Many years ago, New England Life Insurance, now part of MetLife, developed a series of cartoon ads that was witty and terrifying.
Each ad had a formulaic depiction of a person saying the caption, “My life insurance company? New England Life, of course. Why?” The situations varied, but the brilliance was that the reader could see always see an inevitable calamity about to befall the utterly oblivious central character. “Scare the living [bleep] out of people,” someone must have advised the creative director at the agency, “but in a jovial way.” Ha ha.
The vignette I remember best portrays a well-dressed executive in a sleek, all-glass corner office near the top of a skyscraper. He’s seated in a swivel chair chatting on the phone, his feet propped on his desk. Meanwhile, in plain view behind him, an errant half-ton wrecking ball attached to a crane is about to crash through his window. “My life insurance company? New England Life, of course. Why?” Somebody, please! Warn this man!
That visage represents the planning perils that CFO’s and other senior executives face. CFO’s feel confident when projected revenue aligns with targets. But too often, the risks are opaque. Watch out for that wrecking ball! Revenue projections are cleansed of the many uncertainties that lurk throughout the sales funnel. When I recently asked on several LinkedIn forums about whether anyone worked with a CFO who had influence over sales lead qualification practices, a reader question ricocheted back immediately: “Why would a CFO need to be involved in this?” His was the only response.
But it corroborated an observation: In most organizations, CFO’s do not guide the routine revenue bets that salespeople make. How confident can CFO’s be about the efficacy of sales force decisions? How do they know that the risks salespeople accept are ones the company can absorb? For example, one salesperson might have few scruples when accepting new leads: “Hey, if this deal closes, I make a boatload of commission. If not – adios! I was on my way out the door, anyway.” Her colleague might hew to a different risk viewpoint, unwilling to prospect new opportunities in favor of tending his cash cows. The moment those cows cease being reliably productive, he too will probably move on. Other reps, browbeaten by management’s obsession with hitting pipeline targets, might doggedly seek large, but highly uncertain, long-term deals. The pay bonus the company provides them for fattening the revenue pipeline cements the behavior.
Such risks seep covertly into cash planning worksheets, and CFO’s, feet propped on their desks, are sitting on all of it. “Projected Q4 Revenue, Northeast Region.” All the CFO sees is a single-integer aggregation, combining oodles of sales judgements. Smatterings of learned experience and buckets of wild hope – it’s all in the number.
Too much risk in the sales pipeline can create cash planning disasters. So can too little. How do companies manage this yin-yang? How should the most revenue-focused parts of the organization – Finance and Sales – collaborate on managing uncertainty and risk? I asked CFO-novelist Patrick Kelly, an experienced tech executive who has managed several IPO’s, for his thoughts. “Cash flow projections are the CFO’s responsibility,” he told me. In general, “a CFO needs to be involved in the mechanics of a sales funnel, but not in the details of qualification.” In other words, CFO’s need to understand how sales cycles work, how long it takes to close deals, and the percentages of leads that progress through each stage of the sales process, but they don’t need to be involved in the minutia of scoring leads and developing qualifying questions.
Kelly explained why knowledge about sales funnel mechanics is so crucial. “When Sales reports revenue projections to Finance,” he said, “Sales is going to say ‘everything looks great,’ but it’s the CFO’s job to have his own point-of-view,” and to use that perspective for making adjustments. “It’s not uncommon for a CFO to reduce the revenue forecast he or she reports to the board,” he told me. For example, Sales might forecast revenue to a Nigerian subsidiary of a multi-national corporation for the current quarter, but Finance might not include the opportunity for cash planning because the effect of low oil prices on the Nigerian economy could likely cause a purchase delay, or could scuttle the sale altogether. In essence, a CFO can translate what might have been an unanticipated wrecking ball to a cash flow plan into a recognized force against revenue. A force that he or she can possibly manage, especially when it’s anticipated early enough.
But what happens when Finance and Sales work in thick, impenetrable silos, and don’t regularly exchange meaningful information about revenue uncertainty? For example, when I mentioned the disparate criteria that reps within the same company use for accepting sales leads, Kelly acknowledged that a lack of risk standards could be problematic for cash flow planning. But he said that at smaller companies, silos are flimsier, and CFO’s tend to know useful details about individual revenue opportunities. At large companies, however, CFO’s cannot easily monitor the risk profiles for hundreds, or thousands, of pipeline opportunities. While low- and high-risk conditions among a large set of deals generally offset, that doesn’t mean the “average” risk among that group falls within an acceptable range for a CFO planning her company’s revenue flows.
This condition damaged a software company I worked for. The sales pipeline was fat, but customer buying cycles were painfully long, and opportunities did not convert quickly enough to satisfy the company’s ravenous hunger for cash. Finance was starving for money, but the CFO was oblivious to the pipeline risks. All she saw was a plump number on a spreadsheet representing next quarter’s revenue. Based on its cash position, the company had low risk capacity, and it would have been better off motivating the sales force to close lower-revenue deals with shorter cycles.
Sales never got the message. Instead, managers urged reps to hunt for revenue opportunities in the tangled thicket of big, bureaucratic Fortune 500 customers. A perilous high-risk, high-reward strategy for many companies, but disastrous for ones that can’t sustain the investment. In the end, the company laid off most of its sales force, canned its president, and reorganized the remaining management team. The terse press release did not mention anything about pipeline risks, just “Revenue did not meet expectations.” There’s always a back story.
Some companies commit to slogging through long buyer journeys and procurement cycles through maintaining the right capitalization and cost structures. Federal contractors, for example, regularly invest millions of dollars pursuing government sales opportunities that can require many months – even years – to close. If they close. When the stakes are that high, opportunities must undergo a thorough internal risk review before managers can decide whether to compete. One criteria: can the company afford to lose? Without a shared view of risk between Finance and Sales, more CXO’s would unwittingly bet the company. Many do.
Spreadhseet-facing Finance, and Customer-facing Sales – an odd organizational coupling, prone to bickering and personality conflicts. Yet, they must cooperate, because Finance and Sales grapple with the same uncertainties. Notably, how much will customers spend? When will they spend? and how likely are the answers to these two questions? The shared challenge of managing the risks should bring these two entities closer together. But that’s not always easy.
“Companies that embrace enterprise-wide risk management face the daunting task of instilling a risk awareness in a corporate culture focused on other objectives,” Barton, Shenkir, and Walker wrote in their book, Making Enterprise Risk Management Pay Off: How Leading Companies Implement Risk Management. An idea that some executives have put into practice. “To me, running a business is all about managing risk and managing returns, whether on the financial side or the balance sheet side, or running a field operation,” said Unocal CFO Tim Ling. Others agree. “Managers have to make a lot of day-to-day decisions without consulting the higher-ups. If they understand the financial parameters they’re working under, those decisions can be made more quickly and effectively. The company’s performance will be that much stronger,” Karen Berman and Joe Knight wrote in their book, Financial Intelligence.
Risk harmony between Finance and Sales means
1. Communicating the organization’s capacity (appetite) for risk. The CFO establishes this, and he or she is responsible for communicating to Sales which risks are acceptable, and which ones are not. Sales needs this information for its strategic and tactical planning.
2. Identifying and ranking revenue uncertainties based on frequency, probability, and consequence – a collaborative knowledge-sharing effort.
3. Developing strategies and tactics to support cash-flow requirements. Finance and sales must share knowledge about pipeline processes and velocity, sales compensation and incentives, lead qualification practices, and ethical sales governance.
4. Correcting inconsistencies. Companies get into trouble when Sales accepts more risk than the company can absorb, or avoids risks that the company requires to achieve its strategic goals. Similarly, Finance must develop risk mitigation strategies suited for the markets in which the company competes. Put another way, if you can’t run with the big dogs, stay on the porch.
Revenue volatility, the arch-enemy of cash flow planning, comes from risks that have come home to roost. CFO’s see the evidence in actual sales lines spiking and plummeting violently around their more graceful counterparts, planned revenue curves. Closer collaboration between Finance and Sales won’t eliminate the gaps, but it can reduce the area between planned and actual.
Most important, risk collaboration between Finance and Sales will help CFO’s better understand how close wrecking balls are to the cash flow plan, and which direction they are heading.
