Category: Bosses

CFO Folklore: The Mathematical Wisdom of Economic Triangles


Triangles

Optimization of resources is one of the most crucial tasks in business and every day life.  The larger the variety of resources we have at our disposal, the more complicated the task of their optimization becomes. There are mind-blowing models developed with very sophisticated technology trying to approximate the complexity of, let's say, genetic engineering. 

However, there is a fundamental  optimization problem associated with any type of job we undertake.  Whether you are a business owner, a financial exec, a manufacturing manager, a movie producer, a janitor, or a cook, you have to joggle these three basic properties of production: Time, Cost and Quality.

When we want to optimize these three resources we want to accomplish the job at hand with the highest quality, over the shortest time, and at the lowest cost.  Unfortunately, both logical and empirical observations show that one cannot achieve all of these targets at the same time.   

In practice, the dynamics within any economic system characterized by the presence of these resources can be described by three right triangles in the illustration above, in which the shorter the line representing one or another property, the closer we are to the desirable level of that resource.

As Pythagorean theorem shows, the hypotenuse (the side opposite to the right angle) is always larger than either of the catheti (the legs).   So, what do those triangles show us?

You can accomplish something as quickly as possible and at the lowest cost, but the quality will be far from the desirable level (triangle 1).  I can give a task of creating a profitability model for a new line of business to my junior analyst and give him one day to do so.  Do I even have to describe what I will get from him, if anything, tomorrow morning? 

On the other hand, you can strive for the highest quality achieved at the shortest possible time, but then it will not be cheap (triangle 2).  I can drop everything else on my agenda and outline detailed specification for the model myself, and then hire a team of highly paid developers to design it.  The result – outstanding functionality available for use within 2-3 days, if you can afford it.

Finally, you can keep the quality standard on the level and cost at a reasonable low, but it is going to take a long time to achieve the desired result (triangle 3).  I can give the task to my VP of Financial Planning & Analysis, who is very good at creating this sort of models, but has another 15 ongoing and new projects I already assigned to him.  So, I  instruct him not to spend more than 1 hour a day on this one to keep the cost relatively low.  When will I see the model ready?  Who knows?  

Simple?  They teach Pythagorean Theorem in 8th grade AP Math.  Now go and try to explain this to your boss.  Good Luck!     

Big Picture and Staff Training


Closely-held entrepreneurial companies always have some flair of secrecy.  The Owners' lives are intertwined with the businesses and because of that they apply personal privacy rights to everything, including the company's commercial and organizational matters.  This frequently leads to "need-to-know-only" modus operandi when dealing with employees. 

CFOs, Controllers, Directors of Finance are expected to act in the same secretive manner.  And I am not talking about non-disclosure of commercial secrets, compensation details, or owners withholdings – these matters are confidential by definition.  I am talking about organizational structure, commercial partnerships, new financial relationships, transactional details, new venture plans, etc.

The owners who insist on such covertness make a mistake of disregarding the natural human instinct of their employees to fill in the blanks.  In the absence of actual information they will cook up their own assumptions about concealed matters. 

You wouldn't believe what kind of wild baseless fantasies I sometimes uncover: non-existing silent partners, astronomical sales volumes, mythical lines of side business.  In one of my previous employments people even assumed that I was a member of the owner's family on account of my loyalty and strict work ethics. 

That's just laughable, but there are far more serious impacts of secretiveness: people don't understand the mission of the organization, the commercial scope, the structure, the value chain.  Most importantly, they cannot grasp their own place and relevance in the system.       

The unfortunate effect of this disconnect is mechanistic disinterested performance instead of meaningful work.  On one hand, the bosses insist that their employees are kept in the dark, and on the other hand, they would like to see high efficiency and productivity – impossible to coexist.

I have managed to convince most of bosses that while keeping the actual confidential information secret, it is absolutely crucial to provide my subordinates with the Big Picture and their place in it.  I consider this to be the most important step in staff training and development.  You will be wasting your time trying to teach your employees how to apply their expertise and education to the tasks you need them to perform if they don't know why these tasks are important for the company's, and consequently, their own prosperity.

When explaining their role and place in the Big Picture, I frequently tell the employees that the company doesn't employ them to pay salaries.  It is actually other way around: if the company could operate without the employees jobs done, we would gladly do so and save the money we pay as compensation . But it is crucial for the company that the jobs are done well and that is why the employees are retained and paid.  You will be surprised: it is not as clear to most people as you could expect.

CFO Folklore: Frustrating and Demeaning Mistrust


The “Hands-Off Micromanagement” style  so prominent in many business owners— and defined in my September 21, 2010 post —has a lot of implications in daily lives of CFO’s and Controllers.  One of the most frustrating facets has to do with petty mistrust. 

I’ve got volumes of stories illustrating this particular trait of a CFO vs Owner relationship.  Here is a compiled rendition of a rather frequently recurring Tale of Mistrust from the CFO Folklore.

AlphaOmega Inc. is a treasury-intense company and its CFO devotes big chunk of his time managing it.  He personally decides on daily basis whether the company needs to borrow to cover operational deficit or invest the excess of available funds.  He is singly responsible for signing financial instruments, including multimillion-dollar letters of credits and commercial loans paid directly to suppliers.  He electronically hedges foreign currencies, sometimes  as much as $1 million per transaction.  His discounting customers’ trade documents  on London Forfeiting Market frequently reaches $20 million per tranche.

Carrying all these monetary responsibilities makes him especially meticulous about the separation of duties and internal controls.  None of the transactions he personally conducts are recorded by him.  He deliberately never cuts any checks.  He has a designated treasury operator setting up all the wire transfers.  The companies books and records are regularly audited by lenders.  And his quarterly and annual accounting audits are always clean and produce unqualified opinions.

And yet…  he has no authority to sign a $1 check or execute a $10 wire transfer release.  Only the Boss can do that. 

And this Boss is not available for you whenever you need him: the business frequently takes him abroad; May through September he is in his summer house; he has to spend holidays with his kids; and he has a girlfriend (you know, afternoon delight and all that). 

Moreover, he hates signing checks and keeps ignoring that thick folder the AP manager put into his in-box two days ago.  And every time the CFO sends a “pleeeease-release-wires” email, the Boss acts like he is asked to grant a personal favor.  And it is the CFO who has to deal with the frustration of vendors and suppliers waiting for their payments. 

The situation drives him crazy and causes perpetual frustration and anxiety.  Swallowing his pride and ignoring the insulting pettiness of such mistrust, the CFO addressed the issue many times, sticking strictly to the damage the situation causes the business.  He explained on numerous occasions that the way his internal controls are set up, it would require his entire stuff to be part of a scheme to steal even a dollar from the company.  He also explained that their treasury systems allow to set up limits of execution authority and that the Boss shouldn’t be bothered with $2,000 wire transfers.  

All falls on deaf ears.   So, the poor CFO still chases his boss somewhere in Hong Kong, begging him to release today’s wires before the banks’ cutoff time of 5 pm EST, which is 6 AM tomorrow over there.


Remote Boss: CFOs & Controllers’ Dream


Don't get me wrong, I don't like global generalizations.  There is nothing wrong with logical patterns and trends, but it doesn't mean that they encompass ALL people and ALL situations.  So, when I talk about, for example, entrepreneurs or financial execs in general terms I don't mean "every single one."  I mean, the majority of the group.   The majority of entrepreneurs are brilliant, but some of them are just lucky.  The majority of small business CFO's are pedants, but some of them are slobs, and so on.

There are entrepreneurs who are very conscious of their breed's tendencies to squash and frustrate their subordinate execs.  They go out of the way to engage in counter-measures and employ the best of managerial techniques.  Therefore, there are CFO's out there who truly enjoy constant interactions with their CEO's.  Throughout my career I myself have experienced long stretches of time when my boss's personal traveling seemed like a disruption in the work flow, occasional frustration notwithstanding.

However, even those who enjoy the most amicable of relationships, cannot deny that they feel more relaxed and efficient, less frustrated doing their jobs, when the bosses are away, or when financial execs are traveling on business themselves. 

Thus, my correspondent J. has the best job in the world.  It was not set out to be such a fortunate arrangement, but various factors played their roles in shaping the way things are right now.  J, who is an asset-based finance specialist, works by herself on the East Coast, running all operational and administrative functions of a small but very profitable private equity fund, while the founding partners are based on the West Coast.

On an average day J. is in the office by herself, doing her job in completely undisturbed environment.  And she is one of the most balanced and upbeat persons I've ever met altogether, let alone the financial professionals. 

She speaks to one of the partners only on the rarest occasions, when there is something wrong with one or another investment.  The other partner is more hands on: he is responsible for due diligence process of all portfolio prospects.  He also comes to the East Coast office once a quarter when their lender's audit is finalized to have a wrap-up lunch with J. and the  lender's representative. 

A perfect dream set up.  How do I know?  Because J. is never frustrated with her bosses.  I tell her, "It would not be the same, if they were here in the same office with you."  And she agrees – it wouldn't.

The Importance of Prioritization for CFOs & Controllers


My very first post CFO's and Controllers' Many Hats  addressed (in two parts, as the matter of fact) the inescapable issue of overwhelming span of functional control tackled by all financial execs.  The issue has been described as a major source of both frustration and pride.

Well, whether you are proud or not of being a natural choice for a million of high-level responsibilities, keeping all balls in the air is a managerial skill mandatory not only for your professional success, but for taming the frustration as well. 

Both mathematical rules of optimization and circus performances teach us that there is a limit to the number of items you can juggle at the same time without dropping them.  This is why Prioritization and Delegation are two most important organizational tools for a Controller or CFO. 

Let me share with you my own Top Three Rules for each of these tools.

Prioritization:

Rule #1.  Assign priority scores to each task.  Let's say, 1 to 10 with one being the lowest.  The highest priority on your list should always be given to the task that in a long run will benefit the bottom line the most.  For example, writing an angry answer to your boss's email asking whether you are busy right now has lower priority (I would say, 2) than looking at your cash position and deciding whether you need to use your credit line or cash availability to finance today's operational expenses (definitely a 10).

Rule #2.  As much as you can, try to block certain time periods with periodic tasks of high priority in advance.  There are such things as SEC reports, monthly budgets, weekly cash flow projections, etc. etc. that occur periodically.  Prevent yourself from cramming at the last moment by assigning priority scores and scheduling these tasks ahead of time.

Rule #3.  If you work in a privately held business (and most small and mid-size companies are) and report directly to the Owner/President/CEO, be ready to push his/hers priority higher up on your list.  I know it sounds almost psychotic, but being flexible when it comes to your boss's requests sometimes can save you the boatload of frustration.  However,  it does not mean that you have to drop everything and attend to his needs.  Many people make that mistake.  Instead, you need to provide him with reasonable time frame and explain why the task at hand is more important for HIS BUSINESS.  I will get back to the issue of flexibility in scheduling discussion.

Delegation:

 Rule #1.  Don't be afraid to delegate important functions to capable subordinates because you are afraid that they will undercut you.  First of all, if you are a good match for your position and do your job to the best of your abilities,  you should be confident.  Secondly, by overwhelming yourself with extra tasks you diminish your own efficiency and undermine yourself.

Rule #2.  NEVER do your subordinate's job because you believe that you can do it faster and better.  This is a bad mistake many of us make.  When we do that, we damage ourselves in two ways: by wasting our own valuable time and by not letting our subordinates to improve and develop.

Rule #3.  Always make time for training and advancement of your subordinates.  By building strong and reliable accounting/finance staff you better your own chances for success .  

Honestly, it took me a while to develop and even longer to start implementing these rules, but I can vouch for their effectiveness.