Month: November 2011

Quote of the Week: “What Do You Do?”


ROY BLOUNT "If you were a member of Jesse James's band and people asked you what you were, you wouldn't say, 'Well, I'm a desperado.'  You'd say something like, 'I work in banks,' or 'I've done some railroad work.'  It took me a long time just to say 'I am a writer.' It's really embarrassing."

                                Roy Blount, Jr.

The Frustrated CFO comment:

The reason I think this quote belongs in this blog is not because I consider myself a writer.  No.  I find that it is just as difficult for financial executives of small companies to explain who they are, as it is for gangsters or for writers.  The general public is not very educated about organizational structures.  They associate the title of a CFO with sinister characters of newspaper articles targeting troubled public companies.   If you say, "I am a CFO," the next question is usually about the name of the company.  It's like they expect a household name in return.  People don't realize that there are millions of companies in this country.  And even less people understand the essence of the Controller's position.  So, when the new manicurist (plumber, mover, mechanic, taxi driver, etc.) asks the obligatory question, "What do you do?" many of us resort to answers like "Corporate finance," or something of the sort, in order to avoid additional explanations.  Who cares if the person you are talking to assumes right away that you work on Wall Street?  

Quote of the Day


"Talk is cheap because supply exceeds demand."

                                                                                            Unknown

The Lopsided View of Corporate Taxation


Corp TaxesIn October 24th issue of New York Magazine, Andre Tartar's Intelligencer column featured a black-background Darth-Vader-sinister entry, disdainfully called The Freeloading Playbook (see the page's image to the left).  It presented four "tax-dodging" schemes employed by international corporations.  I have quite a few problems with the piece, but will focus on the misleading interpretations that I believe to be the most damaging to the education of general public on such important subjects as political economy and corporate taxation.

First of all, as far as an average reader is concerned, the implications are that the corporations are engaged in unpunished tax-evasion practices.  This is a gross distortion of truth.  We can argue for years about the nature of trickery, but the fact is that the Internal Revenue Code had deliberately created these loopholes to accommodate the international expansion of the US business, and the companies simply utilize the opportunities the tax laws allow them.  I assure you that there are other ways to reduce taxable income, including transfer-pricing of inter-company transactions (between the US parent and foreign subsidiary, or other way around).

Secondly, "freeloading" by definition means living off somebody's generosity.  Way to further confuse clueless Zucootti-Park affectionadoes!  Whose generosity we are talking about here?  Those who get the biggest chunks of the revenue derived from corporate taxation?  The military complex?  Government-subsidized industries like automaking and agriculture?  Chinese bankers (the interest on their loans to the US government must be paid)?  Welfare recipients?

Also, I am absolutely appalled by the fact that the companies that reinvest their earnings into their international value chains are thrown onto the same page with actual schemers who creatively avoid taxation (still legitimately, though) through M&A transactions and intellectual property licensing.  Notice how for "Double Irish," "Killer B," and "Deadly D" Mr. Tartar came up with singular examples – Google, IBM, and Eli Lilly respectively, while for earnings reinvestment he chummily states, "like, everyone." 

Yes, everyone, including  thousands of international  small businesses who set up foreign subsidiaries as their distribution arms to sell US products abroad.  (These structures are so common that I used one of them as a typical example in my book CFO Techniques– see the illustration below.)  So, they don't repatriate all of their money because they incur operational expenses overseas in the normal course of business.  That doesn't mean that they should be compared with the 500 super-rich companies.

Figure 5-1     M. Guzik, "CFO Techniques," Apress, 12/02/2011; Figure 5-1.

What exactly Mr. Tartar and others like him would like to propose?  That establishing foreign subsidiaries for the sake of running more efficient businesses should be prohibited altogether by law, like it was in the Eastern bloc countries during the communist rule?  Or that we allow double-taxation?  Guess what?  Business super-powers will survive anyway, but the small businesses exposed to such treatment would cease to exist. 

And why nobody questions the incredible fact that in this supposed bastion of free-market economy we have practically the highest corporate taxes in the world  – up to 38% federal, plus up to 12% state?  So, in some localities there are companies who end up paying 50% of their income to the government.  We have over 6 million companies with less than 100 employees in this country, and they are suffocated by these rates.  Why don't we approach the taxation problem from that side? 

Those who have at least rudimentary understanding of commercial principles and really care about our economy should be arguing for the protection of small businesses every chance they get, instead of throwing around meaningless and confused statements like the ones in the "Intelligencer."       

Bean Counters vs Breadwinners


I hope my fellow CFOs and Controllers don't mind my calling us "bean counters."  After all, I am one of them and, hence, it's Ok.  It's like with all derogatory terminology – if you belong to the group, you are allowed to use it.  And if that name-calling has upset you, beware – this is just a beginning.

The truth is, many of my peers are just that – the bean counters limited to their narrowly defined tasks, thus contributing to the frequently observed conflict between finance and accounting on one side and the revenue generators on the other.  Both sides have to tolerate each other, but it is a precarious armistice. 

CFOs and Controllers think that sales and operational people don't work too hard, while getting high performance-based compensation.  They are loud and overconfident, while not necessarily well educated and intellectual.  They are never in the office, taking long lunches with customers and prospects.  When they are in the office, they are on the phone most of the time.  They take paid trips to foreign lands and get car allowances for their domestic travels.  They jeopardize the company's well-being with their grandiose "strategic" deals that end up losing money.  Most importantly, they wouldn't be able to do anything without our funding their transactions, controlling their profits, calculating their commissions and reporting their results.

On the other hand,  VP of Sales and COOs think that they are the moving gears of the company.  They despise the bean counters for stifling their "important" deals with "useless" profitability criteria, for knowing how much money they make and for suspecting that there is nothing behind the confident appearance – just the rolodex and lots of air.  Most importantly, they feel that their unique ability to bring business is not respected enough.  Money is not everything, you know.      

The fact is, however, that a sales (or procurement, or operations, or trading,) ace does possess a truly unique ability to generate revenue with skills that frequently have nothing to do with education, professionalism, or intellectual expertise.  There is a reason you don't need a college degree to obtain trading, brokerage, insurance, or real estate licenses.  You definitely don't need an MBA to become a VP of Sales.  These jobs require intuitive abilities and social skills of a very special sort.  Trust me, not too many people are born with those talents.   The real great ones are quite rare. 

It must be said that I am one of the few CFOs who always support the people responsible for bringing business to the company, even if they don't like me.   Many of my colleagues forget that all our functions are secondary and subservient.  Everything that we do either facilitates the breadwinners' success (and failure) or reports it.  That's all. 

Without them I wouldn't have my job.   They are the ones responsible for generating enough dough to cover my salary, benefits and bonuses.  And if I could do what they can, I would have.