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CFO to CFO: Budgeting to Fund Strategic Plans

By Daniel Butcher
December 1, 2021

The CFOs of CSX and ATI reveal best practices for finance to lead organizations’ strategic planning and budgeting processes.

 

With many companies experiencing enhanced challenges during the pandemic concurrent with the rise of robotic process automation and other technologies impacting the finance function, the role of management accountants and finance leaders in their organization’s strategic planning and budgeting has taken on even greater importance. In a conversation with Strategic Finance, Kevin Boone, senior vice president of sales and marketing and former CFO of CSX, and Don Newman, CFO of Allegheny Technologies Inc. (ATI), talked about the finance function’s role in setting the organization’s strategic planning and budgeting, as well as trends and best practices.

 

SF: How can the finance function inform decision-making processes for setting spending priorities?

 

Newman: It starts with finance being a business partner across the organization. For us, the finance organization isn’t on the sideline, waiting to be called in to the game; they’re on the field, part of running the plays that are called. And with that, there’s a clear partnership with our operations, commercial, and technical colleagues, which makes it a lot easier to inform the decision-making process. When it comes to making investment decisions, if you’re involved with the process, like our finance organization is, you’re part of developing the scenarios and understanding the benefits and the risks associated with different actions, and that usually means you’re developing a better outcome or answer.

 

We also seek to develop expertise in our finance organization beyond subject-matter expertise. A lot of our finance folks are very aware of and knowledgeable around operations and commercial initiatives. So it’s a part of our corporate management DNA when it comes to being cross-functional and business-savvy. Transparency and accountability are keys in becoming better, and we’ve been purposeful in creating a culture that supports transparency. The CFO plays a key role in terms of measuring the success and the failures of decisions in the organization. The goal of that is, if we’re transparent and we’re thoughtful as an organization, and we study our successes and our failures, we can become better the next time we make a decision.

 

Boone: Capital isn’t infinite, so the CFO is in a unique position. The finance organization gets to take a holistic view of all the needs of the business and help the CEO and the executive team prioritize what they believe are the most pressing needs for the organization and what projects ultimately will have the highest returns for the company. There’s a lot of decision making around “What should we do from a technology perspective today?” vs. waiting for the technology to evolve over time. Having those conversations is key.

 

 

Before I got into my role, a lot of the budgeting process was just a look back at the prior year and making a decision on how much of the budget should be up year over year in each part of our organization. And now it’s putting all the pieces together and looking at it holistically and making a decision: “This is a year where we’re going to invest in our sales and marketing organization at a heavier level, given our focus on growth.” And by doing that, where are we going to take capital from, or where does it make sense to potentially defer some investments, or where can we get more efficient possibly to pay for that additional investment in sales and marketing? So, that’s a unique perspective from a finance organization that we bring. We get to see all the pieces, bring them together, and analyze them holistically, and try to prioritize the projects that ultimately will deliver the most value to the company because capital isn’t unlimited. We all have to be as efficient as possible. It also creates the opportunity to question the return profiles on a project-level basis and make sure that you’re getting the most you can for each capital dollar you’re spending.

 

Newman: When considering finance’s part of strategic planning and running the business, I see an evolution in our profession. Finance has become a much more integrated part of decision making. This is healthy for the organization, and it’s healthy for our profession and for our roles. But it isn’t just finance where that’s happening: I see it in what digital technology is bringing to the table, our operations, and our technical R&D [research and development] people. I see an evolution to much more integrated teamwork occurring across businesses.

 

It’s speeding up decision making, and it’s making decisions that much better because it incorporates all important subject-matter experts, and it isn’t ad hoc inclusion. We need a finance answer, or we need a technical director answer to the question. We’re all together at the table.

 

Boone: Creating transparency and visibility for our business partners and what they do and letting them understand the levers they can pull that impact the business have been extremely helpful.

 

Probably five, 10, and 20 years ago in the traditional finance role, somebody would bring a project to us, and we would analyze if it had a return on investment and tell them the answer. Now, we have to be integrated in the organization and be partners, provide a lot of insight to them, and point the arrow to direct them to where they should be focused. It isn’t being behind a computer and doing spreadsheets necessarily; it’s digging in and understanding the business.

 

Whether it’s our finance team or the head of operations, technology, or other areas, they understand the business more and are bringing ideas rather than just checking the numbers on the back end. I challenge my organization to think of strategic initiatives that they can partner with various leaders in our organization to drive forward and not just be somebody that’s reporting out on the back end what the numbers look like.

 

SF: How should the CFO help to dictate strategic-planning priorities while weighing them against budget pressures?

 

Boone: Each year we put together a three-year strategic plan, and that informs a lot of our decision making going forward. So, what are we prioritizing? When you have budget pressures like we did last year [in 2020], you don’t want to lose sight of your three- and five-year plans and, ultimately, your long-term goals by doing that and really hurting your business in the long term. We made the strategic decision, given how things have slowed down during the pandemic, to accelerate some of our capital investment so we could be ready when growth returns. And under the perspective that you’d still have to make sure that you have a sound balance sheet, that you’re financially sound, that you’re mitigating any kind of risk, you’re assessing all of the scenarios that could occur to your business, but you’re also there to make sure that you remain on plan no matter what the environment is, and that ultimately, better days will come and you need to be prepared for it. In a lot of ways, we looked at the pandemic as a way to get ahead of our competition by making some incremental investments and trying to think ahead about what the environment could look like coming out of this because the world is changing so rapidly. What does that mean for our business? How can we take advantage of a difficult situation, and where can we create value and hopefully take more of a lead on our competitors long-term? So, that’s how we quickly pivoted to the question, “What does it look like on the other end?” I’m much more worried about how we’re going to handle the growth coming out of this than the downside scenario. And now, how can we take advantage of this? How can we work closer with our customers and capture market share coming out of this?

 

There are always going to be financial and budgeting pressures. But you want to make sure that the strategic vision isn’t lost in all of those conversations when you’re trying to cut budgets and trying to hit your cost numbers; ensure that those plans are still prioritized and you’re making the right strategic decisions long-term so that you aren’t hurting the business.

 

The more I can pull my most talented people away from having to do transactional things and think more strategically, that’s a lot of value to me. A lot of these [technology] tools allow that speed of decision making, which frees up their time to think more strategically about the business and drive growth and the things that we really want to do going forward.

 

Newman: Some of the things that a CFO brings to the table are guideposts and thresholds—establishing the financial performance targets that we need to shoot for as a company. That includes topline growth, cash generation, margin expansion, returns, etc. That’s a key contributor to making sure the plans are delivering the critical business outcomes by creating shareholder value. Also, being a voice of conscience through the process is critical. We remind the organization of the return hurdles that we’re shooting for or the margin targets that we want to achieve.

 

 

Ask the tough questions. A plan on paper is one thing, but it has to be an achievable, sensible plan. Asking how realistic the strategic plan is, or is it not aggressive enough? Is it delayed longer than it should be; can we accelerate it? Those are all critical things the CFO does, part and parcel of that strategic-planning process.

 

The CFO is in a unique position to facilitate the allocation of capital, making sure the entire organization understands the big picture of what we’re trying to achieve, with fierce competition for capital. It’s in all of our best interests to make sure the capital is deployed where collectively we’re going to get the greatest return. That’s a real challenge because we hire type A personalities.

 

Everybody wants to achieve. Everybody wants to fund their business and their growth plans. It’s critical to get the organization to the point of maturity where they recognize it isn’t about their team winning; it’s about the business winning. As CFO, we’re in a unique position to be able to do that. You can’t lose sight of the long-term plan just trying to hit short-term targets. The label we put on that in the COVID crisis is being recovery-ready. We attacked our cost structures, but we didn’t attack them in a way that would hamper our ability to perform in the upcycle. We managed down our capital spending in the short term, but we didn’t do that in a manner that would hamper our capabilities or our capacity to manage the upswing that we see coming our way. That’s another unique position the CFO is in—we can be the voice of reason when it comes to cost reductions and capital deployment. We make sure we’re looking not just in the short term, but also in the long term at what’s going to create the greatest value for this business and staying healthy in the meantime.

 

We’re using AI and digital analytics to find structural efficiencies that we can bring to our working capital management. We see literally hundreds of millions of dollars of free cash flow benefits by becoming better in that area. We’re excited about the value that can be created in our businesses by continuing to invest in this area.

 

Daniel Butcher is the finance editor at IMA and staff liaison to IMA’s Committee on Ethics. You can reach him at daniel.butcher@imanet.org.
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