What is a CFO? As we all know, CFO stands for Chief Financial Officer, which means that they are responsible for the finances of an organization, but what does it really mean to be a CFO? It can be argued that most are only CAOs, Chief Accounting Officers, and not CFOs.
Someone with a master’s degree in financial engineering and 30 plus years in finance is not an accountant, but likely knows a lot about accounting. The opposite can be said of accountants as they may know something about finance but are usually not experts. Numerous accounting departments call themselves the finance department when they really have little to do with finance. A finance person is as different from an accountant as an electrical engineer is different than a petroleum engineer.
In general, the difference between accounting and finance comes down to the perception of value. Finance people concentrate on how value is created and measured while accountants focus on the collection of and accurate assembly of information to produce financial statements.
Don’t get it wrong, this is not criticizing the role of accounting one bit. One can argue it’s a cornerstone of a civilized society. However, a financial statement is not a statement of value. It’s only a representation of the historical flows of monetary units through an organization. If it were more than that the valuation of a company would be a simple mathematical formula that could be universally applied across all industries. Also, if you are searching for value in the GAAP financial statements you are not going to find it.
CEOs need to understand things at a much deeper level than the GAAP financials. For example, having a P&L at the individual instrument level, when done properly, opens an entirely new world of insight into the organization. At the instrument level, value can be “rolled up” to nearly any dimension. A dimension can be your delivery channels, loan officers, departments, customers/members, credit tiers, personas, or about any dimension you can think of.
With this depth of analysis, one can easily spot value creating and destroying elements of the organization. As Albert Einstein said, “A genius is one who can see the obvious.” You must be able to see it first.
Now, according to one of the CEO survey findings on the performance of their CFOs published by KPMG, although CEOs are increasingly expecting their CFOs to play an important strategic business partnering role, the gap between CEOs expectations and the actual performance of CFOs is still huge.
CEOs believe, instead of helping them understand and address the business challenges they are facing, CFOs are spending significant time on financial reporting as well as compliance and regulatory issues. In the eyes of the CEOs these activities are more rear-view focused and do little to help them prepare for an uncertain and volatile future.
So, what numerous CAOs struggle to achieve is the understanding and measurement of “how” value is created or destroyed throughout a company. To do that one must have a keen understanding of the operational processes that create or destroy that value. Only then can a CAO begin to transition to a CFO.
In studying value, one really needs to start at the top and think about the way management works in an organization. First, there are three primary value management sectors being strategic, operational, and financial management. The value stream associated with these sectors is that:
Strategy drives operational processes which result in financial consequences.
Now the only true value creation sector is operational as they execute the strategy while accounting gathers the results. Can a good strategy lead to success? Of course, but it is the execution of that strategy that creates the success. Hence, if the CFO is not sufficiently involved in the operational sector, they are not close enough to understand what drives value in an organization.
So, how does a CAO become involved in the value creation process without seen as meddling? Probably the number one way to do that is through time-focused activity-based costing (TF-ABC). A TF-ABC project falls squarely in the domain of the CFO but provides tremendous access to understanding operations in detail without becoming directly involved.
A valuable byproduct of TF-ABC for the CFO is that it provides a natural process map of what is going on during lending and deposit activities plus how long it takes. Once you know this then adding a “cost per activity” is trivial.
Next, if the CFO then possesses industry time benchmarks for each employee activity, they begin to qualify as a true strategic advisor and a CFO. They can see from the benchmarks where they are spending more time and/or money on specific activities. This can answer questions like whether the company is performing better or worse than peers and most importantly, why. With this information, the ability to pinpoint the most valuable changes to operational processes becomes clear. The CFO is now not just the head of accounting, but a trusted advisor and strategic business leader.
This is what CEO’s really want.