Operational Finance: Blending the Operational CFO and Strategic CFO
There are two sides of the finance function coin — the operational side and the strategic one. When you're looking for a leader, is one specialty better than the other? The truth is that the best finance leaders strike the perfect balance between both (especially now). Learn what that means and how to blend the two sides more effectively.
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Traditionally, there have been two high-level archetypes for the CFO role — the strategic leader and the operational leader.
Each will largely hold the same responsibilities, but with different specialties. An operational CFO specializes in blending the data from functional departments with financial data to optimize performance. And historically, a “strategic” CFO would specialize more in forward-looking strategy, creating three-year and five-year roadmaps to execute the company’s vision.
But business needs and the finance function itself have evolved beyond the point where we can split the CFO archetypes this way. The modern CFO needs to be the leader of both strategic and operational finance excellence.
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What Is Operational Finance?
Operational finance is the subset of a finance function’s responsibilities that revolves around the day-to-day activities that drive the business. Those who specialize in operational finance live in both the financial statements and the datasets of individual business units.
One of the main outputs from operational finance leaders is an operating financial model for the business. These models outline the nitty-gritty business processes that drive top-line goals, headcount plans, budget allocation, and cash runway outlooks.
If you want to learn more about the ins and outs of operational finance, listen to Jenny Jao, Head of Finance at Sprig, talk about her approach to building an operating model.
Benefits of Operational Finance Leadership
Here are some benefits you can expect from operational finance leadership:
Translate Business Data to Departmental Insights
Finance’s unique position at the intersection of all business data is crucial to the modern CFO’s role as a growth catalyst in the business. And someone with an operational finance background is uniquely capable of leveraging that perspective.
An operational finance leader can translate the holistic perspective of all business data to department leaders and surface insights that will help their specific plans. Identifying areas of opportunity for departments to maximize ROI and align with business goals makes finance a better partner.
Help You Stay Afloat During Market Slowdowns
During a market downturn, operating CFOs will know how to drive efficiencies in the day-to-day business.
They could advise you on business decision-making around improving cash flows, such as how to improve revenue per employee or how to change payment plans.
Optimize Performance by Comparing KPIs Against Benchmarks
An operational CFO keeps a tab on important business metrics, such as gross profit margin, working capital, and operating cash flow. They also compare those metrics against the industry benchmarks to help you understand where you need to cut costs.
For instance, the SaaS Rule of 40 suggests that the sum of revenue growth rate and gross profit margin should be 40% or more for a healthy SaaS company. If your SaaS company lacks in this department, the operational CFO can help you find ways to make it right.
Limitations of Operational Finance Leadership
However, an operational finance leadership style alone may be insufficient to ensure future business growth. Here are some reasons why:
Lacks a Future-Focused Outlook
Operational finance leadership learns from the company’s past and focuses on its present. This focus on the day-to-day running of the business prevents it from visualizing the business’s future and the corresponding uncertainties and financial risks.
In other words, a company with operational finance leadership might struggle to prepare for long-term growth.
Doesn’t Factor in the Market Changes
Changes in government policy or natural calamities can turn the course of the business, and the past plans might not hold. Think of how the 2008 recession and the 2020 pandemic affected businesses.
Even if we ignore those out-of-hand circumstances, the evolving customer demands, emerging technological advancements, and changing marketing strategies make it difficult to make the best financial decisions based on past data.
Put another way, you can’t expect to attract recession-stricken buyers with out-of-date pricing strategies.
Differences Between Operational Finance and Strategic Finance
Whereas operational finance has historically meant a focus on day-to-day financial operations across the business, traditional strategic financial leadership has focused on long-term planning.
While this dichotomy doesn’t necessarily hold true anymore, it’s important to note the two primary differences between these traditional models.
Short-Term vs. Long-Term
Operational finance focuses on the company’s operations and immediate improvement of processes. Simply put, operational finance cares about the company’s present and how the operations affect the bottom line.
Conversely, traditional strategic finance focuses on the company’s long-term growth. It accounts for the possible changes in the market and aims to map out risk for future plans.
Numbers vs. the Big Picture
An operational CFO understands operations, financial statements, balance sheets, and the reporting standards the business adheres to. They’re guided by numbers.
In contrast, a strategic CFO examines past and current financial statements to gauge the company’s health and then plans for the future in collaboration with other executives.
In other words, strategic CFOs don’t simply rely on numbers. They look at the bigger picture and use the data to their advantage. They formulate strategies that’ll boost the company’s future financial health.
Operational CFO vs. Strategic CFO Leadership Styles
In 2023, trying to draw a line between operational CFOs and strategic CFOs is misguided to say the least. If you want to behold the mantle of a next-generational finance leader, you have no choice but to master both the operational and strategic sides of the job.
This is why companies need to focus on building out a modern strategic finance function. True strategic finance is when you’re able to translate granular operational data from across the business into sound financial insights in real time — and then use those insights to influence the company’s growth plans.
Blending operational and strategic focuses wasn’t possible in the past because of massively complex and siloed datasets. But by embracing finance automation, you can stop spending 80% of your time collecting, cleaning, and organizing data and start focusing on identifying the strategic and operational insights your business needs.
How To Merge Strategic and Operational Finance for Modern CFOs?
To merge strategic and operational finance, you’ve got to borrow from both.
As a modern CFO, here’s how you can do so while handling major CFO tasks:
- Tracking expenses: Become an operational CFO when tracking service-specific costs to understand the business’s cash outflows and look for pipeline inefficiencies. But don the strategic CFO hat to reduce your costs or adjust your pricing model to beat the competition in the long run.
- Managing trends: Track your revenue, expenses, and bookings to get a read on past and present trends and adjust your financial management strategy accordingly. But look into the patterns and the factors driving them as well to see how you can set up your SaaS business for success in the long term.
- Optimizing financial plans: Work with the department heads to find out their short- and long-term needs. Address those needs in your next financial plan and integrate them into your overarching financial model for long-term optimization and improving the CEO-CFO relationship.
- Keeping headcount plans flexible: Create a constant stream of communication with department leaders to stay on top of changes to headcount plans. Understand the big-picture impact of those plans on the company’s runway and help department heads make the business case for new hires.
- Building many scenarios: Scenario planning is crucial to the modern finance function. It gives the business a clear picture of its different growth paths and creates optionality for leaders across the company.
While all this sounds simple on paper, analyzing costs and building flexible financial models can be time-consuming. Using spreadsheets to keep tabs on metrics and trends can easily eat most of your team’s time, leaving no space for strategic finance.
That’s why we believe that to merge strategic and operational finance, you must automate data collection, record keeping, and financial reporting.
How To Manage Operational Finance Through Mosaic?
CFOs generally have to work with various software for business intelligence, extracting, transforming, and loading (ETL) data, and financial planning for their day-to-day operations. Not only do these tools cost a lot, but they also consume a lot of time.
Mosaic integrates all of your most important source systems — CRM, ERP, HRIS, and billing — to ingest all financial and operational data across your business. Instead of building out complex data pipelines or hiring teams of data analysts to manage BI platforms, you can automate the traditionally manual process of aggregating data to make both financial analysis and planning more agile.
Our Strategic Finance Platform gives you more control over the operational side of the business by helping you:
- Track key metrics: You can track 120+ key SaaS metrics with the click of a button. Whether you want to see the upcoming cash inflows through SaaS bookings or keep a tab on the customer churn, you can do so effortlessly to get a complete picture of your SaaS business’s financial performance.
- Develop optimized financial plans: You can create dynamic plans that depend on present-day assumptions instead of rigid past assumptions. You can create and compare unlimited what-if scenarios, see the live impact of the changing conditions, and collaborate with your team to optimize your financial plan.
- Incorporate granular data: You aren’t limited to high-level data. Instead, you can drill down into department-level details to know exactly where your cash goes. You can also track the department-level spending to find your company’s money pits.
Besides that, you can also create custom financial dashboards to speed up your financial planning even further — share the relevant financial information with the relevant people in real time.
Want to see how Mosaic helps you merge the operational CFO and strategic CFO? Get a personalized demo today and learn how easy it is to plan for both the short and long term.
Operational Finance FAQs
What is an operational CFO?
Traditionally, an operational CFO has been one with a deeper focus on immediate and short-term performance and efficiency optimizations. They can help with tasks such as:
- Supply chain management
- Risk mitigation
- Analysis of departmental spend and ROI
- Negotiating contracts around equity, debt, and liquidity.
How does finance work with operations?
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