Risk

CFOs Shifting from Risk to Growth

If the recession taught CFOs one thing, it was to prepare for every risk imaginable. But now it may be time to prepare for growth.
Kathy HoffelderMarch 4, 2013

Miriam Connole thought preparing budgets for a large insurance company was tough enough, considering all the unforeseen risks that can come into play. But then she became CFO of Burford Capital, a London-based start-up that provides seed money for litigation services.

Calling it a lumpy business, Connole says the challenges of a start-up can make mundane tasks — like budgeting — all the more difficult. “After budgeting in big organizations, it was so much easier to see the link between a pound of expenditure and how that would drive an extra pound of growth.” Connole became CFO of Burford in February after stints as finance director and CFO, respectively, at two London-based insurance firms, Friends Life Group and RSA Insurance Group’s Central and Eastern European regions. She also has held previous posts at AIG.

Budgeting at a start-up, though, is a much more inexact science. Without the years of historical data to back up one’s judgments, planning for the budget is “about justifying and feeling it’s the right level of expenditure for the level of growth.” So Connole has to remain flexible: “You have to be fluid. A start-up is a more proactive argument.”

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That need to adapt quickly to one’s surroundings is by no means unique to growth companies. If the recent recession taught CFOs and upper management one thing, it was that they have to be nimble and plan for every event risk imaginable. But while a few years ago that meant creating risk-averse contingencies for every aspect of the budget, today those same CFOs are peppering their budgets with all kinds of growth contingencies.

Take Steffan Tomlinson, CFO and senior vice president of Palo Alto Networks, a maker of network security firewalls in Santa Clara, California. Two years ago, he says, everything felt as if it was in a “risk-averse mode” when it came to the budget. Now, he says, “we need to make sure we’re investing in order to support our growth.”

That kind of thinking has already shown in the company’s financial results. Last week Palo Alto Networks said its total revenue for the fiscal second quarter rose 70% year-over-year to $96.5 million, versus $56.7 million in the fiscal second quarter of 2012. The firm added over 1,000 new customers for the fifth consecutive quarter.

“People are getting past the initial reaction of the past couple of years looking at cost cutting and the usual suspects,” adds Brad Anderson, partner and financial-services head at Armada Consulting, a cost-management and business advisory. CFOs and senior managers, he says, are “starting to take a deeper dive into multidimensional profitability,” meaning they are trying to understand the economics of their products better and understand their customers better to grow their firm.

That rings true for Tomlinson. If Palo Alto Networks is 10% above its plan for sales, his firm makes sure that its level of investment is ratcheted up accordingly, or if it is tracking right on plan, he makes sure the company is disciplined on spending to the budget. “The contingency element of the budgeting process is key,” he says, “because you need to be nimble and flexible as you are operating a business.”

Similarly, Wendy DiCicco, CFO of Nuron Biotech, a vaccine producer based in Exton, Pennsylvania, agrees that budgeting right now is “all about growth.” According to DiCicco, “we’re not budgeting for cutbacks or where can we take things out of the budget or where can we save money. But more for ‘Where can we look at a five-year plan? Where are we applying all the current funds?’”

Nuron Biotech plans to hire about 70 people both in the United States and abroad in the next couple of months. “We’re not saying cut this and slash that. This project can’t go forward,” says DiCicco. Instead, she is gearing up for growth, though she is cautious on managing that growth to make sure success follows it.

DiCicco has had some practice with that. Nuron Biotech acquired its first commercial vaccine for meningitis from Pfizer in December, and it also has other vaccines in development. “With our first commercial product, we are putting the right sales and marketing behind that product,” she says.

But communicating any such growth plan to a corporation’s board is also becoming a routine requirement. As DiCicco notes, corporate boards are increasingly clamoring to hear more specific details about companies’ budgets. “The economic times have led to a greater awareness at upper management and board level to really be monitoring these things more carefully and closely.”

That kind of granularity is also needed for staff. “Doing a proper detailed budget and having it signed off on before you start the year with well-communicated, well-understood targets and drivers is very motivational for people,” adds Connole. That way, she says, everybody “understands why they are getting out of bed.”