The CFO (Chief Financial Officer) role has changed significantly over the past ten years. The traditional role of the chief financial officer included reporting, preparing for audits, controlling the treasury, compliance, overseeing finance teams, and supervising capital structure. Today, financial leaders still handle those traditional responsibilities, but the role has dramatically evolved to include additional duties (e.g., portfolio management, capital allocation, performance management, managing relations with investors, etc.).
Boards of directors and chief executive officers increasingly want their CFOs to be impressive communicators, while also helping with shaping the company’s strategy. Many business leaders often blur the line between operational and strategic financial management and leadership.
Strategic and operational financial leadership are two broad categories of the role of the CFO. But what are the differences between these categories, and how do you know which type of financial leadership you need in your organization?
What is Operational Financial Leadership (Operational CFO)?
An operational financial leader is a financial professional who is not just focused on crunching numbers, but develops a more holistic understanding of how the organization operates. Operational CFOs have a firmer grasp of what cash flow numbers actually mean because of their in-depth knowledge of your company systems and processes. Also, they have a strong grasp on accounting and financial reporting, operational risk, and other accounting functions. Such leadership skills can make a world of difference when it comes to the long-term success of the enterprise.
As someone who knows the business inside and out, operational CFOs know reasons why your service is performed or how and where your product is made, which provides them valuable insight into the company’s financial health. Furthermore, knowledge about company operations offers insight into all capital expenditures associated with a certain service or product.
For example, take a product that your company sells. In the past, your CFO could tell you the exact cost of producing each unit and how much profit you would make each time you sell a product. But an operational CFO is able to provide more context into what these numbers mean for your business. For example, they might look for expenses that could be reduced and check for inefficiencies in the way your product is produced. This is an added layer of financial analysis that will save your organization some money in the long run.
Operational financial leaders are involved with the organization’s IT function, working with the finance & accounting systems within the group. When making decisions on new technology or developing new software within the business, their sound operational intelligence and financial industry knowledge can provide valuable information and guidance. Their interest in innovation can also help with cost management. Operational CFOs continue to fill the gaps left by previously eliminated COO (Chief Operating Officer) roles. According to Crist Kolder Associates’ 2014 report, the percentage of S$P and Fortune 500 companies that had a COO had risen from 35% to 48% in just one year. Operations and finance go hand-in-hand for many businesses.
The CFO-COO can provide insights into both departments, thereby saving time and minimizing inconsistencies. They are expected to be able to make smart financial decisions related to key end-to-end processes, such as introducing new products into the market, order-to-cash, or quote-to-cash. The CFO-COO will have the right to access financial and operational data (without having to send a request or call the accountant) required for making the right business decisions. Therefore, a certain amount of time is saved and used for dealing with core issues.
What is Strategic Financial Leadership (Strategic CFO)?
Strategic CFOs are able to provide insights that can drive positive changes within the organization and create a comprehensive financial plan. They also understand the business’ financial operations, but their objectives are different from the operational CFO’s. When developing their strategies, a strategic CFO needs to be forward-thinking, while an operational CFO is concerned with past and present financial analysis.
A strategic CFO will work closely with the CEO (Chief Executive Officer), boards of directors, and other business leaders to develop goals for where the organization should be in the next 5 or 10 years, meaning that they play a crucial role in how you grow your business. The executives will then work together on finding ways to reach these goals. Strategic CFOs use financial and operations data collected from outside sources and internally to provide strategic value, bringing a competitive advantage to the company.
Recent research shows that CFOs are more likely to expand their reach into Human Resources than any other department. Talent management is an important factor in improving the finance function, but not many executives give their CFOs an opportunity to assist, not realizing that hiring is not solely the job of HR anymore. In the current market (as competitive as it is), it’s more important than ever for HR and finance management to work together in order to understand how their staff’s workplace experience impacts the company’s bottom line.
Strategic Financial Leaders are More Involved than Operational Leaders
Strategic leaders are typically involved in driving organizational change, which is why they are required to focus on multiple aspects of the business (rather just a single area). Such strategic thinking is often complex and involves understanding the delicate relationship between the organization and its environment. The roles of strategic and operational chief financial officer are quite different, although they do have some shared responsibilities.
An operational CFO can help you:
- Conduct long-term financial planning and analysis, as well as performance management
- Increase ROI
- Detect inefficient operations and advise on how to improve them
- Eliminate unnecessary spending
- Understand the operation functions of the business
- Understand the financial functioning of your business
A strategic CFO can help you:
- Understand the financial health of each segment within the organization and give strategic direction on how to move forward. They can also update financial performance data as technology and customers change, shifting directions if needed.
- Become involved with M&A (mergers and acquisitions) to advise on the most viable opportunities for sustainable growth and how to avoid potential pitfalls.
- Invest financial leadership and time in hiring the most suitable people to complement their finance teams.
- By advising on the best resource allocation strategies in order to maximize the value for the organization.
- By providing skillful communication, transparency, and integrity to their department and throughout the company.
Which Type of Financial Leadership Do You Need?
If you need an experienced and knowledgeable professional to help you assess your organization’s efficiency and make adjustments to save money and improve production, the operational CFO is the right choice. They can help if you need to deal with equity and debt or liquidity negotiations. Furthermore, an operational financial leader can provide valuable business intelligence that your company needs to mitigate various financial risks or deal with M&A.
On the other hand, if you need someone to provide stakeholders with assurance that your company’s finance is in expert hands, your company can benefit from a strategic CFO. A strategic CFO can help your company achieve the best terms, conditions, payment options, and credit lines with customers and suppliers. They can provide strategic leadership to help manage organizational changes, establish relationships with lending institutions and funding sources, and protect your company’s vital assets by assessing and managing financial risk.
With the level of trust that a strategic CFO instills, your stakeholders will want to invest more into the business, which will help attract new investors. That being said, finance departments have a huge opportunity to make a real difference by using information technology and accurate financial data.
How Consero Can Help
If you are looking for a CFO, you should pay attention to candidates with the right experience, cultural fit, leadership style, and communication skills. And more importantly, look for a candidate who understands (and embraces) your company vision and knows how to take your business there. Determining the CFO that’s right for your company depends on your objective, but a skillful outsourced CFO for support can bring the change your company needs to be able to thrive.
The advantages of hiring an operational or strategic CFO are clear. The level of insight and strategic guidance that CFOs provide to the business is where their value lies. But the challenge that many of them face is having their time regularly consumed by addressing the daily issues that the business faces.
At Consero, CFOs are empowered by taking the day-to-day operations of the finance and accounting off their plate. We can provide your CFOs with a platform of integrated cloud-based operational software, reliable back-office services, and customizable best-practice based processes. All that serves as a scalable operational foundation that delivers financial support to the finance professional, as well as the business, to gain a competitive advantage.
For more information on improving your financial management and finance function, feel free to contact Consero.