Working With Your CFO

Abstract

Companies that invest in research and development do so for a reason: they expect a return on the investment. This is often communicated in some form or other as a value proposition. How do we ensure a sustained delivery of this value proposition? Over the past 10 years as a CFO, I have come to believe that an R&D-based company will never reach its maximum potential unless the CFO and vice president of R&D work as a team. Interestingly, both roles generally require a company-wide perspective as opposed to a divisional one. R&D provides the technology for the future and the CFO builds it into financial models. The process is iterative and the assumptions need to be reviewed periodically in order to ensure that funds are available and spent wisely in pursuit of the overarching corporate goals. The most important aspects of the R&D/CFO relationship are not necessarily intuitive. I have learned through trial and error what matters and what does not. In this article, I aim to share what has worked for me, and welcome a dialog on the subject! If your CFO is not reaching out to build this type of relationship, perhaps you will be inspired to take the first step toward it yourself. The Beginning--the Big Picture Let me begin by taking you inside the mind of a CFO. I love accounting because of the compelling story it tells in taking a good business proposition and showing how it can be funded. In the process, a vision becomes credible. This compelling story is used in the decision-making process of the Board of Directors, the CEO and the executive team when creating corporate strategy. Accounting defines what is financially feasible and quantifies the risks associated with lack of success. It is at the intersection of an idea and its execution. Once this framework of upper and lower limits of financial requirements is in place, a strategic course for the company can be charted. Accounting then measures progress on this course and provides the background to discussions on when to change course, based on results or projections as compared to the plan. 5-10 Year Plan--the Financial Framework A critical part of the CFO's job is to model the funding requirements of the company in the future. Usually this is done in the form of a multi-year plan. If the company has invested in R&D, it will expect value creation from that investment. By working with the head of R&D, the CFO can build what-if scenarios based on what is actually feasible. From this, a corporate vision can be articulated and a definition of the value to be created can be made. These exercises are so important because they ultimately will be used in choosing how to invest corporate funds. It is here that the relationship between the head of R&D and the CFO can determine whether or not a company will meet its full potential. This planning exercise will take place regardless of that relationship. In the presence of a poor one, the CFO will probably not optimize the R&D promise appropriately in the scenarios. In a good relationship, the head of R&D shares his or her thoughts and concerns with the CFO, and takes the time to ensure that the CFO understands the true picture. Failure to do this is a lost opportunity to get the R&D perspective into the corporate message, and to ensure appropriate funding is planned for. In addition, in a strong relationship, the CFO is a good resource for providing a reality check to ensure that an R&D initiative is aligned with corporate objectives and not just a pet project likely to get cut later on down the road. Obviously, the earlier this discussion takes place the better for all concerned. Ongoing Budget Meetings I began with the big picture of setting corporate strategy. I now want to show how important regular budget meetings are and how they are linked to the company's strategic course. Let's assume that all vice presidents of R&D know how to produce a departmental budget and monitor it. …