Walking
the tightrope
The
paradigm for growth is one that ensures a focus on profits. With margins
getting thinner and competition stiffer, the CFO needs to perform
this task well
THE modern day Chief Financial Officer (CFO) faces multiple challenges.
He must adhere to corporate governance, he must ensure responsible
statements of accounts, he must understand the dynamics of working
capital management, and operating and financial leverages and a lot
more. And he cannot forget an important function, that of ensuring
a focus on profits. These responsibilities were the topics of discussion
at the recently concluded ETIG Knowledge Forum with the theme 'CFO:
Partnering with business'. A common sentiment of the gathering at
the forum was the need for a trade-off between growth and profits.
Traditionally, growth has been a key area in focus. Often, companies
got aggressive in their chase for growth. This led to several other
problems like over-leveraging, lower returns on assets due to underutilisation
and other related problems. Companies must not take on steps like
tweaking of some of the parameters that impact profits without giving
due consideration to the overall long-term consequences. There is
a need for strategic and holistic thinking to recognise the effect
of each factor of cost. The CFO must ensure that the company's capital
structure is commensurate with the business, giving specific attention
to the debt-equity structure. He must look at sophisticated risk management
tools like derivatives and swaps. Recently, a lot of companies have
improved profitability by restructuring their capital. Considering
all this, there seems to be a clear shift from the traditional 'growth
oriented' approach to the 'value creation' approach which companies
are adopting today. Mr YM Deosthalee, CFO, Larsen and Toubro, belongs
to that school of thought. He feels that the organisation's orientation
has to be towards value creation. That, he says, can be achieved through
a focus on margins, profitability, a right mindset, appropriate human
resources and greater accountability. Mr R Krishnamoorthy, Director
(Finance), Power Finance Corporation, who shared his thoughts on profit
focus in the forum at Delhi, spoke almost in step with Mr Deosthalee.
He stressed the importance of organisation structure and human resources."Organisations
that have fewer layers in their structure are not only speedier in
their decisionmaking, but are also able to maintain a focus on profits,"
he remarked. Having said this, it is important to chalk out a roadmap
to ensure a focus on profits. 'Profit mapping' is the stepping stone
in this roadmap. The company should attempt to have a holistic approach
to profits and what it comprises, taking into account the viewpoint
of consumers, competitors and other key drivers of profit. That done,
it must identify boundaries of various profit pools and look for what
can be done to leverage the bottom lines. The best way would be to
institutionalise the procedure and ensure that the same is carried
out with continuity. External benchmarking against the industry's
standards appears to be another measure to ensure a focus on profits.
Mr Ram Gupta, Executive VP, PeopleSoft,Inc makes another interesting
point,"Globally, companies are driven by the stock markets. Even
a single penny change in the EPS counts. Therefore, there is a need
for precision management in all functions." In the light of these
arguments, it is evident that the finance function has a key role
to play. And all this places one person at the centrestage the CFO.
The CFO needs to have a strong hand at the steering wheel and has
to ensure excellent navigation so that his ship can balance itself
amid the growth versus profit conflict. Deepa Venkatraghvan and Nikita
Gulabrani The paradigm for growth is one that ensures a focus on profits.
With margins getting thinner and competition stiffer, the CFO needs
to perform this task well Walking the tightrope
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