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Lucas Hughes was a middle manager in finance at SpaceX.

Despite being with SpaceX for 8 years, he had never interacted with Elon Musk.

Until today.

He knew the business, and came from good stock. Before SpaceX he had four years with Goldman Sachs. But he was nervous. Who wouldn’t be?

Musk opened the conversation by dictating his expectations of finance:

“You are not the friend of the engineers. You are the judge. If you’re popular among the engineers, this is bad. If you don’t step on toes, I will fire you. Is that clear?”

After a nervous nod from Hughes, Musk got to business:

“What are the best parts in Raptor as judged by the idiot index?”

“I’m not sure. I will find out,” Hughes responded.

“You better be f*cking sure in the future you know these things off the top of your head.”

What followed was a humiliating diatribe from Musk, but he saved the most cutting line for last:

“You have very badly failed. If you don’t improve, your resignation will be accepted. This meeting is over. Done.”

The next day Hughes returned with all of the data at his fingertips. He and Musk worked through a plan to reduce the cost per Raptor engine by 90% in the next 12 months. Musk behaved like he didn’t remember the conversation from the previous day.

This is an extract from the Walter Isaacson biography of Elon Musk. And a peek behind the curtain of working in finance in one of Musk’s businesses.

I found the book fascinating.

I couldn’t help thinking about what it would be like to be a CFO in that environment.

How would you run a budget process?

How would you control spend?

How would you stop Musk from letting his mouth find trouble with the SEC?

You’d think a CFO would last about as long as Elon’s latest promise of full self-driving.

But Musk’s CFOs seem to have a surprisingly normal tenure.

Zach Kirkhorn stepped down from Tesla last year after 13 years, with his last four as CFO. And did so with a reputed $590m fortune, all before reaching his 40th birthday.

Tesla’s stock increased 10x during Kirkhorn’s four-year reign:

That’s an incredible run by any measure.

And Bret Johnsen has been CFO at SpaceX for 13 years.

So not only is it possible to stick it out as CFO in Musk’s businesses. You can thrive.

But how?

Well, I’ve never met Elon. But I have worked for an autocratic, ultra-successful founder. Some of the stories in Isaacson’s biography rang close to home.

In my view, it takes about ten years as CFO in a regular corporation to learn what you can get from one year as a CFO in chaos.

So, here are the 7 things you can do to succeed as the CFO for a maniacal entrepreneur:

Before we get into it… Elon Musk is a controversial figure. There are enough opinions on Musk’s behavior, you don’t need to hear mine. (Likewise, I’m not interested in yours.)

There are two reasons I have written this piece:

One of the richest guys in the world. A value creation machine.

It’s easy to think working as a CFO for Musk would be a great way to get rich. Just need to keep the balls in the air, and make sure you catch Musk’s slipstream to build your fortune, right?

Well, maybe … it has worked for many, particularly Kirkhorn.

But that has come with more volatility than a normal gig. With survival (and the risk of stock options going to zero) being a threat through the various highs and lows of Tesla’s history. Not to mention the risk of being fired at the whim of the founder.

If you want to get rich as a CFO, this is a way. But not the best way. A F500 CFO role or one or two big-cap PE exits will get you a hell of a bag with less career and financial risk.

To get the most out of working with someone like Musk, you have to commit to the mission. Specifically, you have to commit to his mission.

Whether that’s electric vehicles, going to space, or some brain chip I don’t understand.

Musk describes himself as ‘hardcore.’ He is punishing on his team and justifies it by being even more punishing on himself. Unless that sounds electrifying to you, stay away.

One of the first lessons you learn in corporate life is ‘managing expectations.’ This is corporate bull sh*t speak for promising less than you deliver. Being cautious about the commitments you make.

But managing the expectations of a rabid entrepreneur is a great way to get fired.

Entrepreneurs are tinkerers. Pragmatists. They are the kid in school that pulls the fire alarm. They do it just to see what happens. Spoiler: when you pull the fire alarm, the fire alarm rings.

You cannot tell people like this that they are wrong.

So a debate about whether it is going to take 2 hours or 5 days to refresh the costings for the Model 3 is pointless. That is not going to end well for you.

Don’t manage expectations. Instead, try. And fail, if you must. But go for the moonshot.

Musk’s great trick is setting an outlandish target. A 100x transformation. And when only 25% come in, he still has a 25x transformation in hand. Then he goes again.

In 2016 Musk ordered his engineers to remove all steering wheels and pedals from the prototype Model 3 and Model Y.

Each time Musk walked the factory the engineering team would make sure there were pictures and models of pedalless robotaxis to show to him.

This was a distraction. The engineers continued to plow their energy into developing cars with pedals and steering wheels. Eventually, Musk accepted the engineers' design for launching the cars.

He needed to see it wasn’t (yet) possible to accept it.

You don’t get to Mars by accepting conventional wisdom. Musk breaks everything at his businesses down to first principles.

This means removing assumptions. And going back to only the things we know to be fundamentally true. Then building logic up from those truths to solve problems.

One of Musk’s go-to soundbites is “Physics is the law, everything else is just a recommendation.”

Do not expect anything you say to be taken at face value. That means the empty platitudes and delay tactics that work in 99% of the world’s corporations won’t work here.

You need to understand your craft, from the foundations. This will help you react when the sh*t hits the fan. And make you a 10x better CFO.

It’s the opposite of the ‘we’ve always done it that way’ mentality.

These sorts of elevated critical thinking skills are rare. And, frankly, are particularly rare in the accounting and finance profession. But to cut it in this environment, you have to be one of the rare ones.

If you are working for a techno spacebot like Elon Musk, surely you need a high-tech finance function? Yes, I grew up in the 80s, we still say ‘high-tech’.

And to some extent that is true. With a front office at the apex of innovation, you can’t have the back office lagging too far behind.

But … these businesses also move at a breakneck pace. Metrics will change, and new operating units will start overnight. Processes will need to adapt quickly to accommodate.

These are generally bad conditions for automating. Automation is great at accelerating the time of an established process. Like reducing time per transaction/cycle/process.

It’s not good with poorly established processes. If your process produces sh*t, then automation will just produce sh*t at a fast rate.

For example, the Tesla Nevada battery pack factory was built with the highest level of automation and robotics. The goal? Reduce labor cost per unit.

It didn’t work.

“We began sawing robots out of production lines, and throwing them into the parking lot”

(Imagine the asset impairment 😬)

Automate, yes. But only once the underlying process is well-defined and effective in a manual state.

Note - AI technology will change this dynamic in the future, but it’s not the future yet …

Entrepreneurs have their own ‘pet’ metrics. Often a crudely calculated KPI that is more familiar to them than anyone else.

For Elon, this is the Idiot Index.

Idiot Index = Cost of a part or finished product divided by cost of its component raw materials at the commodity level.

Elon has his finance teams track the idiot index by component in every product.

The thought is that the higher the idiot index, the more complexity or inefficiency has been engineered into the component. Either within his businesses or the supply chain.

Anyone with a basic understanding of manufacturing knows this is far from perfect. It ignores labor, equipment costs, energy, etc.

As a metric, it is (idiotically) simple.

Which is exactly why it is perfect for businesses like Tesla or SpaceX. It is the only way to change archaic industries with established supply chains (cars and space).

The idiot index is about using first principles to challenge deeply embedded supply chain norms or rules. The kind that load-in hidden cost.

Most finance professionals can’t cope with this sort of ‘technical imperfection’ in a metric. They over-intellectualize it.

Don’t believe me? Read some of the comments underneath this tweet:

Bright people wrapped up in the technical accuracy, completely missing the point of why it exists in the first place. (Sorry if you are one of the people who commented.)

As the CFO, you need to lean into the pet metrics of the founder. Understand them, and build reporting around them. Maybe you can improve the quality of the metric over time. But they won't hear you until you've demonstrated that you can see it from their perspective.

It’s become cliche, but from my experience, it’s generally true. There are wartime managers and peacetime managers.

Wartime managers are agitators, with a bias to action. Great when ‘something needs to happen.’ Less good at keeping a steady state.

Peacetime managers are the steady hand to keep a good thing going. Not so good when the sh*t hits the fan.

In Musk’s businesses, it’s wartime, all the time.

He moves from one 24/7 maniacal ‘surge’ to fix a time-critical problem to another. He catches an hour or two of sleep in a sleeping bag on a factory floor for days on end. And I don’t mean in the scrappy start-up days. He’s still doing that now.

In other words, aside from the long hours, the environment is chaos.

It would be easy to assume the chaos is transitory, and ‘things will settle down.’

They won’t.

Chaos is the thing with Musk. If there isn’t chaos, he will manufacture some.

He is a walking inertia killer.

Loving chaos, tackling it with humor, and steadily bringing order to that chaos over time is the game.

When Zack Kirkhorn left Tesla, Elon sent this tweet:

Anyone who has read the book will know Elon doesn’t do things like this.

By doing a top job, over a long period of time, Zack clearly built credibility with Musk, as well as the Tesla board and investors.

This credibility would give him leverage and improve his ability to influence inside the boardroom, and with Elon.

The Tesla CFO has a special challenge to deal with. They need to balance the entrepreneurial pirate ship built by the founder with the expectations of the public markets. Often these are like oil and water. And the CFO is the guy or gal caught in the middle.

Knowing where the line is is vital. If you cry compliance too often, you lose respect of the founder. But go the other way and you could lose your career. This requires judgment, guts, and a steady hand.

As Musk’s CFO you would need to slowly build credibility and trust to be able to pick disagreements. You should do this carefully and infrequently. But to work well with Musk (or someone like him) in the long run, you must be able to influence his thinking somehow.

Otherwise, why are you there?

This is an article for entertainment purposes only, based on excerpts from Walter Isaacson’s book and other background research.

Arthur Levitt from US asked:

What items would you focus on if you were hunting accounting frauds?

Arthur, if that’s really you, you are asking this question 20+ years too late buddy … but let me try and help.

Accounting frauds are always detectable (above a certain size) if the accounting function is doing its job properly. The answer is in the balance sheet. It’s always in the balance sheet.

Providing your cash balances and reserves reconcile, detecting accounting fraud is a case of hitting the balance sheet hard. You are looking for assets (Debits) in the balance sheet that are overstated or can’t be supported. Or Liabilities (Credits) that are unrecorded, or under-recorded.

I’ve seen a few accounting frauds in my time, and every time they were detected (and avoidable) through the right balance sheet review controls. It’s normally hiding in plain sight and just waiting for someone to run down the balance sheet line by line and ask sensible questions.

They always look so obvious in hindsight.

If you would like to submit a question, please fill out this form.

Elon Musk is in the news this week regarding his pursuit of additional voting rights for Tesla. Perfect timing, given the topic of today’s special edition, and this month’s series on board structure. Here is an interesting discussion of the issue by Prof G.

This blog post from Mark Mason (CFO of Citigroup) caught my eye. A masterclass in simple finance communication. Reassuring employees about the impact of negative one-off adjustments in the financials.

Making the blog public is super smart too. Reassuring investors, and clients, as well as employees.

Next week our season on Financial Control will get underway.

If you enjoyed today’s content, don’t forget to check out our sponsor Turbine.

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.