Module 1: Credibility and Growth

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Transcript

Let's begin our discussion about credibility by talking about why it's important to have in the first place. This may seem obvious to many of you, but I asked you to consider how many of you are truly fulfilling a finance mandate that makes you a business partner in your organization. More than a few of you are probably bogged down in processing transactions and just getting financial statements prepared. fulfilling a higher value mandate is something that's not on your radar. For the CFO to become a business partner and an advocate of the growth agenda, the CFO must deliver three things. First, the CFO must deliver clear visibility into the future and enable strong decision making.

This will require strong business acumen, awareness of marketplace trends, and an ability to accurately forecast the future. Secondly, the CFO must deliver reporting The financial and strategic perspective, which includes both accurate external and internal financials and ability to evaluate different strategic alternatives, as well as an ability to fund growth with appropriate sources of financing. And then thirdly, the CFO must deliver scalable systems with integration capabilities. This would include an ability to centralize the control of information, the ability to distribute information broadly and in real time across the organization, and the ability to process higher volumes with limited incremental investments in information technology. The path from today to tomorrow is not necessarily going to be a straight line, nor is it like flipping a switch. The CFOs who are already capably delivering on this sort of a mandate have been focused on this for years.

They build credibility personally and with their teams and more broadly across the organization. which opens up the doors to join in with the strategic thinking that's going on in the front lines of sales and operations. This all sounds well and good. However, the problem is when your credibility is shaky, none of this is possible. My background has been working with turnaround companies. I've worked at the executive and board levels with companies in manufacturing, food processing, oil and gas services, land development and the hospitality industries.

These are companies that typically have had a historical track record of success, but in recent years have fallen on hard times for any number of reasons. Some of these companies operate in cyclical industries, which personally explains their challenges. But for a lot of them, that pain is self inflicted. And when I arrive at these companies, one of the first things I often observe is a finance function that has lost or is really struggling to maintain his credibility. I keep coming back to this idea of credibility is the foundation of the growth agenda. So let's take a moment to explore what makes up credibility.

110 Year study asked corporate participants this very question of what makes someone credible. The top four characteristics by a longshot were honesty, competency, forward looking and inspiring. Clearly, your ability to be honest is and always will be really important. The advice and information coming from your finance function must pass this most simple of tests. Yet sadly, how many times have I seen bad news? buried inside information?

Where someone is hoping that an executive or a director's not going to notice it? In the absence of honest information, think of what happens no one believes you know, your fellow executives, not your board, not the analyst phone your company and not your shareholders. When people lose Believe in your thesis, you lose people's faith in you, you lose your following and ultimately the organization loses value. Next consider competency. It goes without saying that finance is heavy in highly technical matters that demands a high degree of competency. failure in competency implies that your analysis and or advice is flawed.

It won't be long before your credibility will once again suffer. conversations will get sidetracked and people will begin defaulting to decision making based on gut instinct instead of factual financial analysis. Let's consider forward looking. And here's a unique challenge for those of us in finance, and that is to provide decision makers with forward looking information that accurately predicts the future. senior executives and directors of the board need credible, forward looking information to make successful In strategic decisions, take a look at your own forecasting in recent years, ask yourself, are you a credible source of predicting the future? If not, this too is something that we need to explore, and finally inspiring.

What good is your information if it fails to influence or is misinterpreted by those who have the ability and authority to act? Finance more so than any other function has decision relevant, action oriented information right at its fingertips, but sometimes uncovering it and revealing the hidden messages in the volumes of data requires wisdom. When credibility is lost conversations at the highest levels of the company feel very different. The absence of credible information and advice creates a barrier to talking about growth. Do you have conversations that go something along this line? I'm not sure which of these numbers are correct.

Why do I keep getting surprised by our results? Let's take the budget. numbers and hedge them by, say 15% for planning purposes, I'm not sure what's included in that number, I'll have to get back to you. When senior management or directors on the board are having conversations along these lines, it's my experience, conversations about growth get derailed. Let me take a moment to tell you a story from one of my experiences and perhaps it resonates with some of you. I was working as a consultant to the Board of a food processing Company A few years ago, this was a $500 million US business that was a subsidiary of a much larger international public company.

So I would say it was a mid sized company that on the surface was doing everything you'd expect of a company that size. It had established shared services to deal with streamlining of receivables and payables. It had an organization wide er p that had been augmented with state of the art business intelligence tools to give the sales and marketing folks drill down capabilities. You product and customer activity. And the company also had a forecasting application that was constantly being updated to maintain a prediction of future profits. And the people running the business were either longtime employees or veterans of the food processing industry brought in from the likes of Fortune 500 companies like General Mills and Campbell's Soup.

And when I first got there working as the extension of the board, the management team had me convinced that the biggest problem we had was one of growth. The issue as they framed it was whether we should focus on either continuing to pursue a differentiation strategy through strong branding, or whether we should instead pursue an operational excellence strategy by focusing in on co packing for the private labels of the retailers and the food service companies. However, upon presenting this frame of the strategic issue to the Board of Directors, I was given some feedback that has changed the way I think about building the capabilities Have a company and have the finance function. The advice would along the lines Blair, you're going in the right direction with this, this company may have a strategy problem, but it's the execution that's killing it more right now. So on the surface, the company appear to have a credible team and systems for creation of shareholder value.

The only problem was, it didn't sure sales were growing. But the more product that was sold the more money the company lost worse, the finance function was unable to articulate or pinpoint what was causing the losses to accumulate. In the first few months of my involvement, I dug in and observed a number of contributing factors. First of all, the company was entirely sales driven. There was a strongly held belief that it was still too small to negotiate effectively with the likes of Walmart and Costco and Cisco foods. This myopic top line focus led to ignorance of all the lines below sales.

The balance sheet and the generation of free cash flow, a view that the finance department was unable to shed any more light on, which further frustrated the senior executives and the board of directors. Secondly, the processes and systems couldn't keep pace with the growth of the business. The sales teams were constantly coming up with new schemes that the ER p couldn't capture cleanly the result, inaccurate invoices to the customers that resulted in millions of dollars of billing disputes dozens of offline spreadsheets to supplement what was largely a lot of manual work around processes and a finance function that was buried in extra work. It was a great ordeal just to get the monthly financials done. Thirdly, I observe what happens when Miss information is circulated. The forecasting and business intelligence tools didn't capture all these offline spreadsheets and monthly journal entries that were necessary to round out the financial picture.

As a result, the sales teams were pricing off of poor information and had a false sense of the profits they were generating. The forecasts were inaccurate, which diverted all of management's attention away from strategic thinking. Instead, management and the board spent most of their time critically challenging the information which created a vicious circle. Finance intern spent all their time trying to defend and reconcile information between the various sources and had no time to analyze the information, let alone add value to it. This was an organization that had lost control. The sales organization was blindly adding orders which in many cases, were increasing the losses and making matters only worse.

Finances failure to flag the issues in a timely manner ultimately eroded its own credibility. So before we go talking about strategic growth is my firm belief that the CFO must first ensure that the execution of the existing business model has been addressed. So let's summarize this lesson we hit on three really important points. Firstly, the CFO is an active and necessary partner in the growth agenda. Secondly, credibility is composed of four key qualities, honesty, competency, inspiring and forward looking. Thirdly, when the credibility is weak, conversation gets stuck in a vicious cycle of challenging information.

This distracts the conversation away from the growth agenda. In our next lesson, we're going to explore how you assess your own level of credibility. Until then,

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