A vital part of a business’s success is the strength of its management team. This is always true, in good times, and during a crisis. A successful business needs all oars of the boat pulling together at the same time. And the boat needs to be headed in the right direction.
The current economic crisis is highlighting the importance of strong financial leadership. That is undoubtedly true, given the flurry of new government aid programs and the impact of stay at home orders. But a business owner always needs strong financial leadership. In a healthy economy, the owner needs to make sure they are operating at maximum efficiency to take advantage of likely higher gross margin opportunities, or to make sure an investment in a new product or service has long term value.
This article points out a few areas to consider in determining if you currently have the “right CFO” and a pointer on “buyer beware” if you are considering making a change in CFO during a time of high unemployment.
Is the CFO too much or too little of an accountant?
There are many paths people take to become a CFO with the most common being:
- Start in public accounting as a CPA and then leave the industry to move up the ranks
- Start immediately with a corporate accounting position
- Begin in a financial analysis type of role either out of college or after obtaining an MBA
Most companies with less than 1,000 employees do not have the resources to afford a Chief Financial Officer and a Chief Accounting Officer. The smaller the company, the more a CFO needs to understand how an accounting department’s operations work in detail as well as understand the interrelationship of the three fundamental financial statements; balance sheet, income statement, and statement of cash flows. However, the owner also needs their CFO to be a strategic partner and to work with all the departments to help them manage their goals in conjunction with company goals. Thus, in almost every small to mid-sized company, the hybrid accountant/financial analyst is needed to be the CFO.
CFOs who do not have any significant accounting education or accounting jobs in their past often experience these common issues:
> The accounting department struggles to get accurate financial statements out promptly
> Controller or Accounting Managers don’t stay for more than a year or two
> A new accounting system is implemented and not working as expected
> Each month something is discovered to be wrong with the prior month’s financial statements
In each case, the cause may be that your CFO is “too little of an accountant.” They don’t understand how payables get processed, or customers are invoiced, or they may not understand the value of monthly reconciliations of all material balance sheet accounts, or they don’t value or understand internal controls. Or they are not able to properly motivate and guide the Controller and accounting team because the CFO does not understand their jobs.
Of course, the opposite is the CFO who is unable to break free from the accounting details. They have created an accounting system that is running the company as opposed to supporting the company. The need for tight controls and extreme accuracy can create an atmosphere of avoidance and animosity instead of a partnership. They are reporting information but not providing explanations behind the data. They know that an increase in accounts receivable, along with an increase in inventory levels, explains why the cash balance has decreased. But they are not helping the owner and management team by understanding and explaining “why are we having trouble collecting our accounts receivable,” “the reasons inventory has been rising even though sales are increasing.” The too much of an accountant CFO just explains how the change in balances means the financial statements are accurate.
How much of an accountant a business owner needs in their CFO will depend on the quality of the accounting team and systems. The stronger the team and systems, the less of an accountant that is needed. However, our years of experience have shown that in a small to mid-sized business, that even with a strong accounting team and systems, the business needs some amount of “an accountant” in their CFO.
A great CFO but, not for my type of business
Most businesses we work with throughout the Pacific Northwest fall under four categories:
- Multi-generation family-owned
- Professional investor-backed
- Not for profit organizations
The ownership structure of an entity is a critical distinguishing characteristic to consider when choosing a CFO. Here are two examples that apply to circumstances where you are hiring a fulltime CFO for your business:
Let’s say you are a CEO/owner who runs the business, and you have a CFO who is a strong accountant along with financial analysis and very operations oriented. Your financial statements are timely and accurate, yet somehow there is an ongoing sense of frustration you have with your CFO or your CFO has with you.
You cannot quite pin it down, but your ideas seem to get shot down by your CFO. You know you want solid financial advice, but at the end of the day, this is your company and your money. You want a solution to understand how your idea could work financially.
Your CFO has spent their entire career working in large corporations that were either public companies or owned by private equity firms; a CFO who is wired for short-term returns and meeting the needs of investors who want to maximize their investment and are likely to move on to new investments. Investors do not have the same emotional attachment to the business as a CEO/owner.
Your CFO struggles with understanding the emotional aspect of what you as an owner wants to do because they do not have similar experiences. For them, it is all about return on investment.
Another example is the CFO who has a similar background as described above, who has been hired by a multi-generation owned business where the board is comprised only of family members.
This CFO is accustomed to working with executives and board members who may be friends, may have worked previously together, but are not family. This CFO may have great difficulty in understanding how to balance family relationships with the needs of the business.
In the case of a multi-generation owned business, the CEO may not be the person who makes the key decisions. Decisions could be made by a family member who may or may not be on the board. Or possibly by an investor-backed company.
A CFO in this organization may find they are spending more time dealing with family dynamics than business dynamics. If the CFO does not have prior “family business” experience, they will likely become frustrated which can result in lower performance or create relationship issues with people at work. In either case, not the optimal situation.
These two examples highlight potential issues for any employee and the best hire is a person who fits with the culture of your company. It is extremely easy to be impressed by a resume of a CFO candidate who has a top tier education and Fortune 500 experience, but is that really the culture of your company? If so, well, full speed ahead, keep that CFO or hire that CFO. You want and need the right CFO for you and the unique and distinctive culture in your company.
Lots of great CFOs could be out there – but beware
As some industries are facing an unprecedented short-term collapse with an uncertain future, there can be a tendency for a CEO and/or owner to think they can now hire that great CFO they previously could not afford. The same thoughts were there during the Great Recession, and the risk is you end up with a CFO who is underemployed. They have been making $350k to $400k a year for the past five years in salary and bonus, and now you are being told they are okay with $250k. And it certainly can be true that right at this moment, they are fine with $250k because getting re-hired quickly helps them versus going a year without any income. However, this CFO is ripe for picking by recruiters and companies who work on positions more suited for the CFO position with higher compensation. You could quickly lose that CFO in a year, and you did not get that “value” from the great CFO, and now you are starting over again.
Just as you need to make sure you get the right amount of an accountant in your CFO and the CFO who has the experience with your particular company structure, you also need the CFO where your compensation is the right compensation for that CFO.
You always need an excellent CFO – make sure it is the right CFO
There are many reasons you might find a need for a CFO, whether it be during good times, a major crisis, a new competitor, or a potential acquisition. It does not matter the condition of your company; you always need a good CFO, just make sure the good CFO is the right CFO for what you need.
About the Author
Alex de Soto anchors the CFO Selections search practice. He brings over 25 years of experience in accounting, finance, human resources, and executive search to his role as leader of the search team.
Since 2008, he has spent most of his time helping CEO’s and CFO’s of Pacific Northwest based companies find that unique match they seek for a CFO or Controller.