CEOs and business leaders are continuously confronted with a difficult dilemma when it comes to short-term cost management versus long-term value creation. On one hand, there needs to be an ongoing focus on managing costs across the business operations to deliver current profits and ongoing cash flow. On the other hand, investment and innovation can lead to significant value creation for owners, employees, customers, vendors and other stakeholders. CFOs of growth and middle market companies play a key role with CEOs in managing both of these seemingly opposing goals to create profit and grow company value.
Cost Containment and Reduction
Business media seems to include more reporting of companies that announce cost savings or restructuring plans than expansion and growth. Many companies are being confronted in the current business and economic environment of slow or no growth to take steps to protect profitability by containing or reducing operating costs as raising prices to customers and increasing market share have become much more difficult. Uncertainties as to business cycles, markets and increased government regulation and involvement have resulted in a reluctance in many business sectors to spend for investment in growth and long-term planning initiatives.
Creating Ongoing Company Value
This reluctance to invest by leaders of growth and middle market companies may result in significant lost opportunity costs for business value creation. Business value is typically computed as a multiple of EBITDA – for example 5x to 7x EBITDA. Reducing current spending in a way that negatively impacts opportunities for increased future profits, EBITDA and cash flow may result in lost future business value that significantly exceeds the current cost savings. Cost containment and reduction initiatives should be viewed not just with current impact in mind but also with an eye on the future.
The Role of the CFO
CEOs and business leaders find themselves many times in “splits” between short-term financial performance and long-term value creation. The CFO needs to be a partner with the CEO and business leaders to proactively approach this dilemma . The CFO’s role is to ensure a solid financial foundation including financial management systems and processes that provide the information needed for the CEO and management team to determine opportunities to redirect financial resources to improve both current operations and ongoing business value. Proper financial information and communication will enable efficient decision making regarding low value products or projects. Proactive financial management will also allow management to determine whether cost saving measures are being executed adequately and if the desired effect is being achieved. The CFO also plays a key role to monitor the company’s available financial resources from internal cash flow and third party financing for investment in new projects, productivity improvements and innovation to strengthen its competitive position and create value.
The CFO in growth and middle market companies is the “financial conscience” for the CEO and the management team. CEOs and business leaders must have a clear business strategy and know their company’s value drivers. CEOs and business leaders also need to clearly understand how these value drivers are impacted by cost containment and reduction plans. If cost containment and reduction positively impacts short-term financial performance but negatively impacts future profitability and decreases future business value, the CEO and business leaders should consider potential adjustments.
The role of the CFO in successful growth and middle market companies has evolved dramatically. Once limited to the accounting and finance function, the CFO is now a strategic partner with the CEO and management team creating value across the entire business. Harvest CFOs understand their role is to enable the CEO to fulfill their vision to create a successful company and to enable a good management team to become a great management team.