How Do CFOs Use Reports to Guide Business Strategy?

Introduction

Reports are produced by most businesses as an ongoing function and provided at least once per month in a dashboard format as a way of helping businesses conduct their review meetings. A CFO may not see this task as an automatic task, but rather as a resource to help them decide.

Reports help CFOs know what area of the business requires additional focus, what area needs less focus, and what area can be ceased entirely. Rather than celebrating wins, CFOs use reports to evaluate how well an organization executes its strategic plans. A report that supports previously established validation points has less value than a report that identifies any areas of risk, conflict, or tension within the business.

From a strategic perspective, reports are not necessarily intended to provide a complete view of the business; rather, they are designed to provide relevant information to help guide managers through the strategic planning process. CFOs place less emphasis on the quantity of information contained within a report and more on whether that information causes appropriate questions to be asked so that managers can accurately evaluate the strategic goals of the company. The strategic planning process begins at the point where an organization reaches a level of discomfort with its current state of affairs, and reports typically serve as the initial forum for an organization to face those uncomfortable realities.

The CFO’s Strategic Role: Beyond Accounting and Compliance

Today’s CFO is viewed as a bridge between Finance, Strategy and Execution. While, having Financial Controls, Statutory Reports and Compliance are still the foundation of the CFO role, they are no longer the key elements defining the role of the CFO. CFOs are now expected to be strategic partners to their Boards and Senior Executives and provide solutions for turning numbers into direction.

Because of this change in expectations, how to think about reports has changed. Instead of using reports to look back on an organisation, Reports are now being used to look forward. Reports are a tool to provide solutions for answering difficult questions. For example, is the organisation really growing profitably or just growing? Are the margins being eaten away due to market pressures or inefficiency internally? Is the organisation scaling in a sustainable manner or are they creating hidden liabilities as they scale?

CFOs utilize Reports to help them to challenge the business case for the narrative that sounds good, but lacks Financial Justification. Strategy discussions typically start with Vision and Ambition, but are ultimately grounded by what the organisation has data for. Reports are what connect an organisation's aspirations to their reality.

Strategic Reporting Vs. Operational Reporting

CFOs differentiate between operational and strategic reports. Although both types of reports provide information to guide an organization, the reports themselves are created for different purposes.

Operational reports focus on what is currently being executed in the organization. They provide performance management on a daily and weekly basis and measure how an organization is performing against its goals. Operational reporting also monitors the various processes related to achieving organizational objectives.

Strategic reports focus on direction. They identify trends, changing organizational structures and long range potential impact.

CFOs take operational reports to manage the organization's performance. Strategic reports assist CFOs in determining the direction that an organization should go. A misalignment of the two reports can result in micromanagement or, worse, a lack of strategic vision.

Strategic reports purposely limit detail in order to provide a clear picture of patterns rather than individual transactions. By eliminating operational clutter from strategic reports, CFOs are able to focus on long-term decisions impacting the organization.

Financial Statements as Strategic Signals, Not Static Records

CFOs use financial statements as indicators of company strategy, rather than simply being used as measures of compliance. Analysing the income statement, balance sheet and cash flow statement together allows CFOs to piece together the various strategic messages from each of these statements.

The income statement indicates how strong a company's earnings are. CFOs typically look for indications of margin performance, cost flexibility and operating leverage with respect to revenue growth. A company's revenues increasing but margins declining is seen as a red flag rather than a good performance.

The balance sheet shows the level of strategic discipline that a company practices. Significant amounts of receivables may indicate that the company has taken aggressive sales actions or that the quality of their customers has declined. If a company has excessive amounts of inventory, this may show that the company has failed to accurately predict demand and/or that they are not accurately forecasting future demand. The amount of leverage also shows the extent to which a company has available to it for strategic opportunity.

The cash flow statement is often seen as the most strategic of the three financial statements. CFOs realize that profit alone does not create cash, and is therefore fragile. Operating cash flow enables businesses to grow, invest and have flexibility in difficult economic times. A business that produces weak cash flow, even if their profits are substantial, will be limited in its future strategic options.

Management Reports as the Core of Strategic Decision-Making

While statutory statements give structure, management reports give CFOs control. The CFO relies on tailored management reports to drive the company's strategic priorities.

CFO's management reports typically fit the actual questions a CFO is trying to address: what products provide the most value, which customers consume the most resources, and which areas provide acceptable growth opportunities with appropriate risk levels. Thus, CFO's utilize these report findings to assist with resource allocation decisions.

Management reports allow CFO's to move from simply aggregating their financial performance to being able to take the aggregate information and calculate actionable steps. Rather than simply calculating if there are cost increases, the CFO will consider "why," as well as, whether or not, the increase was supporting the creation of long-term value.

The strength of management reporting is that it focuses on the relevancy of the numbers. CFO's are ruthless in eliminating any metric from consideration that will not impact behaviour. If one number does not create a change in behaviour, then it has no place in a report designed to provide long-term strategic insight.

Using Trend Analysis to Shape Long-Term Strategy

CFOs very rarely use data from a single time period when deciding on the organization’s long-term goals. Rather than a snapshot, they consider trends as indicators of the direction, momentum, and consistency over time.

Using trend analysis gives CFOs insights into identifying whether there are temporary fluctuations versus permanent or structural changes within organisations. For example, a drop in profit margin for the quarter might be attributed to "noise." If, however, that decline continues for eight quarters, that may signal a strategic issue.

By evaluating the trends for multiple years, CFOs can evaluate if the incremental value that is built increases with the current strategies or diminishes. This view is very important in making decisions about whether to expand capacity, invest in technology, or exit their respective market.

CFOs may also use trend-based reports to provide credibility to discussions that they have with board members. CFOs can support strategic recommendations through observable patterns instead of opinions.

Scenario and Sensitivity Reports: Preparing for Uncertainty

CFOs create strategic plans based on uncertainty. They evaluate options with Scenario and Sensitivity Reports before investing any money.

Scenario and Sensitivity Reports help you simulate various possible outcomes based on adjusting some critical assumptions (e.g., Pricing, Demand, Input Costs, and Interest Rates). The focus is on what is survivable rather than what is most possible.

CFOs can determine which strategies present downside risk as well as Strategic Flexibility by using the Scenario Reporting process. Additionally, with Scenario Reports, CFOs can differentiate between Strategic Options that Fail gracefully versus those that Fail catastrophically when Stress Tested. The information gathered from Scenario Reporting provides reasons why CFOs may make decisions about Capital Structure, Diversification, or Investment Pacing.

Sensitivity Analysis assists CFOs in determining which Variables are the most Critical. When the profitability of an entire strategy can be destroyed with a minor adjustment to a single assumption that gives a clear indication that the strategy is Fragile. CFOs will then utilize this insight to either redesign their plans or develop appropriate Safeguards.

Capital Allocation Reports and Strategic Prioritization

Capital allocation is one of the key areas of responsibility for a CFO. To determine which projects, markets, or business units to invest their funds, as well as which ones to divest or retain, the CFO looks to reports for guidance. Through these capital allocation reports, CFOs compare and contrast the anticipated returns of various capital investment options (projects, business units, etc.) based on the risks involved, the amount of cash converted, and the degree of strategic alignment with corporate goals. Furthermore, capital allocation reports represent a tool for making trade-offs between competing capital investment options, since capital is only available in limited amounts at any given time. By providing comprehensive information about the potential long-term value of each project, CFOs can be more objective in making capital allocation decisions. By utilizing precise reporting capabilities, CFOs can avoid being influenced by emotional or politically inspired capital allocation decisions.

Performance Dashboards and Strategic Alignment

While most dashboards are seen primarily as tools to manage day-to-day operations, CFOs use strategic dashboards to connect the performance of an organisation to its long-term goals.

Strategic dashboards concentrate on a small number of metrics that ultimately drive value creation. These metrics include unit economics, customer lifetime value (CLV), return on invested capital (ROIC) and cash conversion cycles (CCCs).

Rather than capturing every piece of data and tracking them all, CFOs concentrate their efforts on measuring the most important items. By doing this, CFOs can keep their leadership team focused on the organisations' strategic goals and swiftly identify any early signs of going off course.

A well-designed dashboard creates accountability. If metrics are clearly connected to strategy, any organisation will be able to see if they aren't performing up to par.

Using Reports to Challenge Management Narratives

In many instances, the Chief Financial Officer (CFO) acts as a constructive sceptic. Reports serve as the documentation for CFOs when they need to counter a growth-oriented narrative that is not supported by the numbers.

When business leaders approach their CFOs with requests to initiate an expansion, the CFO reviews all report information and asks probing questions. For example, do the past results of the business validate its assumptions regarding growth? Are the profit margins improving or declining as a result of the increased size of the company? And will the company's cash flow be adequate to support this new growth initiative?

CFOs benefit from using reports as tools to build credibility with business leaders. Therefore, when confronting business leaders on their expansion plans, CFOs are presenting the evidence rather than relying on their instincts. In doing so, they help businesses avoid strategic overextension and costly mistakes.

In summary, the CFO's ability to use data to confront uncomfortable truths is a pivotal part of the strategic leadership role.

Key Strategic Reports CFOs Rely On

These reports serve a foundation for strategically focused operations. It's important to note that the insights gained from these reports - not simply the act of documenting them - are what create true value.

Identify and analyse the actual profit drivers by-product, customer, or geographic location; create a cash flow projection model to measure cash flow needs; create a capital expenditures (CapeX) report and return on investment (ROI) report in order of capital projects (long-term investments); create risk and sensitivity reports for evaluating the strategic resiliency of a business's operation; implement performance dashboards that are in line with the business's strategic vision, goals, and objectives.

Reporting Discipline and Strategic Culture

Reports play a significant role not only in decision making, but also in influencing the way organizations function. Through using consistent reporting practices, CFOs are able to affect how people perceive and behave in the workplace.

CFOs signal the organization's priorities by regularly highlighting specific sets of metrics. For example, an emphasis on short-term revenue in reports tends to encourage teams to seek out increased volume. A focus on return on capital instead of revenue encourages teams to evaluate their efficiency and sustainability.

CFOs use the development of reporting discipline as a tool to build a strategic culture for the organization that will complement the strategic objectives of the organization and structure the organization's daily operations to be aligned with the long-term goals of the organization.

CFOs are therefore reluctant to add metrics to reports, as every metric included in a report sends a message.

Technology, Automation, and the CFO’s Strategic Focus

The ability to automate data collection and visualization through contemporary reporting technologies is changing how CFO's approach their job.

Accelerated reporting times and more reliable reporting provide CFOs with the ability to devote less time to confirming and validating financial data and spend more time analysing and interpreting that data. Automating this process creates additional opportunities for CFOs to engage in strategic thought.

However, technology does NOT provide the same level of judgment required when determining what to report, how frequently to report, and in what context to report. The tools are designed to enhance strategy, but strategy is defined by the actions taken based on the information provided by these tools.

The strategic benefit of using accurate financial data, combined with disciplined analysis of that data, creates a competitive advantage for an organization.

Limitations of Reports and the CFO’s Judgment

While these reports are vital, they are not perfect. All CFOs know this as well as the reports have fundamental flaws and need to be viewed from a historical perspective. Historical data and assumptions create reports in an environment that can be outdated. They also can have inaccuracies due to accounting policy or trouble with data reporting quality. The CFO then uses his/her judgment on how to read this report as best suited for current situations.

Reports don't stand on their own for any strategic decision-making purposes. Data from the report must be combined with knowledge of market conditions, the competition and the CFO's past experiences before the strategic decision will be made. Reports can assist the decision-making process but do not provide the decision-making process.

The ability to understand these limitations of reports is a significant difference between a successful CFO and a technical CFO.

Conclusion: Reports as Instruments of Strategic Control

Reports for CFOs are considered tools for Strategic Management, rather than being considered an administrative duty. These reports determine where and how to allocate Resources, how to manage Risks, and how to create Value over time.

CFOs use Reports to identify unnecessary information, challenge businesses' beliefs and assumptions, and to act as a strategic roadmap for developing sustainable Performance.

In an era of continued Uncertainty, the Capacity of a CFO to transform information derived from financial reports into a Clear Vision of their Strategic Plan gives them a significant advantage over other CFOs. When CFOs use Reports with purpose, they do not merely reflect the financial history of the Business; they will serve as tools for businesses to influence the direction they take into the Future.