As a CFO, I’m often included on cc:lists. Because I started my career in larger companies, I get why people cc: a lot of people on messages even though I try to limit this myself. And CFO’s often need to know when something is happening: a major contract negotiation, a sales discussion about an important customer, HR matters, you name it. It’s a core part of the job to be the second pair of eyes on something.
One thing I never do, however, is use bcc:
In my experience, it rarely does any good, and almost always causes issues. Example: someone who is bcc’d does a reflexive ‘reply all’ with a salty response instead of just to the person who bcc’d him. I once had a CEO who was bcc’d commit this sin and it was, to put it mildly, a problem.
This is why someone bcc’s me, I immediately ask them not to do it again. If they really want me to see something without having their recipient know it, then just forward it to me after the fact. This happens sometimes in sensitive situations where someone is on a performance plan and whoever put them there wants me to know. Even more reason not to do it via bcc:.
I mention this in a blog post about build stage companies because these tend to be populated by dreamers, which by extension means people who are young and inexperienced. You need some element of youth and inexperience to believe you can change the world. It’s not required but it helps.
So to those of you lucky enough to have these traits going for you, I’ll just say that this is an experiment I can save you the trouble from running. Just say no to bcc:.
I had a TechCXO partner meeting last week. I always learn a lot at these and this session was no exception.
One of my colleagues who is a long-time CFO told us about a rule he had in his companies about people who see payroll data. Which is: you cannot get another job here that doesn’t involve payroll. Once you see how much everyone makes, you either stay in that role, or you have to leave the company.
This seemed extreme when I first heard it. But the more I consider it, the more sense it makes.
In truth, many build stage companies trust this extremely confidential information in the hands of office managers who double as the people who “do” HR, which includes running payroll. Few of these people have bad intentions. Many are inexperienced. And not many things blow up culture faster than exposing this information in the wrong way. Once that toothpaste is out, you cannot put it back in the tube, and it is very difficult to clean up.
So, today I plan to have a reminder conversation with everyone who works with me and handles payroll data. Not because I don’t trust them – mostly because once you’ve seen this information a thousand times, you can lose sight of how sensitive it really is and how important it is to keep it confidential.
On a related note – another build-stage company payroll risk I frequently see is the “single press of a button” problem. Meaning, one person can both enter payroll and submit it without an approval step. I understand why this is tempting in the early stages, and yet: it is a really terrible idea. (The same goes for bill pay and especially wires, by the way).
Systems like TriNet and ADP actually make it hard to do an approval step in their PEO implementations, which I don’t really understand. That said – always put in a second pair of eyes on this. That pair of eyes too is probably bound by the same rule that my partner puts in place: once you see payroll, you can never go back.
A sentence that usually sets off alarm bells for CFO’s is “It’s strategic”. This is usually code for a decision that seems to make no economic sense, but is so important to the business, the company “has to” do it anyway. Examples of this include, but are not limited to (1) an acquisition that the numbers don’t really justify, (2) launching a new product line that’s not correlated with the current one, (3) geographic expansion to a far corner of the world, (4) overpaying for a certain employee, and (5) going all-in on a particular trade show exhibit or booth construction.
Mainly, I have 2 issues with this approach.
First of all, most things that management teams call “strategic” are actually tactical. M&A is a tactic. It should get you into a market segment, a geography, a product category, and be tied to a broader strategy. In theory, your company will have done a build/buy/partner analysis against that strategy and decided that M&A is the tactic that best gets you there. Even in build stage companies, where deals are often opportunistic buys of smaller or faltering competitors, it’s only a tactic. If you’re chasing a deal because it’s “strategic”, something has gone awry already.
Second and maybe more importantly, a major decision that cannot be grounded in numbers of any kind is almost certainly going to go badly. For example: an acquisition that is dilutive on its face should get to being accretive because it helps you raise prices, lower costs, increase sales volume, cut G&A, something that has an economic return. This return should be based an assumption that an investor can see clearly and question, including seeing the sensitivity analysis around it. After all, it is their capital or stock you are proposing to use.
If an acquisition does none of these ‘strategic’ things, and is still dilutive except with heroic assumptions, it doesn’t make sense. Full stop.
Trade shows are trickier. I shiver a bit when I hear that a particularly splashy trade show presence for a build-stage company is necessary because I know from experience that nine times out of 10, it leads to heartache and lost ROI. I shiver even more when I hear that it’s for “brand building”. Brand building is a very expensive game. And, if we’re spending a lot to build our brand at a trade-show, I would advocate that this needs to be part of a broader strategy including customer service, how we package and deliver our products, fit and finish, you name it. You can’t overspend at CES and make these other things go away.
As CFO, you have to keep your eye on what matters. In my experience, something that is truly strategic will show up in the numbers.
Who CFO’s report to
Not long ago I had a Board member of a company where I am the CFO inform me that I work for the Board, not for the CEO. My impression is that it’s somewhat more common in larger companies to have the CFO report to both the Board (in particular, to the head of the Audit Committee) and the CEO. I think it’s rare in build-stage businesses.
I am not a fan of this kind of reporting either. I think the CFO should report to the CEO and only the CEO, full stop.
First of all, I am a believer that in a company, there are 2 kinds of people: the CEO and everyone else. Others can skip the holiday party, not be on the phone with the most important client, ignore unflattering press mentions, not attend Board meetings. The CEO cannot do any of these things. Their jobs are demanding in a way that no others are. So, they need to trust their teams implicitly. It is much more difficult to do this when reporting structures are unclear.
Relatedly, the CFO role is challenging for a number of reasons I’ve outlined in other posts. For one: you’re often held responsible for the numbers but don’t sell, develop products, handle customer service or make ad buy decisions. It’s hard enough without serving 2 masters. I have been in situations before where Board members, usually inexperienced ones, will approach the CFO to provide numbers to them without letting the CEO know. I have made this mistake before and will never do it again. The damage this does to trust all around is not worth the seeming expediency of getting certain information. Transparency and trust are everything.
In a similar vein, I want members of my team to feel like they work for me. There is formal reporting and there is how it feels, which are not always the same.
When they have a question, CEOs frequently go directly to the person with the answer. I give them a lot of latitude to do this, because as mentioned above, their jobs are hard enough (see above). However, when this inevitably happens with someone in the G&A structure, I’d hope that they would let me know, and the CEO would know that they were going to let me know. It is more difficult to insist on this as CFO when your own reporting structure is vague.
In some cases, the investors in my companies have wanted to make a change at CEO and involve me in the process without letting him (it’s been a “him” each time) know. This is governance at its worst and I will never do this. My response is always that if they are looking for a CEO exit and want my help during a transition, operationally or otherwise, first make the change and then we’ll discuss how I can help. Until then, I work for the CEO and that’s it. Under no circumstances do I ever want a CEO looking over their shoulder at the CFO wondering what he and the Board are up to. Once that trust is violated, it is nearly impossible to get it back.
I’ve been fortunate not to have worked as CFO in companies where the CEO has committed some kind of fraud. My main deliverable is integrity, so if that’s being violated by doctoring results, I’d probably react badly. Short of that though, this rule of thumb on reporting has always served me well, and I plan to stick with it.
There is a concept in Buddhism called ‘radical acceptance’, where you accept something as it really is without struggling against it. For example: you realize that you are running late for a meeting and further that you can’t do anything about it. The next thing that usually happens is stress, which is a useful input but not particularly helpful. Better to accept that you are going to be late, not worry about something you can’t change, and then act appropriately.
I bring this up in a blog about build stage companies because recently I have seen a lot of struggle against things that would be better accepted. As a CFO, I get a fair amount of ‘can we make the numbers say X?’ I resist this every time because sometimes, accepting that the forecast isn’t that good is the first step in making change. The corollary to this, which I have also seen, is the investor who doesn’t quite believe the numbers and wants to triple-check them because they show less cash, sales or progress than expected. Sometimes the results say that performance isn’t good. Accept it, and then help the team figure out what to do about it.
Often I help manage the HR function. Another example of where startups rarely exhibit radical acceptance is in how they deal with underperforming employees or those who can’t keep up with the role they need to play as the company evolves. Procter and Gamble can survive this. Your build stage startup cannot. It hurts to realize that a member of your team is not working out. This is painful – but pain is a helpful stimulus. What is unhelpful is suffering, which is self-inflicted. Keeping an underperforming member of the team in a critical role – and in build stage companies, every role is critical – causes suffering for everyone.
My apologies to the true Buddhists out there as I’m sure I’ve butchered this teaching somewhat. I accept that.
Accounting and finance people
In an earlier post, I suggested that there are 2 kinds of people in business, those who have the money and those who need the money. I stand by this oversimplification. To it, let me add another one about accounting people vs. finance people.
As someone who became a CFO having never been either, this took me some time to figure out.
Accounting is about portraying the past as accurately as possible. Debits and credits. Extreme attention to detail. Process. Tying out pennies. Having the equity roll work exactly a certain way. On average, this attracts a certain personality type: precise, introverted and someone who operates well at ground level. This kind of person is absolutely essential and vital to have in any business and especially one that is growing quickly. They provide the data for the early warning systems. They strive to eliminate ambiguity.
Where I’ve had to adapt is in describing how the output should look and what it all means. I can look at a balance sheet and quickly tell if something doesn’t make sense. Deep in the weeds accountants, even really good ones, most often cannot. Frequently this has frustrated me; when I get a statement that can’t possibly reflect reality, it makes me doubt the accounting that was behind it.
Although sometimes this is right, I’ve had to unlearn this reflex. That’s because this is finance. Finance is about making sense of the results, communicating them, and trying to predict the future. It’s about a lot more than that but this is it at its heart.
Finance people, of which I am one, often lack the patience for accounting. It’s a little more right brain than left. Yes, you need the skills to build a pivot table or a model. First though, you need to know what you are looking for. Ambiguity is your friend. This is the part that CFOs are good at, or should be. That mindset is very different than being particularly OCD about the accounting for stock-based comp.
Over time I have learned to appreciate both and tried to adapt in particular to working with skilled accountants. I respect what they do, and know that I couldn’t do it. I hope that they can appreciate what I do as well.
A colleague once told me that as CFOs, we don’t really have measurable output. Salespeople have bookings, engineers launch products, marketers drive leads, manufacturing has a whole set of statistics. Our only product is integrity.
This saying is always playing in the back of my head when I’m asked to pull things in a certain direction. Can’t we show that cash will last 18 months instead of 15? Can’t we show that those months where we got rent abatements were profitable? Can we just up the size of a few deals in the pipeline so that it looks a little fatter?
It is difficult to push back against this sometimes. It is also difficult to push back against what you can show is expansion that is way too fast.
This happens all the time, and I mean all the time, in the SaaS world where companies flush with cash feel obligated to spend it as quickly as possible on a much bigger sales and marketing operation. Their investors often want this too. Sometimes growth does not materialize, for which there are usually adequate warning signs (examples – not enough leads per salesperson, salesperson tamp is taking way longer than expected). A good CFO can see this coming a mile away. But there is tremendous pressure not to “be negative”, so many say nothing. Then one day there is a reckoning, and a restructuring. For some CFOs, this is when they too find themselves looking for a new job.
I have left a client over this before, and I’m sure it will happen again. I understand the prsssures in growth build stage companies and consider myself an optimist and someone who helps management teams set stretch goals. We’re not A/P at IBM after all. But I remember always that my only product is integrity.
Time kills deals
I’ve been in the middle of a lot of transactions: fundraisings, M&A, partnerships, and deals within and across divisions of the same business. They all have one thing in common, which is that they are not done until they are done. More and more, hiring is becoming a high-stakes transaction, and it too is a perishable one. Put another way: time kills deals.
It kills me when people celebrate prematurely on deals. So much can go wrong between “almost there” and crossing the finish line. People leave companies. New management or investors can have new priorities. The market can shift. Fashion changes. Employees or other franchisees can do stupid things. Cash becomes more scarce, or if you are the one looking to invest it, the your target company may rethink if they need it. Geopolitics have killed more deals than I can count.
This is why I give transactions very high priority in juggling different clients. If I have one raising money, those phone calls get priority. I sometimes have to juggle a lot of things around for this (it’s one reason I hired an assistant). The others know that when it’s their turn, they’ll get the same treatment. I suggest that when you’re in deal mode, you do the same and insist that your advisors do as well.
Choose your words
Recently I’ve had to get particularly pedantic with a couple of my clients about language. Specifically, how they talk about certain metrics in the business.
A common one things that young companies conflate are bookings and revenue. It’s not just an accounting nuance that they aren’t always the same thing. It’s an important business problem to be solved. My client that sells fashion online? The credit card swipe is nice, but until we ship, it’s not revenue. It’s actually a debt: we owe someone a hat. In the SaaS world this debt is called deferred revenue and it sits on the balance sheet for a long time.
Another is on the opposite side: cancellations and churn. Or for my co-working client, cancellations and move outs. If someone cancels on November 10th, their move out is December 31st. Without getting into which one is more important to track, they are different and tell you different things about the business.
These distinctions matter a lot when you’re looking at unit economics (more on this topic later). Put simply – per widget that I sell, how am I doing? A widget can be a hat, or a square foot, or for a staffing company, an hour. My new client services cars in mobile trailers. Our unit is the trailer (like a store). It makes sense to know how each trailer is doing. But I could argue, and might continue to, that once the trailer exists, it’s the appointments that matter. Optimizing those is the whole ball game.
My point is that this stuff actually matters. Once you choose a unit, it becomes the root word, so to speak, in the language that your team and your investors are speaking.