5 tips to better understand your CFO and get them on your side

Sylvain Mestrallet is a finance executive with over 10 years of experience in a large corporate, following his MBA in HEC Paris, he is also a mentor and board member for a number of startup companies.

In this guest article, Sylvain will give you some top tips on how to be more successful in understanding and connecting with your finance team and CFO.

CFOs

We live in a constrained world: there are not enough resources to satisfy every want.

Chief Financial Officers (CFOs) live this reality on a daily basis. They are the ones in an organization who see the aggregated view of all requests, and it is their responsibility to find a delicate balance with the company’s scarce resources.

This conflict is often the reason you don’t see eye-to-eye with your CFO.

If you have ever had to go in circles to get funding from your CFO, did not get your requests approved, or had your budget cut unexpectedly, this article may be helpful to you.

Let’s dive into how your CFO is thinking so that next time you are better prepared to align with them on common goals.

#1 Understanding the pros & cons of investing instead of expensing

Expenses are just that: they are activities that take money out of the company’s accounts.

Expenses can be fixed or variable, controllable or uncontrollable. Every organization needs a healthy level of expenses to run its daily operations. However, it is critical to find the most efficient way to spend this money. Your CFO will scrutinize the company expenses very closely to understand where cash is being spent and whether it could have been better allocated elsewhere. They are usually the person who has to justify the cost structure to the board of directors.

When explaining your expense requests to the CFO, you will need to determine whether they are fixed or variable in nature. Variable costs are those that change relative to sales or production, which directly impact your product or service cost, hence competitiveness. Fixed costs are those that do not change with production or sales but can dramatically impact your ability to respond to changes in demand.

Investments are another type of expense. The difference with investments is that they usually pay for themselves in the future, for example, acquiring an asset to generate new revenue streams. Therefore, it is very important for your new project or investment idea, to partner with your finance team or CFO first. They will help to build the business case and demonstrate the expected return on investment (ROI).

If you are better able to classify your expense types and describe the effectiveness of each investment you will likely face lesser resistance from your CFO.

#2 From Revenue to Cash (or Cash Conversion)

To be successful as an organization, everyone needs to understand the importance of collecting cash.

Cash is the lifeblood of a business and a business needs to generate enough cash from its activities so that it can meet its expenses and have enough left over to repay investors and grow the business. While a company can fudge its earnings, its cash flow provides an idea about its real health.

Why Cash Management Is Key To Business Success

Your finance team (and CFO) will likely only celebrate when the cash is received in the company accounts, and the full cycle of sales, execution, to payment is completed. This is sometimes frustrating for everyone who has been working on a deal ahead of when the cash arrives.

If you happen to be in this situation, be patient, and remember you still have reasons to celebrate the hard work and pipeline building!

Cash is a key item to consider when making economical trade-offs. You need to evaluate and explain the risk to future margins vs faster cash collection. Your CFO will pay close attention to this balance in assessing both the business’ profitability as well as cash generation.

#3 Profitability (Cost vs Price)

No company wants to generate large revenues but realise small profits. This would mean that the company is misallocating its resources compared to the reward.

While assessing profitability, there are two main variables that your finance team will closely track: cost and price. While for operating businesses, you may already have an existing baseline, estimating a path to profitability for new companies may prove more challenging.

For this reason, it is important for startups or investment cases that you can demonstrate to your CFO, leadership and shareholders that you can break even within a pre-defined period.

Here are some key points that will strengthen your case in this area:

• Analysis with key internal stakeholders to establish product/service cost.
• Benchmark external price and cost by analysing similar products or services.
• Forecast customer demand based on historical or current market data.

These are some key foundations for your discussion but are not an exhaustive list. Be prepared to let your CFO see the profitability reasoning and bring a variety of types of analysis to help them get comfortable with your forecasts.

#4 Value Creation

Your CFO (and leadership team) may not immediately recognize the potential of an idea, especially if it is non-traditional or involves a different business model that will most likely generate losses at the start. This is where the notion of value creation comes in.

Investors do not measure a company on its revenues, profits and cash generation alone; but also on how valuable it will be in the future. This is done by assessing a multiple of the cash flow generation adjusted with factors like the business model and the industry in which the company is operating.

That is why companies like Amazon, Tesla, Netflix, and Uber were able to raise colossal investments despite many years of operational losses. In the example of Netflix, moving from DVD rentals to streaming media was very costly at first; but enabled them to secure a significant amount of recurring revenues, at a higher profit rate, which in turn completely changed its valuation.

Other examples include:

• Complementing a product business with a service offering (often with higher margins),
• Transitioning to a subscription or software-as-a-service (SaaS) model which secures recurring revenues and cash, or
• Finding new applications for an already existing product or capability (new industry or niche demand).

You do not need to know how to run a detailed valuation analysis to convince your leadership team; just understanding basic concepts of how value gets created can make a difference. Think through the explanation of how your project or new venture could drive your enterprise valuation higher in the long run.

#5 Timing is Key

Successful companies usually follow an organisation-wide planning cycle at least once a year. This usually covers the following year as well as a longer-term view of the next two to four years. During this exercise, business leaders will predict future revenues and expenses and complete a review of strategic opportunities to pursue with the associated investment.

If the company is public, the leadership team will have to make a commitment in the form of a financial guidance statement which is made public. Internally, this long-term planning will form the basis of a budget allocation by business unit, function, or region.

As a business leader, understanding the expectations ahead of this exercise is key to being successful in securing appropriate budgets. Many investment requests are not accepted if they are submitted outside of the planning window. Your track record of meeting prior targets will also make your future plans more credible (having a strong say-do ratio).

Your finance teams and CFO are not the only decision-makers in this process; however, they are usually co-owning this process (along with the strategy or business development teams) and can influence these decisions or partner with relevant stakeholders to help build investment cases.

Bonus: Perspective Is Everything, understand the broad context

In large organizations, silos can form between different business units, regions and also functions. Breaking these barriers by developing the ability to connect outside of your zone of expertise or direct line of reporting (internally but also externally) can also help you achieve better outcomes.

As a matter of fact, this is usually what differentiates the best business leaders.

Next time you are building a business case or presenting an idea, consider putting your results or projections into perspective (vs competitors, other product lines, understanding impact on the bottom line, connecting them with the overall strategy). This may not only help you to get the funding you need from your CFO or CEO, but also differentiate you as a strategic business partner in your organization. 

Your CFO is neither your friend nor your enemy. Like you, they have priorities to achieve better outcomes for the organization. Partner early with them, explain to them what you see on the field, and try to understand what they need from you to defend your case and get a win-win situation on both sides.

If you found this article useful or have your own tips to share, then comment below.