Three Ways CFOs Can Drive Innovation, Growth

The keys in the current slow-growth economy are capital flexibility, transparent decision-making, and informed opportunism, says Deloitte CFO Frank...
Frank FriedmanMarch 14, 2013

The need to innovate is never more important than during an extended period of slow economic growth, such as the one we’re in now. The decisions that go with it are some of the toughest a CFO will encounter.

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Where should capital be deployed to best position the organization for growth without taking on additional risk? How does a CFO drive innovation while protecting the balance sheet? How can one ensure cost-effective access to capital? How does a CFO stay focused on the long-term strategy amid near-term pressures? What changes are required in operations to enable growth?  

Those questions aren’t easy to answer. Yet by providing capital flexibility, delivering data-backed insight to make informed decisions, building transparency into capital-allocation decisions, and knowing when to be opportunistic, CFOs can help their companies responsibly pursue growth and innovation in a weak economy.

Providing Capital Flexibility
Providing capital flexibility that allows a company to grow organically and invest opportunistically during downturns without putting the bottom line at risk is one of a CFO’s most important jobs. So in my role as CFO, I need to make sure we have the balance-sheet strength that allows us to pursue our strategies while continuing to invest in our infrastructure and improve performance – all while protecting financial stability.

The main external challenge to capital flexibility is the ability to access capital cost effectively. Public companies can turn to the equity markets, while both public and private companies seek combinations of public and private debt. With banks operating under thin margins due to low interest rates and reconsidering their capital requirements under Basel III, they could become more discriminating in the deals they want to finance.

That means asking, “Do I have access to capital funds to give my company the flexibility to invest in growth?” and “Have I evaluated the potential scenarios to demonstrate preparedness for economic changes?”

Internal challenges to delivering capital flexibility can be the most difficult. There’s always more demand for capital than what’s available, so it’s critical to prioritize investments. 

The starting point should be your established company strategy and annual plan. Ask, “Where do I most want my next dollar spent to serve that strategy? What’s the second most important use for the next dollar?” “What’s the payback, and will the investment really drive more sales or earnings?”

Then you can set the principles, criteria, and metrics for the best cost/value decision-making on your capital, working with your various business leaders. For example, our evaluation criteria include business-level cash flows, which rewards those who make the best use of capital.

With regard to M&A, the most important consideration is whether a deal fits into the strategic framework – regardless of economic conditions. Slow growth shouldn’t change a company’s acquisitions strategy that much. Downturns can provide opportunities to acquire companies at prices that you may not see in a robust economy, but it’s also a mistake to think M&A is a panacea for slow growth.

Bringing Insight and Transparency to Decisions
Growing in a slow-growth economy requires leaders who understand, and proactively plan for, changing market and economic conditions. Using data analytics, econometric modeling, and scenario planning, CFOs can help their companies identify opportunities to free up capital for investments.

These tools, for example, have helped my organization monitor costs, adjust pricing, and make policy changes to help ensure we have capital to deploy to both internal and external opportunities. 

Analytics also can help identify and monitor the metrics to use when evaluating an investment proposal. And they can help a CFO provide transparency into the decision-making process and explain why a particular proposal did not receive funding the first time around.

Being transparent about evaluation criteria and decision-making shows people how to clear those hurdles the next time and helps level the playing field. You don’t want those who have lost to always lose or those who win to always win.

Learning to Be Opportunistic
Increasingly, CFOs have to view the organization through a strategic, not just financial, lens. They have to understand the difference between operations and opportunity. And they have to be opportunistic at times – even if it suppresses operations for a short period – because the focus ought to be on what’s going to happen next year and the year after, not on next week or next quarter. They need to ask themselves, “Does an opportunity allow the business to go down avenues that over the long run are going to be good for the company, while not compromising its risk exposure?”

That doesn’t mean always saying “yes,” but rather understanding the strategies of the different businesses and understanding that executing them is going to cost money. 

Realistically, no matter how sound the evaluation process, not everything is going to work. Some acquisitions will fail to live up to expectations; some internal investments will go nowhere. As the CFO, you have to live with the possibility of hitting a single instead of a home run, or even striking out.

That doesn’t mean taking on extra or unnecessary risk is acceptable. It does mean you can’t be so cautious that you’re unwilling to fail. In the pursuit of growth, the key is to have a good batting average and to learn from the failures.

Frank Friedman is U.S. CFO and managing partner of finance and administration for Deloitte LLP.

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