The CFO Position (#87)

In this podcast episode, we discuss the nature of the chief financial officer (CFO) position. Key points made are noted below.

What a CFO is Not

I’ll start this off with a story.  About 20 years ago, I interviewed with the CFO of a company that had just spun off from Hewlett Packard; the CFO wanted a controller.  To say the least, we did not get along.  I thought he was a jerk, and he thought that I didn’t know what the differences were between a CFO and a controller.  As it turned out, we were both right.

The problem with controllers being promoted into a CFO role is that they really think it’s an accounting job – and it isn’t.  20 years ago, I had not yet figured out the difference, and it took a long time to get it right.

The CFO role is easier to define by what it isn’t.  It does not involve anything remotely associated with accounting or any other transactions.  It does not involve preparing financial statements, or creating control systems, or installing accounting software, or preparing public company forms, like the Form 10Q or 10K.  All of those items are the responsibility of the controller, and the controller’s staff.

Now, anyone who’s come up through the traditional path of getting an accounting degree in college, and then picking up a CPA or CMA certification, thinks that what I’ve just described is the high point of an accounting career, because that’s what you’ve trained for.

Realistically, though, all of that training only gets you to the controller position.  It does not do squat for someone in the CFO role.  If you still do all of those things, and your title is a controller, then you’re in for a nasty surprise, which is that your title may be CFO, but you’re not.  Either you failed to hand off your job to a new controller when you were promoted, or the company president gave you a title instead of a pay raise.

What Does a CFO Do?

We’ve just established what a CFO is not; so what IS a CFO?

At the very highest level, it’s about being paid to think.  This is the hard one for an accounting person.  You’re no longer spending time dealing with interpreting accounting rules, and making sure that entries are made correctly.  Instead, it means taking a very hard look at the financials and related metrics to try to pinpoint trends.  And, if you think you’ve found something, then you need to cut right through the entire organization until you get an answer.  And then you’re paid to act on it.  For example, if the cost of goods sold has jumped a couple of percentage points over the past year, the controller is primarily concerned with reporting this information, but the CFO has to investigate the situation and correct it.

Another CFO role is monitoring controls, which does not mean daily reviews of controls, which an internal auditor handles.  Instead, the CFO is talking to the audit staff about problems they’ve spotted, and is figuring out how to keep those problems from occurring again.  Now, someone in a controller role is probably thinking that they do that, too.  Perhaps.  But the rule with controls is that you’re going to have a control breach exactly where you never expected it.  I’ve seen this over and over again.  And this is where the CFO needs to focus – continually reviewing the entire organization and trying to identify those key holes in the control system that need to be filled.

Of course, controls are only one piece of a bigger picture, which is risk management.  The CFO needs to be all over this one.  And it does not mean having a working knowledge of the various company insurance plans, though that would be nice.  Risk management involves all kinds of internal systems, and insurance is only the extra coverage you need in case everything else fails.  So the CFO needs to know about things like the risk of computer systems failing, and the possibility of a key facility being in a flood plain, and having a foreign currency hedging strategy, and so forth.

Here’s another one.  Finance.  The CFO usually runs the treasury department, assuming there is one.  This means that the CFO needs to have a very good handle on not only the cash situation right now, but where it’s going to be.  The reason is that the person responsible for fund raising is the CFO, and so he or she needs to be well out in front of any cash flow problems, so there’s always enough cash on hand.

The CFO also needs to be deeply involved in budgeting.  This does not mean the super-detailed accumulation of information that the accounting staff gets involved with each year.  Instead, the CFO needs to be spending lots of time on the general direction of the company, and where cash is really being allocated.  It’s one thing for management to talk about some nifty new direction, but it doesn’t do much good if the budgeting process is starving all the new initiatives of cash.  It can also mean that the CFO spends a lot of time questioning the reasons for larger capital investments.  So, again, the parts of the budgeting process that the CFO gets involved in are exactly those parts where he may not have much experience.

If a company is a public one, then the CFO needs to learn about investor relations.  There’ll be a quarterly conference call with investors, there may be road shows to raise money, and there’ll certainly be other types of meetings with investors and analysts.  In this role, the CFO needs to have some solid public speaking skills, to give investors the impression that the company is in good hands.  But, have you ever noticed how many people in accounting are introverts?  Once again, this is not a place where someone coming up from the accounting side has good fundamental training.

There’s a common thread that runs through most of these job items, which is that the CFO needs to be a forecaster.  It means constantly monitoring the entire organization to figure out what could happen, and what the odds are of those things happening.

And to be an effective forecaster, the CFO needs some pretty major people skills, since the foundation for most of this crucial knowledge is not sitting on spreadsheets – it’s in the sales staff, and the customer service department, and the engineering staff, and the CFO has to go out and get that information.  And in case you hadn’t noticed, that bit about people skills is also something you didn’t learn in school.

And finally, this is a persuasion job.  It means figuring out the direction that the company should be heading in, and then convincing everyone about why your vision is the right one.  If anything, figuring out what to do is the easy part – it might take up a third or so of your time.  The persuasion part is really hard, and it takes up the other two-thirds.

Parting Thoughts

In short, if you’re promoted from controller to CFO, congratulations.

But it also means that your presumably deep knowledge of accounting won’t provide any real basis for success.  Instead, you have to hand off all of your old job, and buckle down for a couple of years of serious additional training.

Related Courses

CFO Guidebook

Enterprise Risk Management

Investor Relations Guidebook