CFO Competency #3 Create Investment Cases

The Financial Planning & Analysis competency contains the following five skills:

1. Allocate Capital?
2. Build Financial Models?
3. Create Investment Cases?
4. Analyze Data?
5. Manage Outcomes?

Today's Newsletter will focus on Skill 3: Create Investment Cases

The CFO plays an essential role in ensuring that a company allocates capital effectively to achieve its strategic objectives and maximize shareholder returns. This is crucial for driving sustainable growth, maintaining financial stability, and meeting stakeholder expectations. Below is an overview of key CFO responsibilities:

• Capital Allocation: CFOs must prioritize investments in projects that align with the company's long-term vision and strategic goals.
• Understanding Shareholders: It’s vital to understand shareholder expectations, including desired returns on investment and the appropriate balance between reinvesting in the business and paying down debt.
• Supporting Strategic Objectives: CFOs need to ensure teams are equipped with the necessary funding, either through current capital or new investment proposals.
• Investment Scrutiny: CFOs should thoroughly evaluate new initiatives to confirm they are essential for the company’s objectives, ensuring each investment case is fully assessed for sound decision-making.

A deep understanding of the company’s cost of capital and financing costs is crucial for CFOs to support effective capital allocation and assess the viability of new projects. This insight helps deploy capital efficiently and ensures projects deliver financial returns. Furthermore, CFOs should implement robust monitoring and reporting processes to track the progress of investment cases, ensuring projects stay on time and within budget.

By excelling in capital allocation, cost management, and investment oversight, CFOs play a pivotal role in driving business plan execution, satisfying shareholders, and fostering long-term growth. These practices ultimately enable CFOs to secure the necessary funding for teams and ensure the company stays aligned with its strategic goals.

In addition to these responsibilities, CFOs must also excel at building strong investment cases for new initiatives. Companies often generate new ideas, and CFOs need to collaborate with the broader business to create compelling investment proposals. These proposals should clearly outline the business rationale, risks, costs, expected returns, and how the initiative will enhance the company’s performance.

Here are six key steps CFOs can follow to create a powerful investment case:

1. Define the Problem: Clearly define the business need the initiative addresses and explain how it will improve efficiency or generate new revenue.
2. Identify the Solution’s Benefits: Quantify expected outcomes and demonstrate how the initiative will positively impact the company’s bottom line.
3. Calculate the Cost: Consider both financial and opportunity costs. Highlight what the company might achieve if it decides not to invest in the initiative.
4. Develop Scenarios: Outline various potential outcomes, assessing both risks and rewards.
5. Run a Cost-Benefit Analysis: Evaluate the initiative’s potential impact on the company’s bottom line, considering risks, potential roadblocks, and the likelihood of success.

Write a Robust Presentation: Present the key points clearly and concisely, enabling decision-makers to easily understand the investment case and make informed decisions.

A well-thought-out investment case ensures that all initiatives are properly vetted, with risks, costs, and returns thoroughly considered. It enables CFOs to communicate effectively with decision-makers and build support from key stakeholders, aligning new initiatives with the company’s strategic goals.

To deepen your understanding of effective investor communication, check out this episode of the Grow CFO Show featuring Andrew Seski from nthround. He discusses the vital role of CFOs in maintaining strong investor relationships, addressing challenges like dynamic cap tables and the need for efficient information access. Andrew emphasizes the importance of tailoring communications to diverse investor needs and highlights the evolving responsibilities of CFOs in investor relations.

Ultimately, CFOs must be able to articulate the investment case clearly, address tough questions, and update the case as new information arises. Mastering this process helps secure the necessary capital for high-impact initiatives and ensures the company remains on track toward its long-term objectives.