What do you regard as the critical areas to be watched in the ongoing running of the business?
For me as the CFO of a software products company, one of the key areas is pricing and discounts. You need to develop a clear sense of the value that your product provides to the customer, and you need to be able to put a price on that value which corresponds to something that the customer feels is right. This forces you to understand not only your company’s product offerings, but also how the customer is going to be using a product in their business to add value, and what exactly is the nature of that value that they are generating. For example, is it saving them production time by comparison with alternative approaches? Does it enable them to get their product to market more rapidly—and if so, what does that mean in terms of increased returns for them? When you understand this, you then need to look at the channels and means available to you to deliver that product to the customer. Is it to be through outright purchase? Through renewable licenses? Through the traditional software approach of a license purchase followed by annual maintenance fees? Through a rental “software as a service” model?
Revenue recognition has become very sophisticated, and it is up to the CFO to ensure that the transactions done by the company are in fact transactions that you will be able to recognize in revenue within an acceptable time frame. It is all too easy for companies to get involved in transactions where revenue recognition will be delayed by a number of years. Therefore the way transactions are structured has become a key part of delivering results for a company and enabling it to meet its goals.
One of the major advantages of the rental model, for example, is that it “locks in” a specific, predictable revenue stream for the organization and gives the company a good measure of predictability on future revenues.
As a CFO you also have to understand the nature of the life cycle of the products in your organization’s portfolio. In our case, a product will generate revenues for approximately a decade, which means we aim to make a very substantial improvement to the product at least every seven years.
One of the things the CFO has to be able to provide for an organization is accurate forecasting of revenues and costs. Strong revenue recognition really is part of the CFO’s mission. This is not about the arithmetical addition of figures coming back from field operations. This is where the CFO’s deep understanding of the business really comes into play. You have to understand what the deeper significance is of the numbers on the screen or the printed page, what the trends are that lie behind the numbers. In a multinational operation this requires an even greater level of skill.