Your business / startup is scaling, and you now need a great CFO. You start imagining the perfect person: they have top grades at an Ivy League school, they’re also a CPA, they’ve had experience in public accounting and also a decade+ of experience as a controller. And, if you’re lucky, they were the CFO of a company that went public. But don’t forget, they need to be strategic, good at presentation skills, diplomatic and sharp.
In your mind this would be the perfect CFO, but you’d be wrong. These may be true of a great CFO, but they may not be. Are you hiring the real-deal, or an impostor?
Hiring nowadays is tough. A lot of people have figure out how to get an A+ in interviewing, and a C- in work ethic. They will sell you the world by telling you that they are best CFO in the world, in reality they are nothing more than a glorified bean-counter.
Years of hands-on experience have taught me to look beyond the credentials, and honors, the impressive C.V., to the most important “X-Factors” and I’m going to share 5 of them with you.
They Must Say No Often, But Not Always
A good CFO understands the numbers but is often reluctant to question the CEO’s priorities. A great CFO questions the CEO and actively listens.
Many of the greatest CEOs are dreamers, visionaries, and idealists. It’s their vision, their company, and their money. Except, it isn’t their money. It’s their investors’ money. And a great CFO represents the investors’ best interests. This means a great CFO isn’t afraid to step up and challenge the CEO’s spending priorities, but this isn’t enough. A CFO who challenges everything without ever listening, who challenges for the sake of challenging is more arrogant than wise, and therefore, a poor one.
I personally know CFOs who saved their company from bankruptcy and ruin because they had the courage to challenge the founders but also the wisdom to know when to listen to them. To be great, the CFO must actively challenge, actively listen and actively act in the best interests of the company and its investors.
You may think that CEOs hates to be told no. In my experience, that’s only the bad ones—who live in their ego. The smartest CEOs appreciate getting pushed back on, even when it’s not on their own terms.
This is a rare trait in anybody, especially a CFO. When you find it in somebody, hire them immediately.
They Live and Breathe Cashflow
We all know about businesses growing revenue and profits at seemingly exponential rates, only to fail suddenly. And we all know the reason: they ran out of cash because their growth outpaced their receipts (the VC world is seeing a lot of this lately).
No matter how much money you raise, without wise, street-smart cash management, your company is likely headed for a cliff with no parachute. A great CFO watches your cash flow like a hawk and manages it like Warren Buffett selects stocks.
Smart cash management means that your valuations will be higher, you’ll surrender less equity, you’ll get better interest rates on LOCs, and you’ll have sufficient runway when your company makes a costly mistake—because inevitably you will. Your CFO needs to make sure that when it happens, or when the economy turns side-ways, or when it’s seemingly impossible to raise another round (like now), you’ve got the cash to keep on growing.
Your CFO Knows Cash Isn’t the Only King. So is Reporting.
The Truth: Reporting is boring. Who cares about reports that no one ever reads? So, I’m going to give you a different word: visibility. The purpose of reporting isn’t to spit out reams of data, but to give you transparent insight into your business.
A good CFO will produce the basics: monthly P&Ls, cash flow statements, balance sheets, and KPIs. But the great CFO will go far beyond that, analyzing KPIs of sales, engineering, etc., and statistically correlate those with the company financials. They will also know precisely how accrual accounting is represented (which is the standard for companies with investors) and how to explain it to the layman non-accountants.
In other words, the great CFO will develop their own metrics suitable for your particular business and workforce. They will give you 20/20 vision instead of cataracts.
Lastly, if you don’t have a COO (or you have one that’s “skimpy”), the CFO will implement Standard Operating Procedures (SOPs), and business processes that must be executed flawlessly.
They Must be a Strategist and Negotiator
All CFOs have strengths and weaknesses. Among the most important strengths, they must be a strategist and negotiator, not just another accountant or controller. Economics teaches us that all resources are scarce. This is true, not only in a market economy, also inside your own company’s “economy.” You have projects to spend on/resources to acquire/people to pay/operational expenses/R&D (in some cases)/and much more. The demand for spending cash, will always exceed the cash you have.
This leads to the problem of how to allocate your financial resources to these different demands. How do you optimize this allocation? How do you know where to cut back and where to invest more? How do you know which debt instruments, equity raises and other sorts of working capital you need to have for unique opportunities—and emergencies? These are all questions of strategy, not of tactics—and a well-ordered controller is not going to cut it.
Your CFO must be someone who understands how to evaluate, optimize and make tough choices about these allocations, whether in times of great growth or when your business lies fallow. If your CFO can only spit out numbers and spreadsheets but can’t give you insights into the how and why, you have an accountant or controller, not a CFO.
Additionally, your CFO must be able to negotiate. If your CFO can’t negotiate with vendors to reduce costs and doesn’t understand the intricacies and cost structures of your business in your market, you have an imposter, not a CFO.
Your ideal CFO is not someone who abandons details and tactics for strategy, but someone who has a mastery of them all.
Does your CFO Understand Debt and Equity Capital?
Does your CFO understand the standard valuation models used by your investors, whether private or institutional? If you have an intention to go public, do they have the experience to implement all the necessary SEC compliance requirements, such as Sarbanes-Oxley? If you are private, do they fully understand every item on a term sheet, from valuation caps to liquidation preferences to pass-through rights and many more? Can they sit toe-to-toe in a room with a commercial banker, an investment banker, a venture capitalist, a private equity analyst or a family office director and demonstrate absolute command of the facts as well as the terms proffered?
If they don’t understand any one of these things, show them the door—and make sure to give them a copy of Venture Deals on the way out.
Conclusion
These are not the only “X-factors” a CFO must have, but they are the important ones. A CFO’s roles and responsibilities are vast, so finding one who can master all these areas are rare. They will make the difference between steady or even stunning growth, and financial missteps that will doom your company. Make sure your CFO is on the right side of the equation.