Losing Perspective

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The story is that if you drop a frog into a pot of boiling water, it will jump out immediately. If you put it into a pot of cool water, however, then turn on the heat, the frog won’t notice the temperature change, and will eventually die when it gets too hot. Who knows if it’s true, but it’s a great metaphor, and we see it happening everywhere.

It’s easy to lose perspective.

We Are the Best

I worked on the conversion of a newly-acquired retailer’s systems to those of the acquiring parent company. Although the new system was much more sophisticated and comprehensive, fundamental accounting controls were missing, and it was so difficult to acquire, verify or reconcile certain information that we had lingering doubts over its overall integrity.

The parent company had a unique corporate culture based on the belief that they were the best – had the best stores, the best products, the best people, the best systems, etc. – and there was no room for discussion of improvements. The corporate controller explained to me that the systems were terrible before he joined the company, but they were great now. He listed examples of how bad they used to be, and every one of the deficiencies still existed… but they were the best.

Years later, there was an accounting scandal that hinged, among many other things, on the system’s inability to properly account for cost of goods sold.

They refused to look at their systems with a critical eye, and they lost perspective.

Director’s Cut

A well-known filmmaker invited me to see his new film while it was still a work in progress. He had been editing it for weeks, and was ready to show a rough version of the finished product. It was a demanding film, with dense dialog requiring concentration, and a limited budget for production values, and I was drained by the end of the screening. I looked at my watch several times during the film, so I was very aware of the fact that it was well over 2 hours long.

Called on for comments, I sincerely praised the film for its merits – a respected film critic eventually included it in his annual “Top Ten” list – but I felt the length of the film undermined its overall success. Surprised, the filmmaker responded: “You should have seen it when it was 4 hours long.” I attended the screening of the final film, and still found it much too long.

Art is subjective, of course, but I believe he lost perspective.

Competing Systems

A homebuilder developed an elaborate and advanced construction management system, and its reporting mechanism was tied to an accounting package. For reasons lost in history, they also continued to customize the primary general ledger system that had been in use since the 1970s. The result was that there were two very complex systems, but the reported results were often materially different.

Each member of the management team had his own favorite reports from both systems, and every meeting started with an argument over whose report was correct. One member of senior management knew how to reconcile the results, and he spent more than half his time doing so. By the time the reports were reconciled, the meetings were often over. Important business issues were never addressed, and the managers made their decisions based on different information.

This was one of the first issues I raised when asked for my observations on the company and its operations. The CEO, early in his career, personally directed the customization of the ledger system, and he wouldn’t listen to any criticism. He and his managers had developed the construction system, and were so proud of it that they invited homebuilders from around the country to show it off. There wasn’t going to be any discussion of problems there, either. When I tried to address the gap between the systems, the response was: “It’s great now – up until 6 months ago, all the computer terminals had green screens.” I hadn’t seen a monochrome screen in over 20 years.

The company went bankrupt. They had lost perspective.

Hey, What’re You Gonna Do?

Another retailer was very dependent on its highly complex systems. The nature of the business is that there is a high rate of turnover among line managers, and the corporate training systems placed more emphasis on sales and marketing than on administration. Unfortunately, the systems, while comprehensive, were not user-friendly, and there were constant problems requiring many long telephone calls to explain and resolve issues.

There was constant finger-pointing and redirection. A manager would direct associates to call the technical support hotline, only to be directed to the regional office, who might then send it back to the original manager. Certain employees became known for their ability to resolve certain types of problems, and everyone had a favorite go-to fixer.

Frustration abounded, but there was no feeling at the field level that there was anything fundamentally wrong with the systems. The company had been in existence for a long time. There was no problem with customer service, but the amount of employee time wasted by awkward systems was huge. When I asked why nobody complained up the corporate ladder, they just shrugged and said it wouldn’t do any good.

They had lost perspective.

That’s How it Should Be

In a construction company, it was highly unusual for accounting reports to tie out to the general ledger. It was a constant problem, and drove me crazy, because I could never trust that I was working with reliable information. We were involved in huge projects and equally huge financings, and acting on wrong information could have major consequences.

The CFO and IT director had been with the company for many years, and together had implemented most of the systems in use at the time. They knew them so well that they could tell me how to do elaborate reconciliations of the reports, which would often involve writing special programs. Their default question would typically be: “What do you need that for?” This exercise turned up problems with the original reports often enough that we had the battle many times.

When I pressed the CFO to set up a task force to streamline and clean up the accounting systems, he would argue that the systems were good, and that the reports actually shouldn’t tie out. “That’s how we designed them.”

They had lost perspective.

Does your CFO encourage taking a fresh look at long-established systems and methods?

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A Part-Time CFO

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At certain stages of growth, many companies find themselves in the awkward situation of needing the services of an experienced CFO, but feel they can’t afford to hire one.

Yes, a good CFO with the depth of knowledge and experience you need can come at a steep price. And – no offense intended – there may not even be enough to keep a good CFO challenged and interested on a full-time basis at this stage of the company’s growth. So what are the options?

The Options

Try to hire a CFO who may or may not find the job satisfying and lucrative enough to stick around for a while.

Hire a slightly stronger accountant at a slightly higher salary, and hope that he or she can rise to the challenge of a job far beyond his or her education and experience level.

Redirect your attention away from running and growing your business to focus on the CFO role yourself.

Ignore the financial needs of the company, and hope for the best.

Divide up the CFO role and ask your other executives to take care of it in their spare time.

OR…

Hire a part-time CFO at a fraction of the cost of a full-time CFO.

What Will a CFO Do for You?

In collaboration with you and your management team, an experienced CFO will quickly assess the company’s finance, accounting and control needs, and lay them out in order of priority. Areas that he or she will be considering include:

Project the future needs of the company based on achievable growth plans – resources, facilities, and the associated costs.

Identify and quantify financing needs to achieve the business plan – both short term and long term.

Develop relationships with financing sources – debt and equity – that are important to the company’s ability to operate and grow today, as well as to support long term growth and development.

Evaluate and make recommendations regarding the strength of the existing accounting staff.

Evaluate and make recommendations on accounting and information systems.

Oversee the preparation of financial statements, ensuring that the best professionals are chosen to provide auditing, tax and other outside services.

Lead the preparation of operating budgets to keep the company on track to achieve its short term goals.

Introduce the management disciplines and internal control structure necessary for the next level of growth.

Advise on the most appropriate methods and rates of growth – including acquisitions.

Conduct due diligence on acquisitions, and satisfy due diligence requirements of investors and lenders.

Lead programs and efforts to contain and reduce costs while still fostering growth.

Strategize on potential exit strategies – sale of the business for example – and help attract investors and buyers.

What to Look For

The more experience a CFO brings to the table, the more widely that experience is likely to vary among the candidates you speak with. All the more reason to have an idea of the qualities that are most important to you and your business. Here are a few thoughts:

Do you feel comfortable talking to the CFO? We all work better with people we like and trust.

Does the CFO seem to find your business interesting? Of course you find it interesting, but you can’t just assume that others do too.

Is a CPA important? Yes, it probably is. It demonstrates a minimum intellectual standard and level of accounting knowledge, and like the top business schools, the top accounting firms tend (with clear exceptions) to attract the best talent.

Does the CFO have a wide variety of experience in which he or she had to show resourcefulness and flexibility, as well as the willingness to learn on the job? How has he or she performed in situations similar to those likely to arise in your company? References come in handy here.

Has the CFO worked with companies similar in size to yours? I can tell you that working for a Fortune 100 company is very different from the environment of an owner-operated entrepreneurial venture. If you are planning to grow rapidly, does the CFO have rapid growth experience?

How about industry experience? Unless you are in a wildly specialized business like banking or insurance, industry experience is probably not critical. CFOs and CPAs are famous for their transferrable skills, and should be expected to learn your business quickly. On the other hand, some businesses like real estate have a steep learning curve, and some prior experience can make a big difference.

Why would a CFO want a part-time position? If this is a temporary move while he or she is looking for a full-time job, it doesn’t have much long-term potential. On the other hand, there are plenty of financial executives who like the flexibility of a part-time situation, and who enjoy working with a variety of interesting clients, each with its own challenges and rewards.

As the company grows in size and complexity, would the CFO potentially be interested in turning a part-time arrangement into a full-time position?

Do you know who to call to discuss hiring a part-time CFO?