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Seven essential questions for the strategic chief financial officer

AS THE ROLE of a chief financial officer continues to evolve, it is imperative that finance executives up their game strategically. This means being able to advance your organisation's growth or improve its competitive position by identifying the key constraints holding it back, and then using finance to free it from those constraints.

Today's environment requires a CFO to be not just a strategist, but a pragmatic strategist.

To get there means cultivating a mindset where you ask the right questions about where your company is currently positioned, what is holding it back from achieving its potential or what could hold it back, and then framing what you might do to move the company forward.

The critical questions

1. How does your company plan to grow, through mergers and acquisitions, organically (by driving new or existing products to new or existing markets), or both?

The first question involves knowing the current strategy: What combination of these growth choices is your company currently committed to?

The CFO's role then is to make |sure that capital is available at the right cost for these choices to be profitable, and that the company has processes and decision-making rules for capital allocation to support that growth.

2. What are the dominant constraints that hold back your company's growth, and how might you overcome them?

The dominant constraints are the issues that prevent a company from reaching its potential. Considering a company with a heavy debt burden that was paying an interest rate more than twice the rates available to its competitors, here the cost of debt capital was a critical constraint, given that competitors could finance growth through M&A and other strategies much more cheaply. In response, the CFO enabled a sale of a large stake in the company to a strategic investor, raising capital and relaxing the "finance constraint".

Other types of constraints include the lack of a needed or key product in the pipeline or simply the mindset and culture of the company.

3. What is the greatest uncertainty facing your company, and what can you do to resolve or navigate it?

Say the company has potential asbestos liability because the |substance was formerly used in |some products, and the uncertainty around that liability is constraining the company's share price and keeping it from making aggressive growth plays.

A CFO can go to the legal counsel and say, "Let's figure out what it would cost to settle this potential litigation, and see whether it's worth that price to get rid of that uncertainty."

Alternatively, CFOs can ask their finance, planning, and analysis departments to model the consequences of different outcomes, and then decide if they want to insure against risks arising from the uncertainty.

4. What is your greatest area of spending where there is a lot of uncertainty about return?

For example, a CFO of a consumer packaged-goods company with a big chunk of spending going to advertising and promotion should ask, "How can I get greater bang for my buck in my advertising and promotion spending? And how do I make headway on measuring returns from promotions to guide future spending?"

Creating clarity and better disciplines on spending are often a source of quick strategic wins.

5. Are your company's financial and growth goals ambitious enough? What would we do differently if the company were an order of magnitude bigger?

Say your company's goal is to double its revenues, from Bt1 billion to Bt2 billion, and you're looking at a variety of projects to achieve that growth, but some entail a lot of risk because of the capital involved.

The CFO might look at this challenge and say, "A Bt400-million project blowing up is going to do some serious damage to a Bt1-billion company, but not so much to a Bt20-billion company. So maybe our ability to invest in future growth is enhanced by increasing our scale not by two times but by 10 times through a series of roll-ups or acquisitions."

If you bring that option to your chief executive and the board, you've started a conversation that could be truly game-changing for the company.

6. What could disrupt your company, and what can finance do about it?

This is about envisaging a competitor's move such as a merger or a new industry entrant that changes the nature of competition or a new technology that dramatically changes product offerings.

Again, CFOs can ask if they themselves could use the likely playbook of a competitor to disrupt the industry and also leverage the firm's analysis capabilities to model out disruptive scenarios and help frame responses.

7. What would you like your company to stop doing? Finally, are there underperforming business units or a part of the company that does not generate required returns, or customers who are not profitable?

If there isn't a way to scale the business to increase returns, it may be best to dispose of it and free capital and management resources to grow more high-potential businesses. Similarly, choosing not to serve unprofitable customers or to increase prices to them may increase log-run returns.

A matter of pragmatism

All of these critical questions |help CFOs identify strategic opportunities and cultivate a strategic mindset.

By asking the above questions and formulation solutions around them, the CFO can be the pragmatic strategist by addressing critical constraints, uncertainties, and performance issues through tangible and realistic actions to move the company forward.

This can create the leadership team on pragmatic and tangible ways to grow.

This article is drawn from Ajit Kambil, Ph.D., global research director for Deloitte's CFO Programme.

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