The business model is the foundation of a successful business, and the CFO plays a critical role in building the optimal model for a company. The CFO tests the assumptions and presumptions of the business model, exercising his valuable role as professional skeptic. The CFO will look for potential improvements and enhancements, continuously looping that process periodically throughout the life of the business. The CFO helps the team place their plans and evolving culture beside the model to “defend” those plans or to realize they have moved beyond the original model and that is time to revise the model. Evolution does not justify failure to follow the model. It may call for changing the model and failure to do this is called chaos. A business model adopted and ignored is more dangerous than no model at all.
Consider, a business may have a great product or service, but the business model to take the product to market must be designed and executed continuously and consistently across the organization. The CFO, with the CEO, should analyze the critical elements of the business model. This will lay the foundation of the company’s strategy and define the key tasks of the CFO going forward. According to Todd Whetstone of FocusCFO, “the CFO must have a strong understanding of the company’s business model and industry to build strategies to create additional value for the company.”
The first element to understand is the company’s value proposition – this is the heart of the business model. Is the customer’s problem being solved by the solution (product or service) the business offers in the best way possible? Are customers receiving the best possible value? The solution to the customer’s problem must also be solved as promised. In the market, the product or service may be positioned as a low-cost alternative to higher priced alternatives, or it may be positioned as superior to alternatives and come with a higher price. Either way, it must be delivered as advertised. The analysis should also consider whether the value proposition can be enhanced. Can new or better products be offered to current customers or to attract new customers?
Second, the CFO will evaluate the revenue model of the business. Pricing should be analyzed to make sure it is designed to ensure the highest revenue possible. The price may be too low based on customer demand or the prices of the competition. Conversely, it may be too high to attract more customers. The CFO will also look for additional revenue streams that can be added from offerings such as warranties, or customer support subscription plans.
Next, the CFO will comprehensively examine the costs of the company to find expenses that can be reduced, or even eliminated. This must be done in context, considering all other elements of the business model. If the company is offering a low-cost product in the market, costs of goods sold and other costs should be as low as possible, while still supporting a viable product. A higher priced product must have sufficient quality to support the price; hence higher costs to create and support the product.
Additionally, the CFO must understand the company’s customers. Knowing who the customer segments of the business are is key to reaching them. There may be multiple segments already, and segments that can be added.
Understanding the company’s customers drives the strategies to sell and market the products, and the CFO will determine if these strategies are designed to produce the best possible ROI. For example, if sales are being made online through a third party, i.e. Amazon, would it be worthwhile in terms of costs and benefits to create a direct online sales and distribution channel? Additionally, are all potential sales channels being utilized? Can any be added, and what are the costs/benefits of doing so? These discussions can and will go on many levels.
From the analysis of these elements, a plan to improve, or even pivot the business model, can be developed to drive cash and increase the value of the business.
In summary, having a CFO who can play the role of professional skeptic will assure that the business model is well-managed and consistently applied across all departments and segments of a business. This will result in:
1) A focused team who are unanimous in their understanding and execution of the company’s methods, culture, and values.
2) Customers who are receiving consistent messaging and results.
3) A very nimble company that can quickly detect change and precisely respond to change.
4) And with adherence and constant management – efficiency will be maximized.
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