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The strategic shift: Why CFOs must embrace a 95/5 mindset
In today’s rapidly evolving business landscape, CFOs are no longer confined to their traditional roles of managing finances and crunching numbers. As strategic partners to CEOs and key decision- makers, CFOs now play a pivotal role in driving growth, ensuring financial stability, and delivering value to the organization.
Applying a 95/5 mindset: strategic roles need you to identify what small effort can have the most impact.
One concept that holds great relevance for CFOs is the Pareto Principle, also known as the 80/20 rule. The Pareto Principle states that 80% of the outcomes are typically derived from 20% of the inputs. However, for CFOs, the application of this principle requires a shift in perspective. In the case of their strategic responsibilities, it is more appropriate to consider a 95/5 ratio, emphasizing that the vital 5% of their efforts can lead to a 95% impact on the organization’s outcomes.
Let’s consider the hypothetical example of Mr. Gupta, the CFO of a solar powered cell manufacturing company, to illustrate the application of the 95/5 principle. To maximize his impact, he must identify and prioritize the key areas where his efforts can generate the most significant outcomes.
After conducting a comprehensive analysis of the organization’s financial performance, Mr. Gupta discovers that optimizing working capital management is critical to improving profitability. However since his team is adequately capable of employing efficient cash flow forecasting, streamlining inventory management, and negotiating favorable payment terms with suppliers, he is able to reduce working capital requirements by 15% by offering limited inputs of his own.
Mr. Gupta further recognizes the potential for growth lies in expanding into emerging markets. By focusing on market research, financial modeling, and strategic partnerships, he aims to identify the most promising markets and develop a growth strategy. The successful implementation of this strategy has the potential to increase the organization’s revenue by 30%.
By identifying this key area, Mr. Gupta ensures that his efforts are directed towards the critical 5% that can yield a 95% impact on the organization’s outcomes. This strategic shift not only positions him as a trusted advisor to the CEO but also establishes his contribution as a driver of the company’s success.
For CFOs, embracing a strategic role is essential in today’s business environment. By adopting a 95/5 mindset inspired by the Pareto Principle, CFOs can identify and focus on the critical few areas that have the potential to generate significant outcomes for their organizations. The example of Mr. Gupta, demonstrates the practical application of this concept in a realistic context. By prioritizing working capital management and market expansion, CFOs can truly become strategic partners in driving growth, ensuring financial stability.