[Knowledge Sharing] The functions and mindset of a CFO

The most important resources of an enterprise are human resources and financial resources.

01 How to understand the functions and scope of work of a CFO

　　The most important resources of an enterprise are human resources and financial resources. An enterprise is composed of a series of contracts. Providers of financial resources (shareholders and creditors) transform the original financial resources - monetary funds - into a series of human resources and various tangible and intangible assets to create a business system that provides value to society, and through value-added services achieves a social organization that creates value for shareholders.

　　So the function of the CFO is to assist shareholders in managing the enterprise's financial resources, with the aim of maximizing the ROI of monetary capital value.

　　Financial resources are resources that move from monetary form to a series of physical and non-physical states and ultimately transform back into monetary form (various element accounts on the balance sheet and off-balance-sheet elements). Of course, the most important among them is monetary funds, because cash flow is like a person's blood for an enterprise. Many enterprises do not fail because of the loss of their own asset form or value form, but die in the process of blind expansion due to cash flow rupture and failure to have sufficient cash flow to transform in time when facing changes in consumption habits.

　　So to manage financial resources well, we need to use some tools. I think the two most important tools are: the accounting information statistics system and the management reporting system (note: management reports, not report management)　　

▪ Accounting information statistics system

Accounting information statistics is a basic function of finance. According to certain mandatory rules and industry practices, it statistically records the forms of financial resources at each process node of the enterprise, thereby forming the three statements and one note that we often use. Accounting language is first a business language. Statistically produced according to this systematic language, we can compare the enterprise's historical situation (vertical) and industry competitors, upstream and downstream industry chains (horizontal) to analyze operating results and asset conditions, thereby evaluating the conversion rate of financial resources (ROI).

▪ Management reporting system

　　Note that what I understand is management reporting rather than report management. I believe report management means optimizing reports after they are produced (for example, earnings management to achieve certain assessment targets, or maintaining relationships with regulators or business partners). Management reporting means that before reports are produced, we manage the allocation of financial resources, business plans and commercial arrangements, and strategic processes and evaluation, in order to achieve our expected business results through the reports produced by the accounting system. It includes the following 2 modules:

▪ Budget and evaluation system

　　Budget is the best tool for allocating financial resources. Budget does not mean setting a target at the beginning of the year and then necessarily executing according to an annual budget broken down from that target—spending if there is budget and not spending if there is none. First, budget management should be a rolling budget concept. Under our business environment and increasingly short product and service life cycles and changes, an industry may change within half a year. Therefore, business competition cycles are getting faster and faster. Especially in the TMT field, many product cycles are measured in months rather than years, so traditional annual budgeting and resource allocation no longer fit the cycle of economic development. Budgeting should comprehensively consider where to invest and, through process control, continuously optimize resource integration for evaluation, ultimately achieving the purpose of business arrangements, rather than blindly believing that budget is simply how much should be spent and that spending beyond budget is prohibited. Business competition changes rapidly, and we should carry it out according to the concepts of zero-based budgeting and rolling budgeting.

　　Capital Budgeting: Where financial resources come from, capital structure, and capital cost are issues every manager must consider. How to obtain low capital cost and the optimal capital structure correspond to different business projects. Since the financial industry is not yet fully marketized, for many private enterprises the primary function of the CFO is how to obtain funds (bank loans and A-share listing). Therefore, the market's judgment of a CFO's value is currently more about the ability to bring in money or not. This is a specific function assigned to the CFO position in a particular period. However, I judge that after interest rate marketization and the full opening of financial markets in the future, the CFO's more important consideration will not be bringing in money, but should be looking at the relationship between my capital structure, capital cost, and projects. For example, if a group has a real estate project, then for such a project with high leverage and a profit rate higher than debt cost, debt capital must be allocated. If a group has a convenience store chain project, it cannot be allocated according to debt capital, because your EBIT margin is not enough to cover the debt cost rate.

　　Business budget: By business budget, I understand planning financial resources according to business processes for an already formed commercial project, including investment in human resources and asset resources. Long-term and short-term financial resource allocation should be formulated after a deep understanding of the industry competitive landscape and the enterprise's own capabilities, including credit policy, inventory turnover and asset replacement, and conversion between monetary and non-monetary resources.

　　Innovation project budget: Enterprises either die from innovation failure or die in the revolution of innovation, so innovation is the DNA of a lasting enterprise, and innovation also means risk and failure. Therefore, we must treat innovation projects prudently, use small capital to do big business, and achieve the establishment of business experiments and competitive barriers at the lowest cost—an opportunity every enterprise wants to have. Just as the Ministry of Industry and Information Technology allocates part of its funds each year for technical transformation funds, an enterprise should separately allocate part of its annual profits and capital for innovation projects, and it is necessary to separately budget, supervise, and evaluate this portion of financial resources.

　　Strategy validation and risk control: Whether it is an operating budget or an innovation project budget, the CFO should establish a financial model based on the industry and the enterprise's strategic goals, and periodically evaluate and validate budget projects. For example, if I invest in a 3-year O2O store, the first half year is estimated to still be in the construction phase, so how much financial resource do I allocate to the construction phase, and how much commercial benefit will be generated in the second and third half years, and how to allocate and evaluate resources—this needs to be validated with a financial model, and in each subsequent half year, observe whether the actual results match the expected validation model. It is possible that even by the third half year the expected benefits are not achieved, in which case it is necessary to evaluate whether it is a strategy problem or an execution problem. If it is a strategy problem, consider reducing the project investment loss to the lowest level. Through continuous validation and testing observation, timely early warning and evaluation, achieve maximum conversion of financial resources in strategic projects.

Internal control

　　Internal control is a set of institutional arrangements to ensure that an enterprise's financial resources operate scientifically and efficiently within the enterprise, and a powerful tool to ensure that financial resources ultimately form an objective and accurate reporting system. Specific reference can be made to the Ministry of Finance's various guidelines on internal control, which should be refined and adjusted according to the industry involved. Among these, cash security control is particularly important, including not only the daily operational arrangements for each account but also the forecasting of cash flows and the management of surplus funds for returns, as well as credit policies, supplier procurement, and the custody and operation of tangible assets.

02 A CFO's mindset: financial thinking and business thinking

　　It originated from a recruitment: I was recruiting a finance manager and interviewed a girl from a software outsourcing company. During the interview, I asked about her cost accounting process, revenue settlement process, company organizational structure, and finance department operating structure. From a financial perspective, I did understand her business processes and financial accounting processes. However, the feedback the boss gave me after the interview was: the candidate does not understand her company's business and cannot clearly explain the company's business processes.

　　Later, I thought of two possible points: 1. The boss asks using business thinking, while the candidate either cannot understand the logic of business thinking or thinks with financial thinking and answers the question in financial language, causing communication deviation. 2. The boss asks professional questions, such as how your market channels conduct marketing and how you view competitive strategy. For a finance manager, he may not yet have reached that level; finance only knows how much was spent on that marketing channel and what proportion of sales it accounts for, without insight into the specific competitive marketing methods, marketing tools, and potential competition.

So as a finance manager, when your superior is a non-finance leader, or when you need to communicate deeply with business departments, you should translate the problem into business thinking and use simple business language to describe the problem and communicate solutions. As a result, many companies have considerable disagreement between finance and business departments. A manager with excellent financial knowledge whose direct supervisor comes from a finance background can communicate and understand easily, but when facing a non-finance leader, the gap between the two sides is relatively large. This requires us finance managers to think about how to use effective communication tools and how to simplify and transform financial language on different occasions to solve problems.

03   A CFO's management realm: the more rules, the more humanistic

　　In the Chinese market, especially many private enterprise bosses want to grow bigger while not fulfilling obligations according to the law; these are the bottom lines for enterprises and finance people.

　　In the actual business operations of specific enterprises, business departments and bosses often have disagreements with finance on these understandings (the common argument is that other enterprises do this and it works, implying that your financial expertise is limited). Therefore, finance personnel must grasp, under the premise of bottom-line rules, how to distinguish crime from non-crime, focus on the big and let go of the small, and must communicate with business departments in advance, planning before the business occurs how this business should be reflected and handled on the books, what the ultimate impact on the statements is, and what contracts and documents are needed to support the handling of the matter. Achieve good pre-event communication and grasp the rules; as long as risk warnings and controls are in place, you have fulfilled your duty. This is my understanding: things that should follow rules should follow rules, and things that should be humanistic should be humanistic; the more rule-based, the more humanistic.

Source: internet

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