment decisions.
CFO innovation isn’t limited to the evaluation of the financial viability of new investments or technologies.
The resourceful CFO can offer solutions to their organization by structuring business deals. One of the competitive advantages that firms are now recognizing is that CFOs can be used to close deals, says Mr. Conway, who adds that CEOs expressed that point in the Canadian Financial Executives Research Foundation’s latest study entitled Branding the CFO.
“If you’re the supplier of a large project, the client will probably have to do a business case on their side, and ultimately take it up to their CFO to get signed off on before the CEO will approve it. If it is a large enough project, board approval will be required,” says Mr. Conway.
“So it just makes sense that if a client’s CFO is going to be vetting the business case that the supplier’s CFO provides their sales team with all the ammunition they need to present the strongest business case so they will win the bid and that proposal will ultimately gain the approval of the client’s CFO, CEO and board,” he adds.
Sometimes even basic CFO decisions involving expenses require a degree of innovation.
For example, CFOs often come under pressure to cut expenses during tough times. The firm’s fortunes are going to be significantly impacted over both the short and the long term by how CFOs carry out that exercise. During the last recession, many firms asked their CFO to help them calculate the long-term effects of cuts and find innovative ways to save money.
“A far better way than saying ‘I need you to cut 10 per cent’ is to say ‘let’s work together to find ways of freeing up dollars that you need to invest in the projects that you want to do,’ ” says Mr. Conway. “It’s making the employees understand that there are a finite number of dollars. And the best way to get more funding for their private project is to look closely at being good budget controllers in finding dollars within their own shop by being more efficient, and then redeploying those dollars to use for development,” he adds.
If a company is experiencing tough economic times and is having trouble collecting its receivables, the CFO can establish policies that improve cash flow, such as ensuring a salesperson’s commissions are paid when the product is successfully delivered and the client has paid for it, rather than immediately after the sale, Mr. Conway says.
There are also innovative ways that CFOs can deal with market pressures, such as working more collaboratively with lenders and banks, or by negotiating more favourable financial or lending terms, says Mr. King.