🎩 The 5 Hats of the CFO

What they are and when to wear them

This is CFO Secrets. Giving you the ingredients you need to bake yourself into the freshest CFO.

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In Today’s Email:

  • 🧢 Juggling hats as CFO

  • 📉 How you shouldn’t value Bitcoin

  • 🪓 Taking cost out permanently

THE DEEP DIVE

The 5 Hats of the CFO

The CFO seat is difficult because it requires you to be different things to different people. Sometimes at the same time.

In my early days in senior finance roles, I found this difficult.

I had to make sure I was being what the business needed in that moment. That could mean several gear changes inside one day. Often inside one meeting.

It felt schizophrenic.

I found this emotionally difficult, and hard to maintain my energy. Exhausting even.

So, I set to work… (that’s kind of my thing)

How could I flip this on its head? I needed a way to play chameleon and adopt to the situation in front of me. But also feel I was doing it in a controlled way.

So I built a framework (also my thing).

I called it the Five Hats of the CFO.

I’ve been using those same five hats for over 10 years, and they’ve served me well. Changing between them tens of thousands of times.

Moving between the five hats felt far more disciplined, intelligent and energizing. I still had the same range as before, but on my own terms. This satisfied the control freak in me.

Anyway, now I’m going to share the five hats with you (again… my thing).

The Five hats of the CFO are:

  1. Custodian

  2. Operator

  3. Leader

  4. Driver

  5. Financier

We’ll dive into each one.

1. The Custodian Hat

As custodian, your duty is to protect the net assets of the business. Not grow. Protect.

This is not the sexiest of five hats (think of it like a fedora). But I started with this one for a reason; it is the most important.

If you can’t wear the other 4 hats, you’ll lose your job, eventually. But if you don’t act as a safe custodian for the businesses assets, you’ll lose your job very quickly.

Safeguarding the assets of the company is a primary duty of the directors of a business. And if the CFO isn’t acting as the protector of net assets… who is?

The good news is, if you have a good accounting function. And in particular a good controller… this won’t need much intervention as CFO.

The way I like to stay on top of this is to test it by ‘going deep’ once in a while. Pick something and test it. Make sure that what you are being told is happening, is actually happening.

If your team got used to you signing off the balance sheet with a quick 30 min review. Once in a while, book an extra hour, pick one complex area in the balance sheet and go deep, at random. Test that your understanding of the control / review system works as you think.

You CANNOT go deep on everything. But you can overview everything, and go deep on some things. Pick those things well, and you’ll get the coverage you need.

Examples of Custodian work:

  • Safeguard tangible and intangible assets; physical security, legal security, cyber security

  • Internal Control Framework; ensure control systems are adequate

  • Defend cash with your life; payment controls

  • Prevent fraud risk

  • Accuracy of balance sheets

2. The Operator Hat

As operator, your job is to ensure the finance operations run smoothly. Helping the business to run it’s day to day without disruption.

If the custodian hat is the most important, the operator hat is the hardest to get right.

Finance touches everything. And there are core processes that cut across the organization. These are not ‘finance processes’. They are business processes led through finance.

This is the ‘nuts and bolts’ of the finance function.

Wearing the operator hat you must ensure the effective working of the following:

  • Order to Cash Cycle

  • Procure to Pay Cycle

  • Inventory Management

  • Financial Accounting

  • Management Accounting

  • Budgeting & Planning

  • Day to day cash management

3. The Leadership Hat

As leader, you must steer the business in the right direction. A CFO should think about the leadership hat in two ways.

Firstly, as a business leader. You must make sure that the business has the correct strategy, culture and resources. This is a responsibility you share (joint and severally) with the rest of the Board of Directors and the CXO.

Secondly, as a functional leader. You must provide direction to your finance team to maximize finance’s positive influence on the business. This will also apply to other functions you may lead (IT, purchasing, etc).

Examples of work for the CFO wearing the Leader hat:

  • Strategic planning (including financialization of plan)

  • Resource allocation (to execute plan)

  • Role model culture and build teams

  • Board management

  • Set internal tone on role and approach of finance

  • External face of finance (markets, shareholders, lenders, etc)

4. The Driver Hat

As driver, your role is to accelerate business performance. With your leader hat on you determined which direction you need to travel in. As driver your goal is to get there as fast as possible.

Most of the time wearing the other hats, you are ‘reading the news’. With the driver hat on, you are ‘making the news’.

Being a good driver, means using the lens of the numbers to drive performance. This means exposing opportunities, or under performance, so that action is taken. Radical transparency.

This is both science and art.

Science - Establishing the facts.

Art - Communicating the facts in the right way to generate action.

Examples of the Driver hat:

  • Performance Management Cycle (Monthly Reviews)

  • Building insights from data

  • Communicating insights

  • FP&A processes

  • Profit improvement planning

  • Maintaining risks and opportunities to budget / forecast

5. The Financier Hat

As financier, you must make sure the business is appropriately funded.

This means making you’ve got enough cash when and where you need it. But not so much that you are paying for expensive excess liquidity. And that those funds are on good terms in the right mix of debt and equity.

This is what most people think CFOs do all day. They don’t. I spend less than 10% of my time as ‘financier.’

Don’t get me wrong … there are times when a much higher proportion is necessary. During a big refinance, it could be 70% plus, but they should be exceptions. A good CFO’s natural habitat should be in the business influencing free cash generation.

Note: VC backed CFOs will spend more time in this hat. They are raising capital more frequently.

Typical financier work includes:

  • Investor relations

  • Capital raises

  • Refinancing

  • Liquidity management

  • Debt strategy

  • Strategic cash management

Wearing any one of the above hats is straight forward enough. The challenge comes in wearing these hats simultaneously, or swapping between them.

Consider this example.

Yesterday, I chaired our capital committee. The monthly session where I review all capex > $50k for approval.

For each capital project I had to wear all five hats:

  • Leader - Judgment on alignment of project to strategy, and review financial case

  • Driver - Ensuring resources in place to execute project and deliver the payback

  • Operator - Ensuring the correct depreciation policy

  • Financier - Agreeing the plan for funding the project

  • Custodian - Formal approval of the capex (and ensuring it can’t be released without approval)

In 2 hours I saw and approved 15 separate capital expenditure papers. That means 75 hat changes in 2 hours!

MEME OF THE WEEK

This made me laugh so much I spat my drink out … Hashtag Finance Jokes

BOOK CLUB

2023 will be a survival of the fittest, and CFOs everywhere are scrambling to take cost out. To make lasting cost savings, you HAVE to reduce complexity. Otherwise that cost quickly creeps back in.

Waging War on Complexity Costs by Stephen Wilson and Andrew Perumal takes you deep into how to make lasting cost reductions, through simplifying business. When I first read this a decade ago, it changed how I thought about the shape of the Income Statement.

Now when I take cost out, it stays out.

Warning: This is a heavier read than other books I’ve suggested, but well worth it.

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Sturdy Birdy Greg

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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 to make the right decisions.

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