Face-off

“I guess… that will be me then?”

It wasn’t that I was reluctant, more that I was caught off guard.

We were in the final stages of an M&A deal, and emotions were frayed. The deal was on a knife edge with a stalemate over the last 3 or 4 crucial points.

We were the sellers, negotiating with a PE fund notorious for being aggressive and mischievous. And the deal was being led by one of their senior partners who was particularly unpleasant.

But we were in an exclusivity period with this fund - they were the top bidder - and we needed to get this deal closed.

So far negotiations had run through our appointed investment bank. We had been removed from the real point-by-point heat of the deal. But that approach had hit a brick wall, and now needed something different.

Our investment banker had suggested a ‘principal to principal’ only meeting to get the final points agreed upon and the deal finished. In other words, no lawyers, no bankers, just the deal lead from both sides.

I nodded in agreement before it hit me that he had meant me and this killer from the PE fund get in a room to push this over the finish line. It would be the most high-stakes negotiation I’d been responsible for by 10x. I immediately felt the imposter syndrome creep in.

It would be the first time I’d been the ‘face’ of a company in this way. I was, by this time, accomplished in running M&A deals, but mostly in a faceless, pulling the strings from behind the scenes, kinda way.

This would be different.

It went ok, we got the deal done. I probably conceded more than I should in hindsight. He was definitely the most comfortable in the room, and I was glad when it was over.

But I didn’t realize at the time how valuable this would be for my journey towards CFO.

When I became CFO a few years later for the first time, I realized this feeling of being the ‘face’ of the company to some stakeholders was part and parcel of the job.

And I’d been glad to practice feeling uncomfortable before I got to the seat. 

Intangible liabilities

This month we will focus on what you need to make the leap to CFO.

This is a three-part series:

• Week 1 (Today) - The hidden skills you need to be a CFO

• Week 2 - How to practice those skills and prepare for the role

• Week 3 - How to find your first CFO role

In our March series on the ‘T-Shaped CFO,’ we covered the breadth of skills a great CFO needs. But we did not cover how you acquire those skills.

Building the skills

You can think about building the skills a CFO needs in three different buckets:

1. There are skills that you have practiced all your finance life. These are mostly technical: budgeting, reporting, corporate finance, etc. You have done your 10,000 hours, and they should be finely tuned by the time you reach the CFO seat.

2. There are skills that you have practiced or acquired along the way. This may include some specific technical areas but is more likely leadership/strategic skills. Leading teams, communication, strategy setting, etc. These will get stretched as you hit the CFO seat, but you have a robust foundation.

3. Then, finally, there are the ’Intangible Liabilities.’ These are the skills that are essential the minute you hit that CFO seat, but you have had very little opportunity to practice on the way there. You have to grow from beginner to expert overnight.

What are Intangible Liabilities?

Think of it like climbing Everest. Early on, you rely on your trained skills: strength, stamina, navigation, etc. But as you approach the summit, the air is thinner than you’ve experienced before. There’s a new challenge, one your training could never have prepared you for. You are learning on the job, with much higher stakes.

It’s a classic case of ‘what got you here won’t get you there.’

Today’s post is about identifying those Intangible Liabilities. Each of these are things that caught me off-guard when I took my first CFO role. I knew they were a thing, but I had had no appreciation for how ill-prepared I’d been.

So, here are six ‘hard-to-get’ skills that are essential to be a successful CFO:

• Board management

• Owning the numbers

• Seeing around bends

• Being the deal principal

• Being the face

• Connecting the dots

Let’s dive into them one by one:

1) Board Management

Typically, there are two types of CFOs in the boardroom. One who just serves information to the board. And one who is capable of influencing and changing the view of the board (when necessary). It’s easy to fall into the role of the former as a first-timer, but you need to have the skills to be the latter. And that’s hard when you are dealing with experienced board directors.

The boardroom is an intimidating space for newbies. Trust me. It took a tremendous amount of time and mental energy to get a feel for the big leagues on my first go. Each independent director (which included 3 big hitting former CFOs) had an agenda they wanted to push. And their own information requirements (for which the agenda was less clear).

The Chair, Audit Committee Chair, and Independents all wanted different things. All expecting ‘pre-meets’ before the board meeting to ‘align’.

F*cking exhausting…

A good Board will be more functional than this. However, the problem here is information asymmetry. You won’t know how the Board really functions until you are in the seat.

So how do you practice this from a seat one or two below the CFO? The more you can get exposure to the boardroom, audit committee, the independent directors the better. Next week, we’ll talk about some practical ways you can do that.

My first experience of a BigCo Board was a bit of a sh*tshow. If you want to hear more of my boardroom war stories, check out this post.

2. Owning the Numbers

When you are the CFO you feel the numbers more. You can’t help it. Your mood is affected by this month’s P&L and cash forecast.

It’s hard to explain, but it becomes personal. You know the buck stops with you.

There is no ‘group’ balance sheet to fall back on. No benevolent HoldCo to wire you intercompany funds to help you through a tight spot. It’s you. You’ve got to fund the balance sheet properly.

If the business goes through a rough patch, you start to visualize WSJ stories with your name on it. Not good ones.

If harnessed, this can be very powerful. Motivating. It focuses the mind.

But… I’ve also seen many great senior finance pros crumble under this pressure. Learning to harness that accountability into driving performance is hard. It’s a skill.

And by definition, you need to be in the CFO seat to truly experience it.

But you can get close: through a Business Unit CFO role.

In a BU CFO role, you have the same accountabilities as a Group CFO over business performance (for your BU). But with one difference. You have the protection of a group balance sheet, someone to step in and plug a funding gap if needed.

To practice, simply behave as if that protection isn’t there.

Perform in your BU as if you have to stand alone. Treat that intercompany treasury balance like it’s real cash (spoiler: it is real cash).

Learn to explain underperformance without losing credibility or trust.

Your Group CFO will love you for being so accountable, and you will become a better battle-hardened finance leader.

3. Seeing Around Bends

The further you move up the finance organization, the more the perspective changes. At entry level, you are looking in the rearview mirror 100% of the time. You are recording things that have already happened.

That does change a bit as you move up. You get exposure to budgets, forecasts, and ad-hoc analysis, which is forward-looking. But even at the controller level, you will spend most of your time looking backward.

That’s different in the CFO chair though. Here you will spend your time looking to the future.

But the best CFOs don’t just look out the windshield. They also see round the bends. They see the unseeable. They see the hazards (and opportunities) that others can’t. It is this foresight that justifies that big paycheck.

Giving the business an early fair warning of upcoming issues can become a durable competitive advantage for a business. It is that powerful.

This is another skill that is built on experience (which skill isn’t?). So exposure is key. Gotta get the reps in.

The good news is that spending some time in a good FP&A role will help. Exercising that ‘forward-looking’ muscle. While in that role, you can also practice by expanding the time horizon of your thinking.

Try and worry about the things your CFO might be worrying about. Keep an eye on macro or regulation trends that could impact your business in five years. Think about what impact those issues will have on other parts of finance. And the wider business.

‘Wargame’ these scenarios all the way through. What would it mean in practice? And, given that… what actions should the business take to protect itself?

4. Being the Deal Principal

As CFO you become the ‘deal principal’ for most corporate finance activity. M&A, capital raises, refinancings, etc.

This means leading negotiations.

Corporate Finance deals are often the most high-stakes negotiations in the business.

And everyone is looking to you to get it done right.

If you are diluting the current shareholders by 30% to introduce new equity, you better have gotten a good deal.

Likewise, if you are locking a debt structure in for the next 7 years, that extra 12.5 bps of interest matters.

Early career technical corporate finance helps (e.g. corp fin, corp dev, IB, etc.). There is a lot of jargon in this world.

The good news? It’s not as complicated as people make it sound.

The most important skill you will need is negotiation.

This is the closest you will get as CFO to having your hands directly on the shareholder value steering wheel. It’s a different feeling to being in the passenger seat.

You will do 10x+ more negotiating as CFO than as a controller. Don’t wait until you are a CFO to practice this.

Take opportunities to lead lower-stakes negotiations throughout your career. Supplier negotiations, advisor fees, software contracts, etc. And treat it like it’s the highest of high stakes.

5. Being the Face of the Company

I’ve known some brilliant CFOs who check every box except this one. They never got comfortable with the public scrutiny of leadership.

Like it or not, you just became a ‘face’ of the company, especially for financial stakeholders (banks, advisors, shareholders). Many will see you as a number 2 to the CEO.

Internally, people will watch your every move. You have to be mindful of everything you say and do.

That means you will have to land it on stage at the company conference, investor calls, and high stakes 1 on 1 situations, too.

It’s harder than it sounds.

Then there is the external world. Stakeholders. Investor calls. It could mean the media too. Especially if you are after the biggest CFO jobs. Your external reputation is now linked to the success of the company.

There is little you can do here to prepare. I found my confidence here came from experience and competence in the day job.

The more you know your sh*t, the easier it is to come across like you know your sh*t.

6. Connecting the Dots

This is harder to explain than the others. It’s the most intangible of the intangibles. As CFO you have a perch over the entire organization.

This allows you to see patterns, risks, and opportunities that no one else can. These days, I often feel this is where I add the most value as CFO.

You might spot your procurement team working on a cost-saving initiative that is going to conflict with a new business opportunity your sales team is working on. Or you might spot a faster way to get the operations team the reporting they need.

Businesses work in silos. Especially as they get bigger.

This isn’t a good thing, but it happens. You need forces within the business constantly scanning across the business to spot and fix disconnects between the silos (and ideally break down the silo culture together).

That force is you.

Net-Net

The CFO role isn’t just a promotion—it’s a transformation, and it demands mastery of skills you’ve never had a reason to practice.

Shopify CFO Jeff Hoffmeister (who we interviewed in September) has thrived despite his first role in a business finance team being CFO of a $100bn market cap business. Turns out his experience as an MD for Morgan Stanley helped him develop these skills better than a traditional CFO path.

I’ll leave you with this quote…

Next week we will get deeper into how you can develop these skills into intangible assets ready for you when the CFO seat is yours.

Jake from State Farm asked:

I'm absolutely obsessed with your newsletter. My wife is getting sick of me talking about it (though she's also happy about my improving career prospects).

I've been trying to develop my storytelling skills this year. But one thing I keep getting stuck on is how exactly it applies to when I present my part of the financial results to our CFO for quarterly earnings call prep.

I like the What / So What / Now What framework, but it's the last part where I get stuck. "Gross margin is down 20 bps YoY. The reason is we didn't execute the price increase well enough on Product Line C..." Now What? Am I supposed to explain to him how to better execute the price increase next time? Doubtful... but what?

And even as I write the above, I realize I struggle with the 2nd part too. "So What" isn't asking "why did it happen," it's asking "why is it important." Is it as simple as "This caused a $20M miss on our forecast"? What am I missing here? How do I tell the quarterly story in a relevant way?

Thanks, Jake, this is an interesting question.

And yes, the ‘what, so what, now what’ framework is great for this example (credit to Andrew Lynch for this).

You are right, I think you are confusing the ‘what’ and the ‘so what’. And I think in your example, you can go much further on the ‘what’. I think this is what it is making it harder to understand what it means downstream.

Let me give an example of how you might want to apply it:

The What (What is happening and Why)

• The gross margin is down by 20 bps

• Driven by a failure to execute price increases on product line C

• 25% of the customers (by revenue) rejected price increases on this line

• Two competitors in this range reduced prices last year as they invested more heavily in automation

So What (What are the important implications for the business)

• This caused a $20m miss vs forecast and left segment EBIT 50 bps down vs investor guidance

• We are less competitive than we were twelve months ago on product line C

• This puts us at risk of eroding margins and falling sales. A 10% decline over the next 12 months here would cost us $50m of contribution margin vs our long-range plan

Now What (And what does the business need to do next)

• We have a strategic problem with product line C. Our options are:

  • Accelerate our automation project on this line. It will punch a $25m hole in the capex plan, but deliver $15m of cost savings (annualized) and leave us competitive again

  • Redevelop product C to reduce COGS and improve margins by 300bps, accepting that much of this will need investing in price

  • Explore an exit of a product line C via trade sale. We have plenty of long-term contracts that would be attractive to our competitors (who have the capacity)

It sounds like you need to get deeper into the ‘why’ behind the variances you are reporting. This will mean working more closely with your partners in the business and thinking through the full life cycle of the problems in the business you discover.

Thank you for the question and I hope this helps.

PS - Please apologize to your wife on my behalf regarding your obsession with my newsletter. There is an answer though… she could sign up too then she’ll be able to join in with the conversation.

Just click this link to sign up, Mrs. Jake.

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

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And Finally

Next week we’ll get into how to practice the hidden skills you need to be a CFO and how to prepare for the role.

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Stay crispy,

The Secret CFO

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Disclaimer: I am not your accountant, investment advisor, 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. And certainly is not investment advice. Running the finances for a company is serious business, and you should take the proper advice you need.