The CFO role traditionally has two high-level leadership archetypes: strategic and operational.
Though both have many of the same responsibilities, each type carries different expertise. An operational CFO optimizes performance by combining data from various departments with financial data. A strategic CFO focuses on creating long-term plans to achieve the company's goals.
However, the CFO role has progressed beyond the traditional division of a strategic leader and an operational leader. The modern CFO must possess both expertise in operational and strategic finance to meet the evolving needs of business and the finance function.
What is Operational Finance?
Operational finance is the aspect of the finance function that deals with the daily operations and running of a business. It involves analyzing financial statements and data from different business units. Specialists in operational finance create financial models that outline the details of business processes and their impact on the company's goals, staff plans, budget, and cash flow.
Benefits from an Operational Finance Leader
Operational finance leadership is a valuable asset for any business, as it can bring a variety of benefits to the table. Here are a few examples of what you can expect from an operational finance leader:
Translate Business Data to Departmental Insights: An operational finance leader can take the business data and break it down into insights that are relevant to each department. By identifying areas of opportunity for departments to increase return on investment and align with business goals, finance becomes a more effective partner to the rest of the organization.
Help You Navigate Market Downturns: A market downturn can be a difficult time for any business, but an operational finance leader will know how to drive efficiencies in the day-to-day operations to help you stay afloat. They can advise you on decisions around improving cash flows, such as how to increase revenue per employee or how to change payment plans.
Optimize Performance by Comparing KPIs Against Benchmarks: An operational finance leader will keep track of important business metrics such as gross profit margin, working capital, and operating cash flow, and compare them against industry benchmarks. This can help you understand where you need to cut costs, for example, the SaaS Rule of 40 suggests that the sum of revenue growth rate and gross profit margin should be 40% or more for a healthy SaaS company, so if your company lacks in this area, an operational finance leader can help you find ways to improve it.
Having an operational finance leader on your team can help you make better business decisions, stay competitive in a challenging market, and improve overall performance.
Limitations of Operational Finance Leadership
Operational finance leadership can be an important asset for any business, but it may not be enough on its own to ensure future growth. Here are a few reasons why:
Lacks a Future-Focused Outlook: Operational finance leadership primarily focuses on the company's past and present, which can prevent it from visualizing the company's future and the corresponding uncertainties and financial risks. As a result, a company with operational finance leadership may struggle to prepare for long-term growth.
Doesn’t Factor in Market Changes: Unforeseen events such as changes in government policy or natural disasters can drastically alter the course of a business, rendering past plans ineffective. For example, the 2008 recession and the 2020 pandemic had a significant impact on businesses.
Even in the absence of such events, the constant evolution of customer demands, technological advancements, and marketing strategies make it challenging to make sound financial decisions based solely on past data. This is because, for example, pricing strategies that may have worked in the past may no longer be effective in attracting customers during a recession.
In short, while operational finance leadership can help a business run efficiently in the short term, it may not be sufficient to ensure future growth. A more comprehensive approach that considers future trends and market changes are needed for long-term success.
Creating a Modern Strategic Function
In 2023, trying to separate the roles of operational CFOs and strategic CFOs is not a practical approach. To be an effective next-generation finance leader, one must possess expertise in both operational and strategic finance. This is why companies should focus on creating a modern, strategic finance function that can translate granular operational data from across the business into real-time financial insights and use those insights to drive growth.
In the past, blending operational and strategic focuses was difficult due to the complexity and siloing of data. However, by utilizing finance automation, companies can reduce the time spent on data collection, cleaning, and organizing and focus on identifying strategic and operational insights that are essential for their business.
The Future of CFOs: How To Merge Strategic and Operational Finance
To effectively blend strategic and operational finance, it is important to adopt elements from both. As a modern CFO, you can do this while handling key tasks such as:
Tracking expenses: As an operational CFO, track service-specific costs to understand cash outflows and identify pipeline inefficiencies. As a strategic CFO, look for ways to reduce costs or adjust pricing to stay competitive in the long term.
Managing trends: Analyze revenue, expenses, and bookings to understand past and present trends and adjust your financial strategy accordingly. Also, look for patterns and the factors driving them to identify opportunities for long-term growth.
Optimizing financial plans: Work with department heads to understand their short- and long-term needs and incorporate them into your financial plan for long-term optimization and improved collaboration with the CEO.
Keeping headcount plans flexible: Maintain open communication with department leaders to stay informed about changes in headcount plans and understand the impact on the company's cash flow. Help department heads make the case for new hires.
Building multiple scenarios: Scenario planning is essential for the modern finance function as it provides a clear picture of different growth paths and creates options for leaders across the company.
Although the concepts may seem straightforward, the process of analyzing costs and constructing adaptable financial models can be quite time-consuming. Additionally, relying on spreadsheets to monitor metrics and trends can consume a significant portion of your team's time, leaving little room for strategic finance activities. This is why it is important to automate data collection, record keeping, and financial reporting to effectively merge strategic and operational finance.