July 21, 2023
Author: Peter Theisen
In the ever-evolving world of finance, CFOs are facing a dynamic and challenging landscape. Over the years, the role of CFOs has undergone significant transformations, with each era shaped by historical events and emerging demands.
The Light community members have identified three key waves that characterize the evolution of CFOs and the toolings they require to navigate the complexities of the financial landscape.
Wave 1.0 [2000 – 2009] – The scandals of Enron and WorldCom in the early 2000s brought about the Sarbanes-Oxley Act, which instituted far-reaching reform of financial business practices and imposed harsh penalties that made errors costly. During this period, CFOs were often required to hold CPA licenses, and they predominantly rose up through the controllership path. They were considered a safe pair of hands, trusted in front of auditors and investors. CFOs in this era sought more efficient, technology-driven processes to automate core financial functions.
Wave 2.0 [2010 – 2019] – Coming out of the financial crisis, companies began to demand more from their CFOs, focusing on operational orientation, forward-looking analysis, and next-level business partnership. CFOs became more strategic, managing risk, enhancing liquidity, and positioning businesses for long-term growth. The introduction of ASC 606 revenue recognition standards in 2017 increased operational complexities, necessitating more detailed record-keeping and emphasizing the importance of communication skills and FP&A experience.
Wave 3.0 [2020 – Present] – In recent years, a new shift has materialized, defining the current wave of CFOs. They must now possess three critical capabilities: the ability to utilize data in increasingly complex ways, a deeply commercial mindset, and a developed "CXO" (chief everything else officer) level of contribution. The Covid-19 pandemic accelerated this transformation, requiring CFOs to make faster decisions based on real-time, aggregated data from different functional groups and geographies, which were often scattered across disparate systems.
The insights from the Light community underscore the importance of understanding these historical waves to equip CFOs with the right toolings for this transformative era. As the financial landscape continues to evolve, CFOs must leverage innovative solutions and strategies to enhance their financial strategies and drive their organizations toward success.
As finance becomes increasingly complex, CFOs face pressing concerns. Traditional quarterly planning cycles are no longer sufficient, and real-time visibility into cash flow and operating metrics has become essential. Additionally, finance teams often grapple with limitations in conventional FP&A tools like Excel, while the need for accurate forecasting drives the exploration of AI and machine learning. Furthermore, with the ongoing talent crunch, CFOs seek ways to optimize efficiency by automating manual tasks in accounting and tax functions.
How can CFOs effectively tackle these challenges and leverage the latest innovations to enhance their financial strategies?
Cash Management Takes Center Stage: The FinanceHQ community members emphasize the importance of adapting to real-time cash management. Insights from FinanceHQ members indicate, "Given the current economic uncertainties, having real-time visibility into cash flow and operating metrics is crucial for swift decision-making and resource allocation during turbulent times." Agile financial management, beyond quarterly cycles, allows CFOs to respond promptly to unforeseen macroeconomic shifts.
Empowering FP&A with Advanced Tools: To address the limitations of traditional FP&A tools, the FinanceHQ community suggests embracing next-gen solutions integrated with ERP systems. These advanced tools, with collaborative features, provide a comprehensive understanding of revenue and expenses. A FinanceHQ member states, "The emerging FP&A tools excite us as they offer actionable insights and empower us to analyze financial data effectively, supporting strategic decision-making." Leveraging AI and machine learning for forecasting, as another FinanceHQ member mentions, enhances accuracy and informs strategic choices.
Embracing Automation in Accounting and Tax: The FinanceHQ community members advocate prioritizing automation to overcome the talent crunch and optimize finance operations. One member affirms, "Automation has been transformative for our finance team, enabling us to focus on strategic initiatives and create more value for the organization." Streamlining processes, such as the monthly close, through automation reduces errors and releases resources, allowing CFOs to do more with less.
Amid the rapidly evolving financial landscape, we had the opportunity to engage with an enterprise CFO from the Light community who shared invaluable insights into their forecasting methodologies.
This CFO employs two distinct approaches to achieve more accurate forecasts, shedding light on the potential for better eliminating biases in input data and exploring the incorporation of alternative data sources.
1. The first method is a bottoms-up approach, where the finance team leverages internal information, such as closed financials, compensation data, and pipeline leads. They then collaborate with each functional group to gather input on their hiring plans and growth targets, thereby informing budgets. This method provides a comprehensive and granular understanding of the organization's financial health, reflecting the collective contributions of various departments.
2. The second approach involves an in-house economist who leverages macroeconomic data to construct forecast models. Surprisingly, this method (#2) has proven to generate more accurate forecasts in 9 out of 10 instances. This discovery raises intriguing questions about the potential to further refine and enhance forecasting practices by incorporating macroeconomic insights into financial projections.
To augment the accuracy and actionability of financial data, an increasing number of companies are embracing advanced data analytics and benchmarking strategies. One notable example is by identifying deviations in typical patterns and adapting to new invoice templates, these new tools provide finance teams with enhanced decision-making capabilities.
Recent macroeconomic events, including the COVID-19 pandemic, geopolitical conflicts, inflation, and rising interest rates, have significantly impacted companies' liquidity and cost of capital. Finance leaders are now prioritizing cash preservation and business planning to navigate these challenging times.
The proliferation of new payment methods, from loyalty plays like Catch to wallet models like Ansa, has introduced additional complexities in downstream reporting. New business models further complicate the reconciliation process, making it labor-intensive for finance teams. Consequently, a new role, FinOps, has emerged within the finance function, aimed at automating payment-related tasks and allocating transactions to relevant reporting accounts.
As the financial landscape continues to evolve, these innovative tools and strategies cater to the diverse and dynamic needs of CFOs and finance teams. By leveraging advanced data analytics, incorporating macroeconomic insights, and embracing more adaptable technologies, finance leaders can navigate the challenges ahead and drive their organizations towards sustainable success.
In conclusion, insights from the Light community shed light on the pressing challenges and exciting opportunities CFOs face in the realm of finance toolings. Effectively managing cash, leveraging advanced FP&A tools, and embracing automation are essential strategies for CFOs to navigate the complexities of the financial landscape and drive their organizations toward success.
The collective wisdom of the FinanceHQ community offers invaluable guidance to finance leaders seeking to stay ahead of innovation and meet the demands of the ever-changing financial landscape.
As a piece of advice to founders building for the finance function, our members preach the following:
Start strong: To gain traction, start strong with a strategic wedge that's on the most critical aspects closest to bank accounts and accounting data. Building a solid foundation here and then expanding with additional capabilities proves to be a durable strategy for success in the CFO value chain.
Prioritize ROI: Finance teams are increasingly strategic and cost-conscious, making ROI a central consideration. Simply offering a delightful user experience won't suffice. Finance professionals have long relied on Excel and demand solutions that deliver tangible returns on investment.
Don't underestimate mid-market: The size of the organization dictates the finance team's needs. The mid-market segment offers significant greenfield opportunities, as enterprise users may already rely on legacy solutions. However, addressing the long tail requires careful evaluation of pain points to justify third-party solutions.
Embrace collaboration for the broader team: Finance teams act as the connective tissue across the organization, collaborating with HR, legal, procurement, GTM, product, and engineering teams. Catering to their diverse needs and integrating financial data effectively empowers the evolving role of CFOs.
The Office of the CFO landscape is vast and multifaceted, encompassing various financial products, enablement software, and core tools.
If you wanna learn more about how other finance leaders have set up their Wave 3.0 stack, contact Light today.