Chapter 2
CFO Responsibilities

“The CFO must be the one asking questions that others are reluctant to ask. He must be the one others regard as the person without an agenda.”

Introduction

For the person who wants to consult at a high level, while having significant impact, being a contract CFO is the ultimate head rush. Since 1992, the men and women I met who serve as a contract CFO tell me that they love their job. The three things they enjoy most are

• The high level at which they get to work.

• The tremendous impact they have on their clients.

• The high fees they earn.

Hired Gun CFOs tell me that their clients rarely question the amount of the fee. In fact, their clients tend to rely on their advice and counsel so much that their engagements continue for years.

This chapter will highlight just a few of the nuances that will enable the contract CFO to function at the strategic level.

Completion of this chapter will allow you to

• Understand the high-level role that the contract CFO is asked to undertake.

• Apply the critical skills that a contract CFO will need to be strategic.

• Contrast how the CFO’s role differs from that of the Controller.

• Use the Economic Value Added reporting tool to help the client manage both profits and balance sheet investments.

Attributes of the CFO

A member of our esteemed profession, Joseph Ripp, CFO of Time Warner said in a speech: “The CFO must be the one asking questions that others are reluctant to ask. He must be the one others regard as the person without an agenda.” By extension, his message also applies to the Controller.

In response to the question above, my answer would be that leading at the strategic level requires the CFO to be the true conscience of the firm. You must be the person who is willing to raise issues and counsel other leaders on the viability of their goals, plans, and policies. You must be seen as the professional leader who does not have any biases or an agenda other than the success of the organization.

Amazingly, all the attributes that you rely on to mentor an individual are the same ones you use in being a CFO. You must still be able to listen beyond the words, use questions to open up dialogue, build trust between yourself and your colleagues, and ultimately guide people’s thinking and behaviors. Let us recap those attributes.

Teaching and Training

As the CFO, you are constantly teaching others about the nuances of finance, accounting, and business management. Your position is moving toward that of a constant trainer.

Counseling

You will need to hold the hands of other leaders and colleagues as you guide them through difficult situations and tough decisions. In leading at the strategic level, you will often act as a counselor who dispenses advice and suggestions. You will often need to dispense tough love as well. Sorry, this responsibility comes with the job of being the conscience of your organization.

Guiding

Just as in mentoring an individual, you must guide the actions and decisions of other leaders in terms of making ethical choices, relying on checks and balances, and wise decisions. While it would be nice if every leader in your organization had integrity, meaning that they walk their talk each day, you know this is not always the case. Once you choose to be the Controller or CFO, you must be willing to shape other leaders’ behaviors and decisions so that they stay focused on plans and solutions that benefit the customer, the organization, and ultimately the shareholders instead of themselves.

Learning

Although you are an accomplished professional, you still have many things to learn. By keeping an open mind and knowing that you can learn from the examples of other members of the leadership team, you will ensure your future success and discover that there are many other avenues to channel your talents in the organization. Over the years, I have met CFOs who used their experiences and knowledge to become CEOs, venture capitalists, hedge fund managers, niche consultants, and operations executives. The CFO’s job is a launching pad that opens up to the unlimited opportunities available to the person who is willing to stretch beyond what is comfortable and predictable.

Sharing

Just as in mentoring an individual, you will be sharing your insights and wisdom with others in the form of stories, examples, and analogies. This is why this workshop requires you to spend most of the day sharing your story.

Questioning

One of the more powerful tools a CFO uses is thoughtful questioning. Instead of relying on declarative statements, a good leader uses questions to open people’s eyes and minds to new possibilities. Very often executives and managers are so focused on their issues or goals that they get bogged down in their personal agendas. Because of your wisdom and experiences, you see clearly what the leadership team needs to do to achieve and accomplish its strategic initiatives. Therefore, to be an effective CFO you must get in the habit of using questions—open-ended and pointed—to get the leadership team to create the conclusions that will help them get to where the organization needs to go.

Relating

One of the strongest ways that you, the CFO, builds bridges and fosters relationships of trust is to use analogies, examples, and stories to get your point across. This means you must speak at the same level of the person you are talking to. The CFO will use examples and stories from many different sources. This requires you to constantly be listening, learning, and growing.

Listening

Along with the skill of questioning, as the organization’s internal leader, you will rely intensively on the ability to listen with your ears as well as your eyes and intuition. Managers with hidden agendas or hubris will rarely speak clearly and address the issue. Instead they will circle around the issue. They will resist. They will deny anything is wrong. Your job is to listen to what is said and unsaid in order to get a sense of what the person is not saying or trying to hide. By listening carefully and using questions, you become more of the conscience by bringing forth those things that need to be expressed and brought out into the open.

Intuitiveness

Just as in mentoring the individual, over time you will develop a keen sense of what to say and not to say. We call this business sense, but it is in fact your intuitiveness. It is wisdom you hone from your experiences both within the organization and from without. This is why some executive teams only want a CFO or Controller with gray hair because they feel, with age, this person has developed a strong sense of what to do. While I disagree with this practice, it is human nature for us to assume that only people of a certain age have become in touch with their intuitiveness.

Remember that your intuitiveness is both an asset and your ally to be an effective CFO.

Creativity

The creativity that the CFO needs to be successful in getting others to change is one of being open-minded to new possibilities. This skill works hand-in-hand with your intuitiveness. Your creativity comes into fruition when you think of tools, methods, or processes that the organization and other leaders can use to remove obstacles that hinder execution of the plans.

Therefore, as CFO it is incumbent on you to be constantly thinking of tools and best practices that the leadership team can use to make progress toward the corporate goals and strategic initiatives.

How the CFO and Controller’s Roles Differ

The CFO and the Controller are intimately involved in meeting the organization’s fiscal or financial goals and objectives. The responsibilities of the Chief Financial Officer are broader and extend far beyond the finance department.

Typically more externally oriented, a CFO is concerned with organization-wide and marketplace issues. As an executive with a deep understanding of finance, as well as broad-based business knowledge, who serves on the leadership team, the CFO is responsible for bringing the financial point of view to the forefront in their organization’s most crucial decisions. The board and owners (shareholders or members) look to their CFO to establish, maintain, and monitor the vital Governance Program.

The Controller is generally more narrowly focused on the issues and obligations of the finance department, administration areas, and, most critically, the internal control structure. While the Controller’s responsibilities may be less broad than those of a CFO, a good Controller must be prepared to back up their CFO. A wise Controller will develop a deep understanding of how their organization works and will provide the necessary skills that support their CFO’s responsibilities.

Both financial professionals must be viewed as a business partner and, therefore, take a proactive role by participating in both management and operational decision-making.

As you will see in table 2-1, the CFO and Controller positions can be seen as quite different in their scope and orientation. It is unwise to assume that someone with Controller experience can automatically move into the role of the CFO, or that someone who has been a CFO is also excellent at the responsibilities of the Controller. Some organizations prefer a CFO who is not a CPA to ensure that he or she lacks a “bean counter” mentality. A good CFO must avoid having a “green eye-shade” mentality.

Responsibility Comparison

Table 2-1 shows the overall responsibilities of the two key roles. Notice that the CFO must take ownership for global and firm-wide issues while the Controller must take ownership for the accounting team and its impact on finances and service.

Table 2-1: CFO and Controller Responsibility Comparison

^* This comparison assumes that the Controller reports to a CFO. If the leader of the finance function, especially in a small organization, serves as both Controller and CFO, then many of the responsibilities designated for a CFO must be assumed by the Controller.

Functional Role Comparison

The roles of the CFO and Controller must complement each other, with each person bringing his or her unique skill set to the table so that together they serve to fulfill an essential organizational function, what we refer to in the encompassing term “Accounting.”

Basically, the CFO’s functional role is to help define the big picture and develop or assist in developing global strategies that carry out the organization’s mission. The Controller then uses his or her resources and technical knowledge to execute those strategies with specific tactics. Through the Controller’s reporting responsibility, the executive team will obtain timely feedback regarding their strategy’s viability and on employees’ efforts to carry out the designated tactics.

While both serve as a vital communication nexus, the CFO essentially fulfills the role as the main interface between the finance function and the board or executive team and between the finance function and the shareholders. On the other hand, a Controller is the main interface between the finance function and all internal departments, and between the finance function and most external stakeholders (IRS, vendors, et al.). Table 2-2 compares the roles of the CFO and the Controller in each major functional area.

Table 2-2: CFO and Controller Functional Role Comparison

^* This comparison assumes that the Controller reports to a CFO. If the leader of the finance function, especially in a small organization, serves as both Controller and CFO, then many of the roles designated for a CFO may fall to the Controller.

CFO Tool: Calculating the Economic Value Added

A specific area where the CFO can help their employer or client is to determine if they are truly making a profit. Many small businesses go under because, on paper, the business was profitable but not returning the net cash flow necessary to cover the cost of capital. This strategic thinking tool, called the Economic Value Added is something the contract CFO can use to immediately help a client determine their true profitability picture.

Economic Value Added Defined

Economic Value Added (EVA) is a decision-making tool to determine if an investment of capital is generating a return. It is a measurement of the business unit’s cash contribution after removing what could have been earned elsewhere.

Economic Value Added objectively helps

• Evaluate a business unit’s performance.

• Reward teams for performance.

• Plan strategically.

EVA assumes that capital is not free. This is very important! Owners and managers are mindful of how much debt costs because of the interest rate. They also believe that the capital contributions from stock purchases are free because there is no interest rate applied to them.

Since every operating business unit consumes capital of some kind, the manager of each unit must understand that the more capital they need to operate, the more profit they must generate to cover the cost of the capital. This is determined as the opportunity cost of capital.

A typical operating unit consumes capital through these five balance sheet items:

• Accounts receivable

• Inventory

• Depreciable assets

• Amortizable assets

• Non-depreciable assets

Assume that there is a business unit that sells its products for cash, carries no inventory, and does not require any fixed assets to operate. Intuitively we know that this is both an efficient operation and a highly profitable one.

Assume that there is a business unit that ties up millions of dollars in receivables, inventory, and depreciable assets. Oh, and its margins are razor thin! Intuitively we know that the margins are not covering the cost of capital we invest in the unit. That is the basis for the EVA—charging each operating unit for the cost of the capital it needs to operate.

EVA FORMULA

After tax cash flows - opportunity cost of capital = Economic Value Added

CALCULATION OF EVA IN FOUR STEPS

Step 1

Determine (isolate) the business unit to be analyzed—this includes isolating and assigning its share of inventory, receivables, and debt.

Step 2

Calculate income before interest and after income taxes—this removes the effect of debt interest on profits.

Step 3

Calculate the total capital employed in the business unit—this includes long-term debt, shareholders’ equity, preferred stock, and other capital contributions.

Step 4

Determine the opportunity cost of capital—this is the rate the company would have paid for primary capital in the open market.

REPORTING THE ECONOMIC VALUE ADDED

Please see example 2-1 for an example of one of these reports.

What to Do Next

After the EVA is calculated it needs to be evaluated. Something needs to be done, hopefully to increase the recovery of your cost of capital. This is where the CFO helps the client decide what to do with this insightful information.

EVA Decision Alternatives

Eva decision alternatives include the following:

• Do nothing.

• Invest more capital.

• Improve or streamline operations.

• Replace management.

• Divest the unit.

• Liquidate the unit.

Example 2-1

WAYS TO MAKE EVA MEANINGFUL

Ways to make EVA meaningful include the following:

• Help the company’s leaders calculate their EVA for each business unit.

• Offer to design a simplified method to determine the EVA for each major investment of capital.

• Help employees discover how their day-to-day decisions impact the EVA.

• Be a facilitator for the leadership team on what the next steps might be once the EVA is determined and evaluated.

Conclusion

Job permanence of the CFO is becoming a thing of the past.

In a large firm, the CFO is a strategic partner of the CEO and provides global guidance on the appropriate path to take for the organization. In a smaller firm, the CFO is the strategic partner of the owners and provides global guidance. The difference is that in the smaller firm the CFO is the person who actually gets to implement part or the entire strategic path. The small company CFO is in a unique position to see the whole picture, yet roll up their sleeves to tinker with the organization to make it better.

The CFO uses a variety of attributes such as those listed in this chapter to help the organization and its leaders understand where they are going based upon where they have been. In this chapter, a CFO level tool—the Economic Value Added—is the sort of analysis that the CFO uses to conduct strategic decision-making.

Understanding this role will help you should you decide to be a contract CFO.

A good contract CFO has the ability to monitor the ever-changing landscape for business trends including best practices that work and ones that do not. This person has the ability to pull together firm-wide knowledge and overcome learning curves faster than the current staff.