Navigating a Difficult Year - Principles that helped

During the year – much has been written about how to survive and even thrive in the context of COVID-19 and related business challenges.   A CFOs role is invariably in the limelight in a tough year.  The following points are some reflections of what has enables me, my colleagues in our company to navigate a difficult year. This is not a functional checklist for the leaders of the finance function. But this is rather a set of principles. I suspect this will apply to any CXO role in the company or any HOD role in a company with some modifications.  

1.      Under-commit and over-deliver. 

COVID 19 made it very easy to discard the earlier plans and to go back to the drawing board on how the pandemic had affected the business.  Except for a handful of businesses, most businesses were impacted for at least one quarter in the current financial year. 

The challenge came in forecasting what the new numbers would be, what would FY21 look like and how often they may need to be revised during the year.  Management teams could only make best guesses about several aspects that may impact revenue growth or profitability.  The pandemic taught all of us that it was ok to revise the plans several times as we all learnt more about how the situation would play out for the respective business. 

The key in revising the plans several times was – what key outcomes / metrics needed the most care through the several revisions – what needed to be optimised above all else. Was it costs, was it cash burn, was it hitting customer delivery obligations ? On these critical few financial outcome metrics, it was critical to hit every number that was presented to the board. Many other things could go wrong – and forgiven by all stakeholders – say even revenue growth in many cases - but the top few financial outcome metrics – they remained sacrosanct. For instance - It may have been the committed cash runway a start-up gave its investors. So – no matter whether we hit the projected revenues or other important numbers – cash was king and had to hit that number every time. 

If a business, pre-COVID, already had the habit of hitting numbers that were projected every time, not just to the Board but even internally, then this came easy – as that habit of hitting numbers every time - has behind it, a strong set of behaviours and culture in the organisation to make that happen. Its tough to always adopt a “under commit and over achieve” mindset for organisations. But the organisations that had trained that muscle – this comes easy.   The great thing is – there is no better teacher than a crisis. If an organisation did not have this muscle, it developed this over the last 3 quarters. Key to keep this going. 

Target driven vs plan driven: Too often we have seen organisations are “target driven” rather than “plan driven”. We have used too many jargons to justify certain behaviours – we have called them “stretch plans”, “moon shots” to justify a way of working that detached from the plans.  Let’s make a million plans that fail. But let’s not fail to plan. There is nothing wrong – even in the fastest growing start-up in the world – to be plan driven. I have not heard one investor / board member complain that the actuals came ahead of the plan – but when the opposite happens a few times, then the ability of the company to do well over the long term becomes challenged – and the credibility of the management team gets impacted.

2.      Hold a consistent narrative with all stakeholders

Apart from the founders, the CFO has a very significant responsibility to hold the narrative and numbers together.  A simple test of whether this is working is asking 10 key people in the organisation one simple question – “Where is the company going and how is it doing ? “– let these 10 key people be from board, to CXOs to HODs, mid managers to say even potential investors. Do we get all these 10 people saying the same thing or do we find that the narrative internal to the company differs from narrative to the Board and that differs from narrative that is given say to external stakeholders – partners, potential investors.   If the narrative is consistent, then the numbers line up to the narrative strongly and any performance variances against the plan are more easily understood and corrective actions / execution is aligned.  

In a start-ups journey, the narratives are the most aligned in the earliest stages of the start-up. Then come raising capital. That capital was raised on back of a certain narrative – that say over time does not pan out. So, a new / modified narrative emerges. Before long – we have multiple narratives, multiple versions and sometimes result with no clear alignment on what the narrative is. Narrative differences, if not managed consciously and deliberately – could become big problems for the company - when it comes to where we are allocating resources, investing capital and time and attention relative to what we are presenting to ourselves, our Boards, our investors.  The damage that mis-aligned narrative does - performance variances get difficult to communicate and act upon consistently.       

CFOs have a particular set of obligations to hold the narrative and challenge execution that deviates from it. Challenge resource or capital or time allocation that deviates from it.  These may at times be not just matter of internal disagreements but one that may need all stakeholders – Board, investors, CXOs to deliberate on. 

3.      Democratising data for context led autonomy

What democratising data, if done well over years does is give an organisation speed of execution and enable high effectiveness in remote working / work from home scenarios.  COVID exemplified that all functions were impacted by the pandemic – be it sales, supply chain, marketing, finance or other functions.  A high degree of alignment and autonomy has given several companies the unique ability to react the fastest to the COVID shock.  

What this is also going to result in over time is profound changes to the way organisations are designed and decisions are taken.  Increasingly we are witnessing the death of the middle management – layers that were meant to have access to data and apply judgement on the data and hence take functional decisions.  If data is democratised, organisation direction is defined, and numbers / narratives are highly aligned – why have middle managers. Why have approvals for most things. Why not a loosely defined set of policies and principles that drive the execution and culture of the organisation.

CFOs play a critical role in setting and advising on what have classically been CFO turf matters – like who gets what data, what maker / checker concepts to implement to what degree / who can sign which purchase orders or commit the organisation financially.  Traditionally this has been done through rule books, controls built into systems and generally called bureaucracy and layers of approvals. 

But to do it differently will be – not to discard the rulebooks altogether – but to do this more through constant context setting and reminding.  It is not just the founder’s or CEOs call to do this increasingly – but one that the CFO can lead in an organisation.  The leader with the greatest information asymmetry advantage in an organisation is the CFO. This can be used to get power at a personal level for a CFO – or this can be used to empower others by translating this information advantage into an organisation’s strategic advantage. 

4.      Chasing profitability is back in fashion

Organisations fail more often due to not having enough energy to survive rather than from not having enough financing to survive.  It is tough to survive and grow. Till a few years ago, it was a big deal to pivot a business and any meaningful business pivoting was newsworthy. Today it’s a yawn – even if there are multiple mini pivots in a short span of time.  But what has not been written enough about is what does it take to pivot – for the organisation.  And here cash and operating levers are what we end up falling back on most. 

This need to constantly pivot also means that business models don’t have durability – due to constantly changing customer behaviours or change in market structures. What’s working today doesn’t work tomorrow. But whatever is working today, if built on the back of rapidly falling cost curves or on the back of strong underlying organisational capabilities – that creates possibilities for the founders / CEOs to keep adjusting their business for growth and customer relevance.   

If a founder’s role is to keep looking ahead and anticipating business model challenges and to keep figuring a continual set of business model adjustments to survive and grow, the CFO role is to constantly keep improving on whats working today and what can become strong capabilities or fulcrums on which the pivot can happen.  This is just good old fashioned hard look at all costs, all profitabilities, sweating the detail and being relentless in beating the plans on capital efficiency and profitability dimensions. If this is not done 2x as aggressively as the effort to keep growing the business itself, then the organisation gets energy and money to keep going no matter the adversity.

5.      Company first

CFO is company first in his approach – more than any other stakeholder in the business. It may happen that sometimes there is no consensus amongst the members of the top table on the strategy for the Company. Invariably – when these such situations arise, as they sometimes do, it is the CFO who constantly re-affirms company first approach. 

Company is distinct from the founders, the investors, the stakeholders. In a parallel world of sporting, sports coaches have always known this – they know they need to do right by the team always – even if it is unpopular with the team manager, owners, star players, pressure from the sponsors to keep winning. A coach can’t always explain his decisions to others and too often only judged by outcomes. This unwavering focus of the coach on the team strength has its parallels in CFOs role. For the CFO, the company – the entity with all its stakeholders is distinct from every other stakeholder. 

But to do this well, the CFO should have proven already to the others that she is (a) commercially savvy about the business (b) operates on strong first principles that others understand (c) is highly accountable for his own function and to the critical roles he plays and (d) is a strong communicator.  

A post Covid, CFO is more than a finance leader – this is an explicit expectation for the role from the Boards – but does the CFO make himself, his first principles well understood by being a strong communicator – if not how would he put the Company first and defend his most important stakeholder’s interest.

6.       Trusting the process and not chasing outcomes

Its fashionable to say CXOs get paid of outcomes – and hence deserve the big moneys they earn. The reality is that CXOs get hired and paid for the right judgements and right process. The process can be a strategic process, can be the process of how we set growth agenda for the company or the process of how we raise the right amount of capital from right partners – be it whatever.  The outcome is separate event – that is hopefully a happy culmination of a superbly run process.  

Chasing a happy outcome or being challenged by an unpleasant outcome (say possible risk of start-up failing)– both have issues. A company can set its objective as – lets work to get acquired by these strategics in xx years. But whether that will happen is not sure. But if we were to focus on how to build a company with good operating principles, customer love its products and financial discipline, that acquisition is likely to happen. Similarly – when say conditions are such that it is highly likely that the company may not survive – it is important to focus less on the wall (you may hit) and more on the path. Read Ben Horowitz’s essay The Struggle for more on this. 

I have always believed in that CFOs role is to play the strong process role as compared to the more outcome focus of the founders. It may be the founder’s passion for chasing outcomes or even changing the world that may get the company funded – but it is the focus on the process and good judgements that will give the exit to the investors.

In closing, these are the points that I have found myself deeply contemplating on this past year when it has been one of the toughest years for all of us.  I suspect that many of these points are eternal – not just for crisis years as 2020 has been – but also for the good years.