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Smart Performance, Communication Skills

Yield Better Results for CFOs

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In recent years, CFOs have assumed increasingly complex, strategic roles focused on driving value creation across the business. Growing shareholder expectations and activism, more intense M&A, mounting regulatory

scrutiny over corporate conduct and evolving expectations from the finance function have put CFOs in the middle of corporate decisions.

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While financial performance is what it is, the CFOs role in helping stakeholders interpret the numbers in the context of the business environment is critical. This article explains the significance of the role that CFOs have to play in managing investors, communicating with customers, suppliers and internal teams, bridging cultures in M&A situations, without dropping the ball on day-to-day finance functions.

In a changing business environment, the CFO is tasked with creating economic value through smart performance. It is also his responsibility to ensure that the value thus created is visible and an easy to understand parameter for investors and other stakeholders to gain their confidence and trust.

Businesses today are rapidly undergoing a metamorphosis in India. From the traditionally managed family-run businesses with traditional/informal

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performance measurement mechanism, traditional modes of raising capital and a certain lack of permeance of transparency through the organisation about the future, we are beginning to see an increasing number of existing, as well as new-age, companies with a professional outlook living in an environment which is increasingly inter-connected and inter-dependent. The one key element that has changed in the way of doing business in this modern landscape is the flow of information.

The new age CFO , therefore, must now realise that he is no longer expected to linger in the background and surface every time the results are to be announced. As the one person in the organisation that has intimate knowledge of both the past performance and the expected future growth it becomes his responsibility, not only to steer the company towards a better future through smart performance but also be able to provide a transparent, big

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picture view of the future, to internal stakeholders, customers and investors. What is Smart Performance?

A CFO today understands that the word performance has a broader meaning than just the underlying numbers. There has been a shift in focus in measuring performance from profits to profitability, earnings to economic value and so on. The focus is on creating value which comes from both increased sales, driving better margins, increase efficiencies in operations amongst others which improves stakeholder confidence and builds company valuations. Smart performance would, therefore, mean looking constantly for opportunities to improve economic profits for the company both inside (operational productivity) and outside (sales). Smart performing companies and their CFOs are serially identifying, recording, measuring,

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comparing and finding ways to improve scores on the short and long term value and growth metrics. by working on: Processes and Systems

One of the challenges that companies face is for them to constantly look at improving each of their key processes, be it the sales, operations, HR etc. The CFO plays an extremely important role in defining the key metrics and more importantly tracking them on a consistent bias which not just helps in measuring business performance but also bring out possible areas where process improvements are possible. The need to evaluate and implement systems particularly IT systems that cut across functions and integrate them is a role that most CFOs are involved with. The CFOs input in the selection, design and implementation of an integrated system (ERP)

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which involves massive amount of change management cannot be emphasized more. In that sense, the CFO is only next to the CEO in terms of importance within the organisation. Vision Alignment and Relentless Execution

Being a leadership role, it is essential for the CFO to have alignment with the CEO/Companys vision. Let me illustrate this with an example We recently had an opportunity to work with this company, which was on a high growth trajectory and was looking to grow its revenues to 2x in the next 3 years. The CFO and the Finance leadership team needed to be ready to support this aggressive growth path by providing the CEO decision making support and putting in place performance management systems. The company struggled with multiple versions of the truth and a lack of standard

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performance measures, resulting in management discussions that were all too often spent on reconciling differences in assumptions. Sponsored by the CFO, a project was created to focus on transforming the finance function into a highly valued partner in the business. The CFO set out to lead a strategic change in the business by establishing and modeling a high-performance culture in finance and then transferring it to the rest of the organization with the help of HR. Alignment of thought process and being able to articulate the companys vision is paramount for a good CFO. The CFO also needs to have a strong buy in to the CEO/Companys strategy and should also play the role as an implementer of the thought process/ strategy to the hilt. Increasingly, CFOs are playing a key role in developing and implementing strategy within their company, partnering with CEOs to creatively design growth opportunities for the future. Successful CFO leadership requires a deeper understanding of strategy,

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increased leadership skills, and an ability to effectively communicate financial acumen and knowledge to non-financial colleagues. A CFO cannot wait for things to happen, having an entrepreneurial bent of mind to get things done is the key. Communication

A number of CFOs that we meet today spend a considerable part of their time in communicating with investors and analysts. The CFO needs to communicate on an ongoing basis and also provide an assurance on the direction and pace of growth. It is important for the CFO to be seen as independent, to be able to provide insights on all aspects of business and be transparent. A CFO has got to do the communication himself/herself as far as possible so that the intent of what is being communicated is not lost or misinterpreted. Any kind of misinterpretation

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can have significant implications on the company concerned. Larger organizations build investor relations teams who work closely with the CFO and who feed information or analysis relating to the company or the industry which could be of importance to analysts who track the companys shares closely. Regular engagement with the market/investors and with the analysts is crucial in building investor confidence.

A CFO needs to work closely with multiple stakeholders. A CFO probably needs to work hard on influencing others, improving his/her diplomatic and people management skills. It helps a great deal if the CFO is seen as someone who participates and contributes to strategic discussions, which helps in building influence particularly with the board of directors and investors. A CFO needs to be a leader, understand the business dynamics and be familiar with all the elements of the

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business as well as the operating model in order to be able to be the Quasi CEO or the next in command. In todays economic scenario, CFOs are increasingly seen as natural contenders to the CEO position. And then the magic happens.

CFOs find themselves assuming greater leadership and responsibility while also asserting more influence on strategy. Outstanding CFOs with all of these skills and the right personal chemistry with the CEO have the ability to become his/her right-hand person. Ultimately, such CFOs become agents of change, creating smarter work patterns throughout their organization with insights that drive performance and help achieve better results. Improvement in company valuations is a result of doing the right things consistently over a period of time. As they say, Rome was not built in a day.

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Case Study -1 The Company

RealBuild is a Promoter owned and managed, and privately funded mid-sized real estate company headquartered in Mumbai. RealBuild had developed approximately 10L sqft of residential and commercial space in and around Mumbai immediately before MyCFOs involvement with the Company and developed around 5Lsqft of commercial real estate during the time of our involvement. Senior Management was and conitnues to be exclusively run by close friends and relatives of Promoter. Initial work has been done to induct a professional CEO at RealBuild. The problem MyCFO had to solve

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MyCFO was involved with RealBuild in two phases. In t he first phase, the mandate was to study the business processes of the company, make recommendations for improvement and to recommend a suitable ERP package for implementation. This phase also required us to study the financing structure of RealBuild and recommend strategies to move away from a personal relationship drive approach to fund raising to a more professional basis to raise funds from formal, institutional sources. In Phase II, MyCFO was required to establish financial and operational controls, streamline MIS delivery, help develop models for pricing decisions and study fund raising alternatives, including private equity and lease rent discounting. MyCFO Approach

In Phase I, MyCFOs role was one of change management, working closely with department heads, who

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had never before been exposed to working with professionals. Our deliverables included a comprehensive SOP document that covered land acquisition, broker appointment, project evaluation, contracting and sub-contracting, financing and accounting and reporting controls and processes. MyCFOs approach was to first seek to understand, evaluate the technical and execution capability of HODs and come up with a set of practical solutions that provided some easy wins, but yet were a step up from what the company was already doing. The SOPs formed the basis for the ERP implementation partner to configure Microsoft Dynamix at RealBuild. On the fund raising side, MyCFO introduced banking partners to RealBuild and was actively involved in the negotiations for fund and non-fund based limits, which helped RealBuild reduce dependence on private and expensive sources of lending.

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In Phase II, MyCFOs work was focused on helping RealBuild take decisions on hold/ sell decisions relating to ready stock and timing and pricing decisions of the sale. Rent discounting options were evaluated and implemented with banking partners, helping RealBuild reduce the overall cost of funding. Timely generation of MIS relating to size and quality of sales inquiry pipeline, competitor pricing and inquiry to sales conversion, helped management take timely decisions on the sales side. Financial MIS was focused on Budgetary controls to ensure that costs were within approved limits at all times and that time and cost overruns were flagged in advance. How the client benefited?

In Phase I, MyCFOs involvement helped RealBuild reduce dependence on private funding from 100% to 63%, on a larger funded base. We estimated reduction in ERP

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implementation time, by a minimum of 8 weeks on a conservative basis, with a smooth M+8 days first month closing on ERP, apart from Go live at about 65% of features available in the system. MyCFOs involvement helped improve margins by about 2% through better controls over procurement processes. Our involvement also helped reducing time taken to finalise commercial evaluation of new land bank acquisition process from about 42 days to 23 days.

In Phase II, MyCFOs lease rent discounting solution reduced weighted cost of funding from about 17.5% to about 13.8%. Sales Pipeline reports were moved from Week end + 5 days to daily basis. MyCFO estimates improvement of sales realisation by about 1.5% on account of improved quality and benchmarking of sales pipeline reports. Flagging of cost and time over runs

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enabled project completion within 104% of Budget; of the 4% overrun, 85% was passed on to end customers.

Case Study -2 Our client

Pharmax is a family owned and managed company with turnover close to INR 700Crores. Pharmax is a leading name in the Active Pharmaceutical Ingredient (API) and Finished Drug Formulation (FDF) segments which is sold in both the regulated and the generic markets in India and over 50 countries worldwide. The company has state of the art manufacturing facilities approved by US FDA and has 17 Abbreviated New Drug Application (ANDA) filed and 12 in the pipeline. Challenges for MyCFO

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Budgeting at Pharmax was a simple spread sheeting exercise restricted only to collation of data inputs received from various departments. The variance between budgets and actuals for instance in financial year 13-14 was more than 80%. The variances were reported every month to the HODs and the management on a month on month basis for their review and comments. MyCFO Approach

MyCFOs mandate here was to play the role of an ongoing CFO for Pharmax. MyCFOs approach was to identify the principal reason behind the budgeting exercise, which in this case was to help the management get a clear idea on the cash flow requirement and in helping them stabilize the FDF business. This was followed by a communication from the management team on the need for the departments to participate in the

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budgeting exercise. A 6 member budgets team was constituted which was lead by MyCFO. This was followed by one on one meetings with the department heads where targets were discussed and agreed. Some of the meetings which involved key decision making were attended by the promoters. The targets were discussed and debated amongst teams on parameters such as stock (max order quantity, credit period, lead time, logistics, distribution), debtors, creditors, zero based budgeting for PDF business, competency of personnel involved in the process, inter departmental dependencies, product strategy, capacity utilization, investment in fixed assets and ANDA, making each SBU within the company profitable, EBITDA improvement, misses and issues based on last years achievements amongst others. The budget exercise was finally completed in 8 weeks with 3 revisions. The exercise also served to set individual KPIs

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for department heads and were eventually linked to incentives. How the client benefitted

The budget exercise allowed standardization of MIS reports across the company, helped the company to institute and track performance for the Senior Managers, formation of the budget committee helped the departments to resolve potential issues which may come in the way of achievement of targets. The process also allowed a formal mechanism to review actual progress and it also set the ball rolling in terms of weekly monitoring reports on sales, cash flow, stock movement to the management.

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