The GFC has sharpened the focus of the CFO on issues of managing cash and budgets, improving operational business processes, and improving information provided to managers. These are almost always the issues in front of the CFO, but after a profound event of the scale of the GFC the issues come to the fore when organic growth is on the agenda. Not surprisingly, many CFOs are stalling major capex projects and reducing operational expenditures. In this climate a risk averse mindset prevails – by necessity. In boom periods, established lines of credit were readily available whether they be from traditional bank facilities, on-market capital raisings or trade credit through management of debtor and creditors ledgers. In a post GFC environment, capital and cash management has emerged as a priority.
Just as growth brings its risks – untested markets, imperfect assumptions etc – a more conservative growth path based on organic growth is more manageable from the CFO perspective and more in tune with capital adequacy factors. Organic growth is less risky/more predictable and ultimately more manageable than new product, new market or growth via M&A growth. Organic growth is a far greater predictor of shareholder returns when compared to other growth scenarios. Organic growth – for many established enterprises – is a more familiar terrain and is an ongoing testament to a company and its manager’ ability to extract growth from its core business through leveraging their skills and natural competitive advantage in their market.
Organic growth drivers
Operating in established markets with established products does not necessarily mean benign growth. It can be wholly consistent with shareholder expectations as far their returns are concerned. Investing in projects in marketing, R&D, sales, operations, developing a culture of innovation, are all potentially powerful drivers of organic growth. There is seldom a shortage of ideas in these domains. It is rare that a CFO would not be taking on a range of comparative analyses in order to support his decisions to allocate scarce funding in pursuit of organic growth.
Resource constraints have become the norm across many industries; perhaps with the notable exception of oil and gas and iron ore projects where investors are clamouring to take a share of the action. Elsewhere, selection and prioritization of organic growth projects needs to be done by data-driven quantification and understanding the strategic, financial and risk factors of these projects. Findings need to be presented in a consistent and rigorous way.
In smaller organisations there may be an element of intuitive based decision making on the part of the CEO but from the CFO perspective, organic growth needs projects to be considered against one another. Decision-making based on a balance between analytical and intuition can be optimal. For sure, CFO projections are seldom perfect but for organic growth planning there is always room for improvement in providing an analysis for the CEO and the leadership team to select the right projects to deliver organic growth.