One of the many negative effects of the recent economic downturn is that we’ve seen many companies fire their CFOs because they view them as overhead. These companies often assign their Controller to the CFO position believing that there is little difference between the roles. Not good for the CFO who has to find a job in a tough economy, but what about the Controller who is about to face a baptism by fire?
Recently, I talked to someone who was promoted to CFO without the experience, tools, and knowledge to succeed in that role. He was frustrated, overwhelmed, and felt like he was failing in the position.
Making the jump from Controller to CFO isn’t and shouldn’t be an overnight process. Given the predisposition by business owners to view the financial function as a money drain, the CFO’s toughest job is finding ways to add value. Coming from a compliance-oriented role, the Controller needs time and experience to master this skill.
Income Producer vs. Overhead
What is overhead?
Overhead expenses are general business expenses that facilitate operations of the company, but cannot be directly allocated to the production of the company’s products or the delivery of the company’s services. These overhead expenses do not directly produce net income or improve cash flow. Your challenge as a financial leader is to find a way to produce profits and improve cash flow so you won’t get lumped into this category.
What is an income producer?
An income producer is an individual who has the ability to drive net income and increase cash flow for a company. Sales revenue and net income are related, but do not mean the same thing. An income producer can generate net income by producing high sales revenue, lowering overhead expenses, or gaining operational efficiency. A high net income is achieved not only through sales but also by controlling costs, increasing cash flow and improving the efficiency of assets.
So how do you become an income producer?
As the person in charge of overhead costs, it’s tempting to think that the only impact you can have on profitability is to cut overhead. Unfortunately, a business requires a certain amount of overhead to maintain profitable growth so you’re limited in how much you can cut. Once costs are in line, shift your focus to helping the folks in operations and sales get the information they need to make informed decisions in their areas. You may not be able to do their jobs, but you can give them the tools they need to do their jobs better.
The New Financial Leader
Throughout my early career, I saw myself as someone who helped develop CFOs. With the technological advances of the past few years, particularly in the financial realm, I’ve come to the realization that there are more and more financial leaders within entrepreneurial companies that don’t have the title “CFO“. Ernest & Young conducted a survey and found that two-thirds of respondents believed that the title “CFO” was a misrepresentation of that role. Today’s financial leader might be someone from accounting, operations, or even company management.
The Role of the Financial Leader
Just like a CEO leads the company, the CFO must act as a wingman and influence the direction the company is heading. It’s not only important, but vital to align the business and the financial strategy to result in profitable growth.
A critical step to improve profitability is to analyze the “3Ps of profitability”:
- Procurement – are your costs in line with revenues
- Pricing – are you pricing for profit
- Productivity – are you getting the most out of your resources
When analyzing your EBITDA, ask the following questions.
- What does it really represent?
- Why is it important?
- Who uses it?
When the CFO is wearing the hat of the General, they are likely to have to make some tough calls. The company relies on the General to provide leadership and direction. In particular, the CEO looks to the General to determine the best way to implement the plans to improve profitability and cash flow developed by the CFO in the Strategist role.
Take action on the improvement strategies.
Who relies on the general for leadership? Provide leadership to the CEO and management team and board.
As the financial leader, it’s your duty to make the tough calls. Dan Sullivan, founder of The Strategic Coach, once said, “all progress begins with telling the truth.” Be honest with yourself and others about where you are and where you can realistically go in improving profits and cash flow.
The CFO must also be a Coach. The Coach provides leadership to all stakeholders and puts into play the plans developed by the Strategist that the General feels will be the most likely to lead to success.
All coaches need a playbook. The strategist characteristic of a financial leader develops the plan, the general gets the CEO on board with the plan and the Coach implements the plan with the team. The Coach’s playbook contains many tools to implement these plans such as the flash report, daily cash report, flux analysis, and projections.
Diplomacy is key to financial leadership. Many CFOs don’t realize how many people outside of the company look to them for leadership.
Who relies on your leadership?
Investors rely on the CFO to provide accurate and timely financial information and apprise them of progress towards business goals. Other external stakeholders, including CPA firms, insurance agents, regulatory agencies, etc., also rely on the CFO for leadership.
Oftentimes, the company’s chief investors are your vendors. Vendors look to the CFO to ensure that the company pays its invoices in a timely fashion. This safeguards their source of repayment (assets) should problems arise.
Financial leadership is changing. CFOs of the past relied upon hoards of accountants holed up in a room processing invoices in batches, printing reports on green bar paper and footing the reports with ten-key adding machines. Today’s companies show the “silos” of finance, sales, and operations giving way to an integrated organization. They now have far fewer accountants where transactions are captured live and stored in the cloud.
So how does today’s financial leader cope with these changes? By being a Strategist, a General, a Coach and a Diplomat. Functioning within each of these roles enables the CFO to improve the company’s profitability and cash flow. The CFO also provides leadership to all members of the organization: superiors, subordinates, peers, and external stakeholders. Transform the way you lead your company by becoming an income producer.
Interested in learning a few simple ways you can start improving cash flow today? Click here to download our 25 Ways to Improve Cash Flow to start making a big impact with a simple checklist.
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