How often has the Product Development manager said to his CEO “I have nothing against the CFO. It’s a tough job especially after an economic crisis. That being said, it is the money people who seem to stand in the way of great new products.”
Product development managers, the marketing teams and their mobile warriors selling the company’s products and services, may be the revenue drivers for a company, but all too often the financial assumptions necessary to launch new products are based on overly optimistic expectations.
To the CFO, return on investment is how much money you are going to give back to the company. In this regard a new product launch, a new salesperson or a new marketing campaign will bring a “return” to the organization. But fiscal stewardship is all about weighing up risks against the likely rewards and there is some work to be done in testing some of the assumptions behind a new product launch.
In the case of a product launch in a company with an existing suite of products in the market, making extrapolations based on comparisons is relatively ‘safe’ as far as assumptions go. For a start up venture, however, it is quite something else. Indeed many start ups, once capitalised, will make the CFO the first appointment (after founder positions are allocated).
How much due diligence should be done by the CFO? Is an independent market analysis needed? The answer: it all depends. If the company’s product or service addresses a new market then some additional data is required to support and justify assumptions around market estimates and projected new product estimates. For established markets, customers are often readily ‘tested’ in the field. Typically, in many verticals, it is the customer who says “have you considered bringing out a xxxx or a yyyy to add to the range? This mitigates against any risk profile applied by the CFO in their analysing the budget for the product launch.
The same applies to the question: Does the company have key relationships in place, or is it working on the same marketing and/or sales partners? Here, there is a measured risk as far as gaining the relationships necessary to support a product launch. In a start up, the critical question from the CFO addressing the budget is: Have they chosen the right first market? And does their product or service represent a market push or pull?
The role of a CFO in new product launches may, ultimately, be a question of how hands-on the CEO is in the product launch. Indeed, the fundamental basis of a product launch concerns potential market size and the most basic of all questions is: Have they conducted thorough market research to support their financial assumptions, revenue model? In the absence of the CEO asking this question, the CFO certainly would have a mandate for asking it.
Sales and marketing people are best placed to assess product suitability but are they best able to for example, realistically assess competitors? Is the product good enough to make them superior to competition from the customer’s perspective? These are not necessarily questions that can be laid on a spreadsheet but they are important in the CFO’s overall analysis behind a product launch.