Indian business eco-system is rapidly changing due to factors like new age internet economy, generation shift, improved access to modern education, changing global traction on new entrepreneurship paradigm, etc. Indian MSMEs are no exception to these changes as well. It continues to see trajectory shifts across above mentioned lines.
As MSMEs felt the need to take benefit of liberalisation with vast opportunities available to grow out of local market to more expansive market landscape, business owners realised that the scale cannot be achieved without completely understanding the financial navigation on these growth curves.
This is precisely where the role of a Controllership/Chief Finance Officer (CFO) comes into play in MSME business – to act as a navigator or to drive the show with the help of accelerator, gear and break alongside business owner, and to create value for all stakeholders in the process.
It is important to look at the traditional and strategic role a CFO plays in the process. We have seen many companies run out of cash for simple reason that business owners are unable to take orderly and guided controls with no CFO role carved out, despite getting into growth tractions.
Traditional Functions of a CFO
Score keeping: It is important to have a well laid out financial accounting framework guided with best of IT platforms, business processes and controls with checks and balances built-in. For example, CFO plays a very important role in exploiting every functionality of IT platform, whether ERP or non-ERP, and this sets the tone for key processes around Accounts Payable, Accounts Receivables, Compliance Checks, Cost of Finance Function (COFF), with emphasis on outsourcing of non-core functions and Accounting Standards.
Management Information System: It is important to have a very clear understanding of business numbers from finance perspective to business owners. Good MIS reflects the performance of business, in sense with CFO playing a lead analytics role by interpreting those numbers and generating heat around those numbers in operations and business review meetings.
Cash Conversion Cycle (CCC): As business scales up, CFO’s need to understand the business drivers properly. They need to understand the pocket of investment and inefficiencies carefully. While selecting these, he/she should not hurt the growth of business. His role is to balance out CCC and pick up the thread in the direction, which makes sense to business with proper risk mitigations practices in place.
For example, during the period 2011-2014, we saw many companies turn out as NPA for simple reasons that their cash conversion cycle could not be fine tuned in line with the trend setting economic indicators, reflecting sluggish tone for economy as a whole. Overall, a CFO needs to leverage balance sheet and business strength with financial market stakeholders like Banks, NBFCs and PE/VC players for a better mix of debt and equity, with balancing business model like capex light and opex savy, etc, for a win-win optimum pricing of fund raising instruments.
A Holistic Approach
While the traditional roles of a CFO plays ground rule for organisation design in a growing business, CFOs need to play a strategic role devising avenues around inorganic and rapid organic growth path as well.
In a world, which is short of boundaries, businesses need to take holistic review on their business strategy in terms of growth at what cost and mix of fund, over what time period, which part of world and which part of customer segments, etc.
Decision to have a separate strategy in place needs to be looked at from all the perspective like Operations, Manpower, Sales, Marketing and Management bandwidth, etc. CFO plays a key role in quantifying numbers coming out of these strategic decisions and that too with sensitivity analysis to understand the growth drivers and risk involved, and mitigating the same with proper plan A and back-up plan B as well.
We are aware about dynamic currency and interest market, which offers challenges on financial front and how swings in the market takes away heavy toll on bottom line and top line. CFO plays a very important role in guiding policies around interest and forex market apart from commodities pricing, which plays an important role in EBIDTA level.
Thus, it is important to understand that while growing businesses need to address its front line functions like operations, sales/marketing, etc., in today’s complex world of finance, CFOs need to be in place to address the crucial finance functions.
Outsourcing vs. Hiring a CFO
With knowledge economy driving the pace of change and modern technology coming to address the cost part, outsourcing CFO at a fraction of cost is not away. Business owners must look at this opportunity by looking at finance as an important business driver while scaling up.
Outsourcing CFO is a much better way to getting traditional as well strategic role from CFO and adding huge benefits vs. cost attached to hiring such CFO. It is important to have well driven engagement framework laid down by business owners to take advantage of outsourcing CFO’s available skill and time.
With Private Equity/Venture Capital eco-system taking solid foot print across sectors, in terms of expanding investment horizon, role of a CFO is to play a crucial conduit between the business owner and professional investors in setting the tone for adopting best of financial practices and corporate governance.
CFO’s role in large corporate is increasingly widening with project led initiatives, and this is where CFO’s are today facing acute skill set shortage in their finance team.
With CFO/Controllership role getting outsourced, mid to large-size CFO’s are taking opportunity to hire such skill for specific project duration and supplementing in-house or skill, which otherwise is not available under their disposal in ever expanding knowledge frontier.
Businesses are being run with a lot more convergence around them. CFOs/CEOs need to collaborate more effectively to exploit the challenges and opportunities offered by today’s business world. A true CFO will be the real able navigator in alignment with business, bringing value creation to all stakeholders – owners, investors, employees and customers.