Faced with today’s highly complex business operations and a fiercely competitive environment, the role of the CFO is ever more vital. Based on BCG’s observation and experiences, CFOs need to confront, among others, the following four major challenges:

• How to use cost as an effective lever to create value: With the economy slowing down and revenue growth under pressure, SG&A optimization is being used as one of the key levers to unlock greater profitability and increase enterprise value, aside from seeking other growth opportunities.
• How to better support business decision-making: Strategic finance functions play a strong role as a strategic partner to the business.  Many companies experience a disconnect between their business operations and finance functions. Both finance and the business have a role to play, and this disconnect can be avoided or resolved via shared goals, and strategic capital and resource allocation.
• How to leverage digitalization to empower finance: Technology plays a key role in improving the efficiency and effectiveness of the finance function – it is an imperative for finance to continue exploring potential applications of technology & tools including new age technologies like Generative AI and AI/ML.
• How to generate returns above the cost of equity: Industries face substantial profit pressures in a difficult market. Looking at TSRs (Total Shareholder Return), many sectors haven’t managed to surpass the cost of equity in recent years.

Measures to step into the future

To address the abovementioned challenges, CFOs and finance teams should take preemptive actions. These initiatives are:

• Financial steering
• Cost optimization
• Total Shareholder Return (TSR) management
• Enhancing M&A and PMI capabilities

Financial steering

To steer companies through today’s volatility and uncertainty, it is imperative that finance functions turbocharge their role as forward-looking, strategic advisors. Companies need more accurate and agile planning and more actionable business intelligence to make steering better, faster, and more efficient. For example, finance functions that modernize their planning and business intelligence can often become 15% to 20% more efficient by reducing the amount of time spent extracting, manipulating, and reconciling data. In turn, this requires building the following five blocks:

• Driver-based business logic: Establish a driver tree that links financial KPIs (such as total revenue) with operational KPIs (such as capacity utilization) and cultivates the ability to slice and dice views of KPIs along the dimensions.
• Digital tools: Configure digital-planning tools and visualization engines that allow teams to examine what-if scenarios, interpret the results, develop actionable insights, and define plans. Financial-planning tools (such as Anaplan and OneStream) and visualization engines (including Tableau and Power BI) are examples of modern cloud-based tools that are transforming traditional finance processes.
• Simplified processes: Standardize and apply automation, digitalization, and Generative AI to shorten planning, budgeting, and forecasting processes. Frequent forecasting with occasional detailed planning and budgeting allows companies to maximize visibility into, and control over, operations while minimizing the amount of time spent on the annual planning process.
• A central finance data platform: To feed digital tools and calculation engines, companies should establish a data repository (for example, a data warehouse and data lake) as the single source of truth, and make effective use of that.
• Enhanced talent: Companies must upskill the current workforce as well as hire people for new roles (such as data scientists and configuration specialists for finance tools). A center of excellence should oversee any future changes to the new digital tools and ensure that they are being used to their full potential.

Cost optimization

Companies need to focus on two aspects: firstly, they should pay attention to current cost management mechanisms; secondly, they should integrate future planning, such as implementing Zero-Based Budgeting (ZBB), to promote cost management practices. BCG’s experience indicates that the following methods are highly effective in reducing costs, typically resulting in reductions of 10%-30% on total costs. This provides companies with more room to prioritize their resources.

• Competitive cost advantage: Enable companies to meet the urgent need to expand margins by becoming more cost efficient without sacrificing strategic capabilities and priorities. There are 4 archetypes to approach cost reduction, namely organizational streamlining, direct/indirect materials optimization, strategic operating model & process redesign, and full strategic ops transformation.
• Zero-Based Budgeting (ZBB): ZBB is not only about squeezing costs to bolster the bottom line—but about rigorously identifying inefficient spending and deciding how to use those funds in a better way. BCG enables companies to implement ZBB in ways that strike a balance between driving growth and managing costs from vision, governance, budgeting, organizational culture, etc.

Total Shareholder Return (TSR) management

To address shareholders’ concerns about the company’s development and returns, companies need a slavish focus on short term EPS (earnings per share) and TSR. It is critical to view shareholder value management as delivering above-average and long-term TSR. Any TSR management model requires a foundation of clear TSR strategy and strong value-based management:

• TSR strategy: Alignment of business, financial, and investor strategy with robust management practices will enable a successful TSR journey as well as attractive and sustainable TSR.
• Value-based management: The TSR strategy needs to be integrated into an overall value-based management framework, including designing the measuring matrix and managing processes, setting the right TSR goals, a clear roadmap for achieving the same; and plans linked to the fundamental drivers of the business.

Enhancing M&A and PMI capabilities

To pursue sustainable performance and growth in an evolving environment, and establish a resilient position amidst market fluctuations, companies must consider strategies like M&As, and new business incubation. However, many M&A transactions and post-merger integrations end up destroying value. BCG’s experience suggests that CFOs play a pivotal role throughout this entire process; CFOs and their finance teams should enhance their capabilities to address potential challenges.

• M&A execution: For example, due diligence on targets and accurate valuations are crucial for the success of mergers and acquisitions. CFOs and their teams need to build relevant expertise to make effective assessments of third-party-provided content.
• Finance PMI: The finance function is at the core of the PMI. Firstly, finance plays an important role in Day 1 planning & coordination; secondly, supporting integration teams for synergy planning requires dedicated resources; furthermore, the finance function must achieve its own functional integration.