Five Key Attributes Of The Ideal CFO

Our CFO and founder, Ben Mekie was honoured to make a recent appearance on The Gross Profit podcast.

Along with host, James Kennedy, Ben discussed the role and rise of the CFO in the modern workplace. He shared some valuable insights into the core competencies your head finance person needs to make an effective business partner and drive growth.

Here we share some of our highlights from the episode.

The key competencies that make a great CFO

Many organisations struggle to identify the skills and qualities they should be looking for in a CFO. In today’s complex and competitive business environment, it extends far beyond being good with numbers.

Businesses now rely on their FD, CFO or whoever their head finance person is, to increase efficiency and productivity across the organisation.

Having successfully grown businesses himself, Ben knows exactly what makes a great CFO – they need to be an expert scorer, custodian, business partner, catalyst and strategist.

Scorer

This attribute is about accuracy and precision.

An effective CFO needs to be great at looking at data and ensuring the information is accurate. This isn’t saying that the CFO/FD must do the bookkeeping, but they’re entrusted to implement a set of processes and systems which virtually guarantee accuracy. This makes it almost impossible for the more junior members of staff to do their job badly. The recuring theme among all the competencies, is that the CFO builds your financial infrastructure, and the more junior members of the team operate it.

The work that a CFO does includes building an integrated cash flow forecast model. We always start with the end in mind when it comes to business. You need to understand what your objective is, and the time period in which you wish to achieve it.

Let’s say you want a business valuation of ‘X’ in three years’ time for example. You have to work out what your resource requirement is, what your overheads are, what your gross margin’s going to be and what you’re going to need to turn over. Equipped with this data, you work backwards, month by month to today – this gives you a very clear plan of the numbers you need to achieve to get to your objective in your desired timeframe.

You can then look at this and decide if your objective is realistic. From that, you then derive your KPIs (key performance indicators). The best KPIs are what I call predictive KPIs. This means looking back at your previous months’ performance and making decisions using this data. It’s that old anecdote – what gets measured gets done. A CFO who can measure and interpret this data with total accuracy, will be invaluable to the growth of your business.

Custodian

The custodian skill has a lot to do with commercial acumen. Does your head finance person understand your value drivers? These are the parts of the business that really make a difference to your profitability.

A great CFO can identify value drivers, measure them and come up with the right KPIs to ensure that everyone in the organisation involved in producing value, knows exactly what their numbers are.

Let’s say you’re measuring the success of your two-person sales team for example. You know from the business plan you’ve created that you need to sell 10 things a month. Because you’ve been tracking this data, you also know that you close one sale for every three sales meetings. This establishes that your predictive KPI is 30 sales meetings a month because by law of averages, you’ll hit your target if you’re doing this.

If you measure further, you notice that Sales Person A closes one in every two meetings, while Sales Person B closes one in every four meetings. To get more out of your existing team, Sales Person A can share with Sales Person B how they’re hitting their target. If you can get Sales Person B up to closing one in three meetings, you’re making efficiency and productivity gains.

This is just one example of how a CFO with the right skills can use data to make powerful decisions which will increase efficiency and productivity within the organisation.

It’s the job of your head of finance to set up models where you’re measuring the right things. These are the KPIs you’ve already established because of your business plan or model. It’s the mathematical expression of what you’re trying to do and what you need to be monitoring very closely, because if you don’t hit those figures, you’re off plan.

Ultimately, the custodian piece is about drawing down from the overarching business plan and making sure it’s translated into KPIs. This is then communicated throughout the organisation and measured as live as you possibly can.

In the example I’ve provided, if you notice that the sales team have only done four meetings in the first two weeks of the month, everyone can roll up their sleeves and get them the remaining 26 meetings in the final two or three weeks of that month.

Business partner

Your CFO also acts as a business partner in the sense that they ensure everybody outside of finance has the right level of resource to achieve their part of the plan.

A sales director might say they need to sell 40 things a month but they’ve only got two sales people, making this target impossible. Realistically, you know that you’re going to have to hire six more sales people to sell 40 things a month, because there are only so many meetings you can do.

On the flip side, you might have too many sales people, some of whom aren’t good enough. If you have a sales team of 20 for example and your bottom four aren’t selling anything, what can you do about this?

A great CFO can help to ensure that everyone in the organisation from sales and marketing to operations, tech and compliance, have the resources they need to hit their targets. If the resource balance in a team is out, whether it’s too high or low, that needs to be rectified and it’s the CFO’s job to make sure it’s spot on.

Catalyst

A fantastic CFO ensures that everyone within the organisation is rowing in the same direction. Everyone knows what they’re trying to achieve, they use the same language to describe success, they know the role they play in helping the company to reach their goals and they’re operating in a way that benefits not just themselves, but the entire business.

Strategist

Let’s go back to the business plan example we discussed earlier where you want to get to a particular valuation within three years. We start with the end in mind because this enables us to calculate what our revenue needs to be, what our gross margin is and what our resources and overhead costs are going to be.

We come back to today and realise that we’re going to have to grow at about 400% each year to achieve this goal. Organically, that’s impossible so you think about adding another string to your bow – acquisitions. Buying other companies is a great way to grow an existing business.

If you envisage a company makes £3 million profit a year, the multiplier that someone applies to value your business at that level would be five for example. This means that your business is worth £15 million.

Smaller businesses in the same sector that have a profit of £1 million a year, are going to be valued at £4 million because their multiplier is four. Why does a higher level of profit get a greater multiplier? It’s because that company is more robust. A £1 million shock to the £3 million profit company means they’re still making £2 million. A £1 million shock to a £1 million profit company means they make nothing.

As you get more profitable, the multiplier increases. There’s an exponential relationship between your profit and business value. If you can get to £5 million profit, then your multiplier is more likely to be about seven. Five multiplied by 7 is 35 which means that the difference between a £3 million profit business and a £5 million profit business, is £20 million.

Some smart people who we now call private equity, worked out that if you’ve got a £3 million profit business right now, you can buy two £1 million profit businesses that cost £4 million each. At a cost of £8 million, you can buy those two businesses, add them to your £3 million profit and you’re now making £5 million profit. This means your valuation has gone up £20 million but it only cost you £8 million, so technically you’ve magicked £12 million out of the air. There’s an alchemy here all based upon the nonlinear relationship between profit and value.

In our situation, a CFO with the right skills will be thinking strategically. They’ll recognise you’ve got to hit this valuation in three years, there’s no way you’re going to do it organically, so they’ll find a couple businesses to buy and integrate them into the organisation.

Again, this is another example of how strategic competency in the finance team can be incredibly valuable. It’s all about how you’re achieving your outcome in the best and most efficient way.

Providing you can rationalise the acquisition to the people who are providing the funding to do it, you don’t always have to buy businesses that are making less profit than you either. It’s your CFO who will be providing this rationalisation, highlighting how they can help even the smallest player in the market become the biggest, and that’s super strategic.

For further information about anything discussed in this podcast, please email ben@acuityassociates.co.uk or info@acuityassociates.co.uk or call +44 0203 405 3080. We have plenty of tools and collateral that aren’t on the website but are available to those who apply.

Head over to YouTube to watch the full episode of The Gross Profit podcast.