The Key Role of CFOs in Turning Around Loss-Making Enterprises
When an enterprise incurs losses, CFOs are often blamed, but they actually bear the fundamental responsibility of guiding the enterprise toward profitability. This article, written by Diya Sagar, CFO of AWA Studios, shares her experience in turning around losses: first, it is necessary to distinguish between temporary losses and fundamental failures, then focus on controllable levers, such as optimizing unit economics, rather than blindly cutting costs. The article emphasizes that when approaching profitability, risk tolerance should be increased, investment should be made in growth opportunities, and it should be recognized that turnaround takes time, ultimately validating the CFO's capability through financial performance.
The following is a guest article by Diya Sagar, CFO of AWA Studios. The views expressed are solely those of the author.
When a business is losing money, the finger is often pointed at the Chief Financial Officer (CFO). Although CFOs know they are rarely the root cause of the losses, we must accept our fundamental role in guiding the company to generate enough revenue to cover costs. Before taking on my first CFO role, I hesitated at the prospect of turning a company around. But now that I have experienced it firsthand, I realize that while we are not magicians, there are indeed steps we can take to make financial operations produce almost magical results.
Losses do not always mean business failure
In the startup and venture capital world, it is common for companies to burn cash in the early stages. But if losses persist beyond the first few years, or even longer depending on the industry, such companies are often seen as failures or doomed to fail. While this is true in many cases, there are also many exceptions.
To turn losses into profits, the CFO must first understand the root causes of the company's losses. Some causes are easy to identify: Are operating costs far exceeding what is needed to support business activities? Or is revenue insufficient due to poor sales of products or services?
Other causes may be harder to uncover. For example, the company may not yet have enough market position to achieve competitive unit costs, or sales cycles may be several months longer than normal because the brand is relatively new.
To be clear, not all businesses can be saved. Even the best CFO cannot turn a bad business model into a success story, but determining whether your company is an "uncut diamond" or a "painted stone" will decide whether it is worth investing in a turnaround or decisively abandoning it.
Identify and pull the right levers
One of the challenges CFOs face is that while they need to influence financial results, they do not have control over all aspects of the business. However, it is this limitation that forces us to focus on the levers we can influence. To move a company from losses to profitability, before assuming you must drastically cut costs (though in some cases it is unavoidable), you should examine the composition of unit economics and how they can be improved.
The fundamental question is: How can revenue be expanded without significantly increasing costs, and to what scale? While the answer varies by industry, common themes include optimizing selling price versus volume, reducing production costs, and adjusting overhead to support revenue-generating functions. The CFO should have a clear understanding of how far the company deviates in each area and begin pulling these levers to bring them into alignment.
When a product or service can be produced and sold with positive unit economics, it is the clearest signal of profitability potential. If scaling can raise gross margins to a level sufficient to cover operating expenses, then financial operations begin to work their magic.
Cut losses, but not at all costs
It goes without saying that a company should stay lean and not take on unnecessary costs. But curbing losses through cost-cutting is only the easy part. The truly tricky part is the next step: Where should costs be added when there is no more efficiency to be squeezed out?
If a company is close to profitability or already profitable, it is easy to become complacent. But it is precisely at this time that you should raise your risk tolerance, change strategy, and invest in growth. Consider organic opportunities, such as increasing marketing spend to expand the customer base, as well as inorganic opportunities, including M&A to enter new markets or strengthen core capabilities. This may involve leveraging the balance sheet or raising external capital, and both paths require evaluating the relationship between the cost of capital and returns.
In the short term, the cash flow position may not be as healthy as before, but through disciplined execution, temporary losses for future growth should ultimately drive long-term profitability.
The timeline for turning losses into profits is a key part of the equation, because operational changes may take months or even years to show up in financial statements. However, when the numbers turn from red to black, you know the CFO has performed well.