There is a simple way to define the responsibilities of the chief financial officer. And it extends beyond the usual interpretation of the CFO position in many companies. If it can be counted, the CFO owns the responsibility for controlling it. The CFO should question and control the number of anything, including the number of chairs to be ordered. That may seem extreme to many a CEO, but it serves a purpose. It is the ultimate control over
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rampant spending or uncoordinated purchasing.
Looking at it that way, there is a check and balance for all departments and individuals ordering materials of any size that affect the cash position and profitability of the company. Further, the CFO should speak up in executive meetings and when invited into board meetings, making sure that any major issues are vetted by the group.
[Email readers, continue here…] I was an early angel board member of a company that subsequently raised over $30 million in venture money following the angel rounds, which themselves amounted to $6 million. I remained on the board through the life of the corporation, a witness to some surprises along the way that were, at the least, instructional. First, the VC’s ordered that the company ramp its burn rate (monthly losses in cash) to over $800,000, which I could not fathom. But it was their money and they must know what they were doing, I thought, as I watched what I thought to be all-or-nothing spending. The CFO dutifully followed the VC commands to spend, and managed the spending process well – even if it exceeded reasonable standards of control over the ever-increasing inventory, headcount, and fixed expenses as the infrastructure grew.
But the CFO let the spending rate continue to increase out of balance with the board-approved budget which projected revenues to ramp, reducing the monthly cash burn. In one four hour board meeting with all in attendance, the board spent almost an hour with the CFO analyzing the financial performance of the company. We never saw, and he never mentioned the balance sheet and cash position. It was eight months after the latest $11 million round and no-one thought it worth focusing on cash, since the position should have been over $5 million in cash and starting to grow – if on plan.
A week after the board meeting, the CFO emailed the board that the company was only weeks from having no cash in the bank. Can you guess the board’s reaction? The CFO was immediately fired. I performed a forensic audit on behalf of the board to determine if there had been any fraud or theft; but there had been none. Spending had continued out of control, much of it for inventory and assets – neither of which appear on the income statement. So those expenditures were not reviewed by the board which had not been given a balance sheet to examine.
The moral is simple. A CFO is responsible for all phases of cash deployment and preservation. Failure to manage to plan, and failure to inform the board of dangerous excursions, caused this company to fail as the VC’s decided ultimately not to continue to pour money into the investment.
Maybe the CFO could not have saved this company; but he surely could have slowed the flow of cash, informing the board, and giving the board and CEO the opportunity to pivot the plan, to reduce inventory, to reduce spending, or to consider looking for a strategic partner or buyer.
Especially in companies where the CEO or founder is not a financial expert, the CFO is expected to be knowledgeable, willing to confront as well as inform, and to find early warning metrics that help in the process of effective cash management. That person is not a bookkeeper, counting the past, but an expert at forecasting and control.
I would go a step further. I would want the CFO to be devil’s advocate on any strategic decisions affecting revenue generation, biz dev, cost of sales, changing or extending the product line, customer service, training, billing (an area where customers can be driven away quicker than sales can build new accounts), product development, and on and on like that. In some organizations the CFO has direct control of, or shares responsibility with the COO for, the administration of the company. And this is another area where companies often run aground: failure to pay attention to the plumbing. Bottom line, a good CFO who can hold your feet to the fire on strategic and administrative decisions is worth his/her weight in gold, because all that stuff ultimately affects the bottom line.
I agree with the premise that the CFO owns the financial plan (CAPEX, Operating Budget and cash flow). However, I would extend Dave’s argument to include all performance metrics such as cost of customer acquisition, customer retention rates, life time value of customer. etc) since many of these are key budget assumptions and indicators of financial performance. They should be compiled, reported and monitored by an objective party which the CFO should be.