Authored by Gene Jones (CPA, MBA and 6-time CFO) with Edith Hamilton, CFO, CPCC (MBA, CPCC, former Group CFO and corporate CFO).
Edith Hamilton, CFO, CPCC, MBA, CPCC is a certified executive coach for CFOsand VPs in Finance and Operations, particularly recently promoted women in the C-suite. She is a former executive of Fortune 500s, and has a background in private equity. With over 25 years’ experience in finance, operations, and growth strategies in corporations of all sizes including middle-market and entrepreneurial, Edith is a catalyst who accelerates leadership growth using tailored coaching frameworks that typically have an ROI of 4x-6x.
Gene Jones, MBA, CPA is a seasoned finance executive who has served in various roles including Chief Financial Officer, Chief Operating Officer, Corporate Treasurer and Controller for public, private equity, venture funded, and start-up companies. For nearly three decades, he has helped firms of all sizes with financial management, IT, human resources, risk management, and technology services. His focus encompasses companies in transition, especially those challenged by leadership changes or process remediation, and companies in need of emergency funding or fraud detection and investigation. He continues consulting and advising as a Partner with SeatonHill Partners, the fastest-growing CFO services firm in the nation, offering the power of combined thought leadership and the support of the country’s top financial talent to the benefit of clients. SeatonHill has offices in Dallas, Fort Worth, Los Angeles, Austin, Houston, New York, Atlanta, Denver, Chicago, Philadelphia, Phoenix, San Diego, and London.
Whether you’re about to start your first CFO role or your next one as a seasoned finance executive, these 6 essentials ensure you start on the right foot and are well equipped for mid-course corrections.
1. CASH FORECASTING AND MANAGEMENT.
“OMG, we can’t make payroll!” is a classic nightmare for most CFOs. Whether that could actually happen at your company, or is merely a scenario you want to ward off, having a firm handle on cash is as vital as oxygen. So, your first priority is to always know where cash is coming from, when, where it’s going, and how long it will last. How clear is every member of the executive team and the board about whether cash is increasing or decreasing — and how fast? If you are burning cash, how clear is the CEO and Board on when the next fundraising event should get underway?
In your First 100 Days, ensure your cash management system is a daily process – monthly, or even weekly. Transactions should be updated every day. And, if you see a cash flow crunch on the horizon, and you’re a first-time CFO, find another CFO who can show you how to manage through that without damaging the business. (FEI, the Financial Executive Networking Group and CFO Leadership Council are excellent resources.) Ironically, a bank will lend you the money only if you can prove you don’t need it.
So, getting ahead of the need for a cash infusion by managing cash collections, payables and lending-relationships is the most important thing you can do. As the CFO, you may be the only executive focused on this. Don’t be swayed by any other influences around spending until you have a firm handle on cash.
2. BREAK EVEN
“How much do we have to sell this month, just to break even?” Figure out and communicate the company’s breakeven point – that is, the point at which the company produces just enough revenue to fully cover fixed costs for the month. Sales above that amount can “flow through” to the bottom line at a certain percentage of revenue. Know what that flow-through rate is and be sure your finance, sales operations leaders do as well. Only after you’ve reached that point in the month are you beginning to make a profit. It can be fresh and galvanizing for the C-level team to think this way.
3. BUDGETING AND FORECASTING
A traditional budget process takes too long and often has little value. Your management team is probably planning once a year, so consider whether the company might now be better served by running the business with a rolling forecast model, updated in a simple end-of-month process. With a traditional budget, variances get bigger and bigger as the year goes on, and managers generally begin to ignore the official budget by about May or June.
So instead, as you approach the end of your First 100 days, consider re-orienting the mindsets of the senior leadership team. What if you were to all agree to focus on short‐term forecasting cycles, on a regular basis? The length of the forecasting horizon need only be as long as you typically need to see ahead to make reliable decisions. In a very fast-changing business, this could be a short as 3 to 6 months. In a stable business, it could be 6 to 12 months, or 18 months. Here’s how to get your business on board with rolling budget forecasts.
Can you accurately predict orders, backlog, collections, and expenses? If so, you can forecast further out, and it may be useful – and your lenders may require a 3-year plan. Yet the fact is, most businesses change too fast for any operating and financial plan that’s long term to be of much value. And when CFOs create Board presentations that compare actual results to both the original budget and the current forecast, it muddies the waters and clouds the focus of discussions around what’s important.
Instead, redirect the time that would be spent analyzing variances from the budget to figuring out what’s going on in your business and where you are going. Use your limited energy to maintain focus on potential opportunities ahead, and as for explaining variances to the Board and investors, that can be done much more efficiently at a high level: what sales failed to materialize? Where did the company fail to manage expenses as tightly as planned? Where did the executive team guess wrong, in broad strokes? And what have you learned for this next cycle? That’s what the Board really wants to know. As for showing how the forecast has evolved over time, you can use something as simple as a tool like this – for both Revenue and EBITDA:
4. ALIGN INCENTIVE PERFORMANCE TARGETS
After your First 100 Days, evaluate how your company’s bonus incentives are determined. Ensure that the bonus pool a percentage of earnings, cash flow, or some other measure of the ability of the company to pay. You may also set incentives on things such as efficiency, customer satisfaction, or some specific improvement goals. If you do this, it reduces the ability as well as incentive for leaders to game the system. Reinforce all of this with a good reporting system where 70% of the metrics are forward-looking indicators, based on actionable metrics. Equip your C-level colleagues with the insights they need to focus on strategic matters and leadership, not with the day‐to‐day management of tactical matters. Here’s how you can do the same, starting in your First 100 Days as CFO:
- Hire, keep and groom your ‘A’ players. Provide a clear vision of where you are going, and what is in it for them.
- Feed your ‘B’ players who show a fair amount of promise. Expose them to more operationally facing responsibilities.
- Weed the ‘C’ and ‘D’ players: especially those who are a drain on the team’s morale. Yes, even if they are technically proficient. Trust that it will be good not only for you but also for them.
- Provide clear objectives, be accessible, and get out of their way.
5. ENSURE BEST PRACTICES FOR APPROVING CAPITAL EXPENDITURES
A simple 2×2 one-page form that makes the business case is vital so you as CFO and other leaders can make fully informed decisions quickly and consistently.
- Quadrant 1 = The Basic Details & The Business Case. What is the proposed asset purchase? How much does it cost, including taxes, installation, training, site preparation, permits, wiring, testing?
- Quadrant 2 = What is the Value? What makes the proposed purchase a smart move at this time? How much will it help increase revenue? What costs can it reduce? How will it make us more efficient or competitive, or at least enable us to not fall behind? What risks will it reduce? Yes, some of this is hard to put a number on (cyber-security might seem fuzzy, but there are case studies on how to quantify its value).
- Quadrant 3 = Process Changes & Vendor-Details. What company processes will change as a result of implementing this purchase? How do we know we have the best possible combination of price & value? Does the item come with a warranty, and for how long? If a vendor has been identified, what other options were considered and what makes this the best choice?
- Quadrant 4 = Costs, ROI and Signoffs. What is the economic life of the asset? Have you considered leasing the asset, and received proposals for leasing? What are the alternatives to acquiring this asset? Do we have a similar asset we could use? If there is a financial analysis needed, who vetted the assumptions and the calculations? If the item is to be leased, someone in Accounting has to look at the lease to determine how it would be accounted for.
The discounted cash flow model doesn’t work very well for most capital expenditures. But the need to demonstrate answers to clear, qualitative questions, and justify spending the company’s money to someone who is going to provide valuable structure and critical thinking around the decision is vital. Don’t make it too easy to spend, but find a good balance so you don’t hamper the business, either.
6. HELP YOUR CEO RUN AN EFFECTIVE BOARD MEETING
As you complete the materials and other prep for the initial Board meeting in your First 100 Days, ensure you can highlight the results of operations in a way that unfolds like a clear story. Focus on the big picture of what’s gone well, where the gaps are, what the business risks are, what the team is doing to mitigate risks, how long your cash runway is, and what decisions the Board should be considering in view of the coming few Quarters.
Keep in mind that Chief Financial Officers excel when they can compensate for the CEO’s weaknesses, and vice versa. They are self-aware, and are well able to intercept the behaviors that lead to failure: such as saying “yes” too much — or on the flip side, being hyper-vigilant and becoming known as the “CF No”. The best CFOs manage their own tendency to be hyper-achievers, or overly controlling, or perfectionistic, or restless. They avoid starting too many new initiatives at the same time. Above all, the best CFOs have good “boss management skills.”
As you build the skills that increase empathy for yourself and for others, then lead with curiosity, creativity and the ability to take laser-focused action, you are paving the way to both success and fulfillment as a CFO.