This article was written in collaboration with my colleague, Hardik Sheth
Top of mind for CFOs in 2024
Faced with today’s highly complex business operations and a fiercely competitive environment, the role of the CFO is ever more vital. Based on BCG’s observation and experiences, CFOs need to confront, among others, the following four major challenges:
Measures to step into the future
To address the abovementioned challenges, CFOs and finance teams should take preemptive actions. These initiatives are:
Financial steering
To steer companies through today’s volatility and uncertainty, it is imperative that finance functions turbocharge their role as forward-looking, strategic advisors. Companies need more accurate and agile planning and more actionable business intelligence to make steering better, faster, and more efficient. For example, finance functions that modernize their planning and business intelligence can often become 15% to 20% more efficient by reducing the amount of time spent extracting, manipulating, and reconciling data. In turn, this requires building the following five blocks:
Cost optimization
Companies need to focus on two aspects: firstly, they should pay attention to current cost management mechanisms; secondly, they should integrate future planning, such as implementing Zero-Based Budgeting (ZBB), to promote cost management practices. BCG’s experience indicates that the following methods are highly effective in reducing costs, typically resulting in reductions of 10%-30% on total costs. This provides companies with more room to prioritize their resources.
Total Shareholder Return (TSR) management
To address shareholders’ concerns about the company’s development and returns, companies need a slavish focus on short term EPS (earnings per share) and TSR. It is critical to view shareholder value management as delivering above-average and long-term TSR. Any TSR management model requires a foundation of clear TSR strategy and strong value-based management:
Enhancing M&A and PMI capabilities
To pursue sustainable performance and growth in an evolving environment, and establish a resilient position amidst market fluctuations, companies must consider strategies like M&As, and new business incubation. However, many M&A transactions and post-merger integrations end up destroying value. BCG’s experience suggests that CFOs play a pivotal role throughout this entire process; CFOs and their finance teams should enhance their capabilities to address potential challenges.
M&A execution: For example, due diligence on targets and accurate valuations are crucial for the success of mergers and acquisitions. CFOs and their teams need to build relevant expertise to make effective assessments of third-party-provided content.
Finance PMI: The finance function is at the core of the PMI. Firstly, finance plays an important role in Day 1 planning & coordination; secondly, supporting integration teams for synergy planning requires dedicated resources; furthermore, the finance function must achieve its own functional integration.
BCG drives significant impacts in the abovementioned areas:
Case study 1: From strategy to financial planning
A Chinese company was facing a slowdown in traditional business growth and needed to explore a second growth curve. BCG assisted in devising a new strategy and identifying the strategic priorities of the future. BCG’s team reallocated headcounts and financial resources, established financial disciplines, and improved processes for financial budgeting and expense management, to ensure that the company could focus on strategic high-priority areas while cutting costs in other areas. Through various initiatives, the company has achieved substantial revenue growth, while expenses, costs, and capital expenditures are expected to decrease by 5%-20%, thereby fostering confidence in steady growth over the mid to long-term.
Case study 2: Dynamic planning and financial modeling platform
A major US retailer faced three major challenges. Firstly, while its strategy was positioned to win, siloes rendered the business sub-optimal; secondly, there were individual bright spots of innovation, but not yet a step change; thirdly, there was limited flexibility and ability for the company to implement agile approaches. BCG helped the client establish a dynamic scenario analysis platform, including driver-based models for core strategic initiatives, accounting for over 90% of revenue. This platform work was part of a dynamic long-range planning and collaboration use case. The platform transformed the client's perspective on their business, enabling a shift in the finance function from a primarily backend role to one that actively supported business decision-making.
In summary, the transformation of finance involves a wide and highly complex range of aspects. Companies need to demonstrate firm determination and patience to drive this transformation. The journey of transformation will vary across industries and companies, and it is essential for companies to tailor the approach to specific circ*mstances, defining suitable transformation visions and goals to propel their financial functions into the future.