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Lead from the Front

“I don’t understand. How do you not know?”

I wasn’t being difficult, I really did not understand.

Yet again, Steve had turned up to a monthly business review and didn’t know his numbers.

Unacceptable from the CFO of an underperforming business unit.

Steve had been in place when I joined a few months earlier. He wasn’t my pick, and I was still making my mind up about him.

He bit back…

“Look, if you want to go into this sort of detail, next time I’ll bring Jerry.”

Jerry was his controller. I got the sense Steve and I saw the CFO role differently.

“You can if you want. But to be clear, I expect the CFO to be able to answer these sorts of questions.”

Steve scoffed, “that’s not really how I work.”

Steve’s arrogance was annoying me. I was ready to unleash both barrels, when the CEO (who had, until now, been quiet) said, “it will be how you f*cking work if you want to work here.”

It was the start of a five-minute tirade about what he expected from leaders of the business.

Eventually, to take the heat out of the room, Steve and I agreed we would take this ‘offline.’

In that conversation, I made clear to Steve what I expected from my business unit CFOs.

But he was indignant.

“I don’t agree. CFO jobs are about more than numbers. I am more involved in the operations than the finances.”

“Steve. CFO jobs are about more than numbers. But they are also about numbers. It’s not ‘or’, it’s ‘and’. There is a COO for your business unit to run the operations. That isn’t an excuse for not being on top of your function.”

It became clear that Steve had mentally promoted himself out of having to be involved in the finance function in any way.

He was gone by the time the next monthly business review came around.

Let’s call it ‘irreconcilable differences.’

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This is part 2 of a 4-part series diving into the skill stack a top CFO needs.

Disciplines Every CFO Needs to Master

Last week, we introduced the T-shaped CFO.

Top CFOs have both broad business leadership skills (horizontal), and functional/domain specialism (vertical).

Steve’s mistake was his belief that CFOs graduated out of the finance function.

The F stands for finance. And it always will. You can’t be a Chief Financial Officer if you don’t chief your finances.

Steve did have one thing right. It is true that the functional skills you need as CFO, are different from those you need at more junior levels.

Some of those skills are evolutions of skills you need earlier in your career. Others are entirely new skills you need to learn when you hit the CFO chair.

Today we will dive into what those skills are and the differences compared to junior levels.

Working from bottom of T to top. The bottom is more finance specific and the top is more about the broader business

There are ten key functional disciplines you need to master to be a top CFO of a complex business:

1. Overseeing Financial Control

2. Investor Relations

3. Technology

4. Investment Appraisal

5. Corporate Finance

6. FP&A

7. Corporate Governance

8. Driving Performance

9. Turnaround

10. Cashflow Acumen

Note - today we are sharing the skills you need, not how you build them. We will get to every single one, in detail, through this newsletter over time, though.

Let's take each in turn:

1. Overseeing Financial Control

If there is a massive reporting blunder on your watch, it is you, as CFO, who will get famous (infamous even) and fired.

As CFO, you hold overall responsibility for financial control.

You have a contractual, professional, and ethical duty to ensure reporting accuracy.

You do not need direct controlling skills to be a CFO (though it helps). What you must have, though, are the tools needed to manage a controller/CAO. And the skills to oversee control as a whole.

Last week, we talked about zooming in and zooming out. Well, you need to know when and where to zoom in.

In a mature, large business, that means oversight of the control environment. Treat it like a risk management exercise.

You can use your internal audit function to test that it is working as you think. You will also need to manage the external audit and have the skills to manage audit at a partner level. 

Because if something goes wrong, you will be the one in the audit committee explaining it. And maybe even in front of investors.

If you came through an accounting background you should find this bit easy. In fact, your challenge will be making sure you don’t spend more time than necessary here. It's your comfort zone. You have other skills to learn.

And if you didn’t build these skills on your path up, you need to find a way to shortcut them. That starts with showing real interest.

2. Investor Relations

Some CFOs are good in front of investors. Many are not. It's a skill that is hard to grow without direct exposure.

This will be second nature if you have an IB background, or have spent time in an in-house IR function.

But, if not, it is not a skill you get much practice with. When I took my first Group CFO role, I had nearly zero experience in IR. I leaned heavily on my VP of IR. But I soon realized there isn't much to it if you know your business and numbers well. And could tell clear stories.

Here's the dirty secret. If you are raising debt or equity in a large quantity, you will appoint an investment bank to advise you. Their job is to pick up the bits you can’t do. You just need to learn to manage them well.

Finally, there are earnings calls. Every CFO I know manages them slightly differently. Here is how I do it:

3. Technology

I'll confess this is a weak spot for me. The days of the IT department and finance working separately died a long time ago.

Finance is technology. Everything is technology.

This is a huge area, but let’s focus on what the CFO needs:

• Working understanding of core finance technology. ERP systems, reporting (PowerBI etc.), FP&A, Excel.

• Working with the IT function. I find IT investments the hardest capex to review. Technical jargon, bags of execution risk, hard to measure. You need to speak enough of the language so your IT director doesn't hoodwink you into a gold-plated infrastructure investment.

• Understanding of emerging technology. As CFO you need to have one eye on emerging tech. Especially AI. You don't need to be an expert. But you need to be curious and keep an open mind.

4. Investment Appraisal

Evaluating investment opportunities is a bread-and-butter finance task.

You earn your stripes running DCF, IRR, and WACC calculations using different assumptions. The math is the easy bit.

As CFO, your role is to form judgments. With a focus on whether the assumptions in an investment appraisal are reasonable. And to measure execution risk.

Ultimately, the question is do you believe the numbers? And do you believe the team in front of you can deliver the numbers? This requires fine judgment and a ton of experience.

As CFO of a large business, most investment appraisals that reach your desk look awesome on paper. But returns are not delivered on paper. They happen in stores, on construction sites, on sales calls etc. And things go wrong. All the time. You need to work out which business cases you believe and which you don’t.

For example, if a COO proposes the build of a new factory, you need the skills to evaluate it critically. 

• What are the sales growth assumption?

• What are the market assumptions that sit behind that growth?

• What will the competitors do in response?

• What are the execution risks against the plan?

• What is the disruption as a result of the project itself?

• Is the team in front of you the right team to do this?

• What are the risks they can’t see but you can?

• How will you know if they have been successful?

• How do you monitor progress?

I could go on.

Investment appraisal from the CFO chair is not spreadsheet work. It’s much less black and white.

It's a judgment muscle you need to build.

5. Capital Allocation & M&A

This is a cousin of investment appraisal. The business is looking to you to make sure money gets to the right place and in the right way. It’s a first principles responsibility of the CFO.

In practice, this can be a headache. You need to weigh up capex investments vs M&A vs dividends vs share buybacks vs debt paydown vs raising debt. This becomes multi-dimensional quickly.

So you need a framework and way of thinking.

Under this discipline, you also need to learn to execute M&A. As CFO, you may need to be the principal on M&A transactions. That means leading the negotiations and building the team.

Some people get to the CFO seat having never led an M&A transaction. That can feel like a big step if you find yourself in a deal, with the board looking to you as the expert.

6. FP&A

I have covered FP&A extensively in the past, so I won’t repeat the content.

However the CFO’s role in the FP&A cycle has a particular slant. You need to work at the intersection of people and numbers. Numbers are pure. People are not. The CFO’s job is to restore that purity.

Your primary job is to resolve the issues. Address the tension points:

• A gap between your bottoms-up budget and top-down? 

• A VP of sales who is trying to squirm out of their sales target?

• COO & CEO can’t agree on whether to build in that big investment or not?

These are the sort of things that can take an FP&A cycle from a 9 out of 10 to a 3. You, as the CFO, must be the difference maker. Clear the roadblock, and resolve the issue.

7. Corporate Governance

I found board management to be the hardest part of being a new CFO.

There’s a whole layer of politics you never even knew existed.

It's not something you learn on the journey. And overnight it becomes vital, with no one helping you make the transition.

High-stakes influencing. In a room full of opinionated, smart people who have a direct interest. No one trains you for this.

Directors’ responsibilities are something you can learn on paper early in your career. But it’s only when you find them tested that you realize how difficult they can be. Again, it’s an area where you don't get low-stakes practice. One day it's not part of your role, the next it is.

I wrote about this extensively back in January.

8. Driving Performance

As CFO, you are there to drive shareholder returns. And that means driving business performance. Which means great execution.

Great execution is hard to master. But the best tool I have found for ensuring execution is a regular performance and review rhythm:

• Daily, weekly, monthly, and quarterly KPIs

• Monthly financial reports

• Board meetings

• Performance reviews by business unit and department

• Escalated frequency of reviews for underperforming area

Building this into a well-oiled machine is much harder than it sounds. Getting the right reporting format, accuracy, and cadence is even harder.

As CFO, you will likely be the owner of that overall system, which means you need to plug gaps, simplify it, and make sure it happens. It’s a skill that you need to learn.

9. Turnaround

As CFO, you will at some point find yourself facing a performance problem. Maybe it's localized, in one part of the business. Or maybe it’s bigger.

Your ability to intervene and change the course of performance is how you earn your money.

Sometimes called Profit Improvement Planning. Knowing when to intervene, and how, is a skill to learn. Too early, and you’ll cause chaos. Too late, and you are sleeping at the wheel.

Managing cashflow shortfalls is a specific skill here too. If the business runs out of cash, it is your reputation on the line. Don’t be the CFO who lets the business run out of cash. I wrote a piece on this a year ago.

Some CFOs specialize in the skill of turnaround. It becomes part of their unique skill stack.

10. Cashflow Acumen

80% of people in the business will think 'sales first.' 19% might think about profit first. You will be lucky if even 1% think about cash flow first.

As CFO, you need to be the cheerleader for a cash flow-first approach. That only works if you think in the language of cash flow.

Remember, as CFO, you are a figurehead. If you want others to think about cash flow first, you have to walk the walk. I call this cashflow acumen.

Those aren’t the only disciplines you’ll need to master to become a great CFO. But they’re a good start. 

And, of course, under each of those disciplines, there are several individual skills that you need to master.

But, have no fear, we will cover all of them in the coming weeks, months, and (in some cases) years!

With the ‘vertical’ part of the ‘T’ covered, next week we will tackle the 'horizontal' part. The skills you need to successfully apply your vertical skill inside the business.

QUESTION

Landon from Michigan asked:

For a first-time SMB buyer/acquisition entrepreneur, what should I be on the lookout for when evaluating SMBs? (<$1M in EBITDA/SDE)

ANSWER

Hi Landon,

You should be looking for a business with:

• Resilient demand

• Manageable owner dependency

• A reasonable price (2-4 times earnings). No SMB with <$1m EBITDA is worth more than 4 times.

Don’t overleverage, or overstretch yourself financially, and be careful when signing a personal guarantee. There needs to be enough headroom in your cash flow forecast to absorb a downturn in performance.

However well you select a business, there is always a probability the business will fail. So make sure you role-play this scenario before you sign, and that the worst-case scenario doesn’t feel too disastrous to you.

Hire a good lawyer, and make sure you get a quality of earnings report done.

SMB acquisition is a wonderful way to build equity in a steady way, and a lot of fun. But deal selection is everything. And it will not be glamorous.

Best of luck with it, Landon.

Thank you for the question.

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And Finally

Next week we will run through the 'horizontal' part of the T (the skills you need to successfully apply your vertical skills inside the business).

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Stay crispy,

The Secret CFO

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need.