Is your CFO a bookkeeper or a strategist?

Here’s one that most small company founders and CEO’s miss until it may be too late.  What is the role of a chief financial officer in growing and protecting the company?

How about co-strategist?

I recently coached a CFO in a small company to urge the CEO to stop working upon the operational issues and focus upon the future, even if that meant a pivot to protect the business as the world was changing in that industry at an accelerated rate.  That challenge would require vision from the CEO supported by data and what-if analysis by the CFO.  How much more valuable would the role be if not to think and work strategically?

Defining the expected and common role of a true CFO

There is a simple way to define the common 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 founder or CEO, but it serves a purpose.   It is the ultimate control over rampant spending or uncoordinated purchasing.

Where else would there be a knight-protector in a company?

Looking at it in that light, 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.

Another of my stories, this time about a CFO in name only

[Email readers, continue here…]  I was an early board member of a company that subsequently raised over $30 million in venture money following the angel rounds which I led, 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.

Board member orders a ramp in spending that kills the company.

First, the VC’s ordered that the company ramp its burn rate (monthly losses in cash) to over $800,000 a month, which I could not fathom.  But even though I objected, 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.  For me this was nuts.  But the CFO dutifully followed the VC command 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.

How the CFO could have saved the company.

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 board members in attendance, the board spent almost an hour with the CFO analyzing the financial performance of the company.  No talk of strategy.  No input from the CFO except to answer questions.

… and how the CFO missed the chance to be responsible.

We members of the board never saw, (never asked) and the CFO 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.

Then the bomb dropped…

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.  And how about that role we touched upon – as co-strategist?

Facebooktwitterlinkedinyoutubemail
This entry was posted in Depending upon others, Growth!, Hedging against downturns, Protecting the business. Bookmark the permalink.

3 Responses to Is your CFO a bookkeeper or a strategist?

  1. Alan Bernstein says:

    Dave, what’s the right time to upgrade to a CFO from a bookkeeper and accountant in a startup? Any guidelines? Thanks.

  2. Dave Berkus says:

    Alan,
    Accountant should set up the books in GAAP format (I assume you are using QuickBooks) and do taxes. Bookkeeper is fine for operating tasks. CFO is needed for planning (such as forecasts and budgets) and controls over large expenditures. But most of all, a good CFO is a co-strategist with CEO and a valuable part of the “C” suite. When to hire? It would be good to interview rental CFO companies or individuals for part time guidance right before a major capital raise and then as a regular contributor after funding. Hope this helps.
    -Dave

  3. Hear, hear!! Truly words of wisdom from a seasoned investor/entrepreneur, gratefully acknowledged by the founder (and still president) of the first “rental CFO” or “fractional CFO” as they’re known today, in California, if not in the country.
    Solid advice, Dave. And of course I’ll circulate your post widely. Have a great day.

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.