My book "CFO Techniques: A Hands-on Guide to Keeping Your Business Solvent and Successful" (Apress, December 2,2011) is now available for pre order at Amazon and Barnes & Noble:
- ISBN-10: 1430237562
- ISBN-13: 978-1430237563
Category: Nature of the Job
The Weakest Link in a Corporate Finance and Accounting System
Let’s say, as a CFO or Controller you have all policies outlined and procedures carefully designed. Everything is properly documented and bound into books and manuals, which are readily available for orientation, training, and daily reference. Through intensive internal audit program all components have been examined; everything have been tested in practice. Whatever did not work well has been tweaked; cumbersome procedures were replaced with more straightforward ones; the inferior ones have been improved.
Finally it has been determined that the internal control system is both effective and efficient in accomplishing the company’s goals and the executive management’s objectives. Is it reasonable at this point to expect that everything should be working like that expensive watch I keep mentioning as a model of a perfect mechanism? Unfortunately, not.
We don’t exist in the virtual world of The Matrix trilogy, where everyone is manipulated by the digital code. In real life it is the other way around: our well designed systems and structures depend on being properly handled by people. Their proficiency and diligence determine how well the policies and procedures are being performed. The truth is that every task performed by an employee is vulnerable to occasional unintentional errors, consistent sloppiness, and even deliberate mishandling.
Any designer of functional systems, with frameworks that include people as key elements, knows that humans are the weakest links in the chain of actions. Long time ago, when computers were so huge that a single unit occupied a hall the size of the New York Public Library’s Reading Room, all programs and data were coded on punch cards. A punched out spot was read by the computer’s card reader as a character or a digit. These cards were manually created by operators trained to use a keypunch machine. Guess what? Two separate people produced every card in duplicate. No exceptions. If the cards did not match, they have to be re-punched. Thus, the risk of human error was managed.
Such duplication of staff is unthinkable now. Today, we rely on computer systems to reduce at least the most common of the risks. The rest of flaws must be caught through vigorous and persistent scrutiny of performance quality. Monitoring is the cornerstone of internal control and one of the most important responsibilities of a supervisor. It brings the entire system together and assures that policies, procedures and people concur. A series of timely and thoughtful tests should become a part of your, or your internal auditors’, routine.
Remember: If not corrected, every mistake your employee makes will end up in financial data, documents and reports, for which you are ultimately responsible. One erroneous entry may affect your bank’s collateral statement or a presentation to the board of directors. Omissions will impair strategic decisions. Communication mishaps can impact commercial relationships. These flaws will most definitely be a poor reflection on your reputation as a financial leader. You have to create filters that will catch the debris before they pollute the results of your hard work.
You can read about various practical techniques of reducing accounting and finance systems' vulnerability to human factor in my upcoming book "CFO Techniques" (Apress, 12/02/2011), now available for pre-order at Amazon and Barnes & Noble.
CFO Folklore: The Home Front
I touch on the gender inequality among financial execs once in a while – an obligatory topic for a female CFO/author/blogger. I mean, everyone writes about it. Entire institutions and organizations compile sociological studies dealing with these issues. None of it seems to be creating any changing momentum, but hey, at least someone is willing to pay the researchers their salaries.
The interesting thing, though, that most of the time these topics (including my earlier posts) deal with the social, rather than practical, aspects of the phenomenon. People talk about advancement rates, compensation levels, female-to-male executives proportions, etc. In a very scientific way, we say: all things being equal (education, achievements, intelligence, etc.), women still don't get a fair shake. And nobody talks about the fact that, on a practical level, things are never equal between men and women, who strive for, or already achieved, top job positions.
First of all, women by nature are more conscientious and responsible than men. That is why we have higher percentage of female straight "A" students both in high schools and colleges (yet, there are more male valedictorians!). Secondly, women know only too well that they are at disadvantage due to the simple fact that they are not men. That makes them work ten times harder than any man in their position would. So, in truth they get rewarded at lower rates not for the equally good work, but for the job done much better.
But the biggest practical inequality occurs on the executive's home front. I remember having a friendly airplane conversation with my CEO, on our way to a meeting in Germany. At one point he said that I was the hardest working person he knew besides him – he honestly believed that he worked as hard as I did. Of course, he was talking about the job itself. Well, I thought that even at that I worked much harder (I did not take Friday's off during summers), but I chose to turn to more obvious facts of life.
I asked, " Who prepares your suit, shirt and tie for tomorrow every evening?" "My wife," he said. "We frequently work until 9 or 10 pm, is the dinner ready, when you come home?" "Yes." "Who writes checks? Who deals with repairmen? Who talks to teachers? Who buys groceries? Who takes kids to the doctors'?" "The wife" was the answer to all the questions. "Now, who do you think does all that in my home?"
He knew the answer, of course. So, every day I was working my executive job, let's say, just as hard as he did, plus his wife's job. And that's true for most of female CFOs, whether married or single, with or without children.
Look, how many unmarried male CFOs or Controllers you know? I don't know any. Even if their wives leave them, they get remarried very quickly – someone needs to take care of the home front.
On the other hand, a woman expected either to give up her personal life for the career, or hide it away, as if she does not have any. It is especially true for those female executives who work in small and midsize companies – the salaries are not large enough to afford a Mr. Mom of a husband. So, we are talking inequality cubed: the majority of women work harder, plus cover the home front (or give up life outside of the job), and still get paid and promoted on a much smaller scale.
Here is the funny part. At the end my boss asked, "How come you still read more than I do and go to the theater all the time?" "Because I don't sleep," I answered.
New CFO’s Essential Knowledge Prerequisites
When you start as a CFO, the first thing to do is to get your bearings – to assess your position relative to your surroundings. As quickly as you can you must grasp general ideas about typical characteristics of your environment, your own role and purpose, expectations of others, as well as primary routes for channeling your talents and efforts. But as soon as you are done with that, comes the time to get down to the level of firsthand details and study the specific aspects of the business. You need to draw a detailed map that will help you on your journey as a financial leader.
This is a mandatory activity for a recently hired head of finance, new to the company. It is a good idea for someone who has been with the company for a while in a lower position and just been promoted – new vantage point may provide you with the better vision of your company. Even if you’ve held the top post for a few years, but never got around to do this and feel that incomplete picture prevents you from excelling, maybe now is a good time to go back to the drawing board.
This is your R&D stage, necessary for proper functional design. Your research will help you to improve future performance. Every CFO and controller must acquire an exhaustive understanding of his employer’s business. There is no doubt, that compilation of, what I call, the big picture is the key element in your strategic responsibilities. However, it is just as important for day-to-day hands-on management. In the absence of thorough knowledge of all operational and organizational features, it is impossible to construct budgets, define tasks, or determine reporting requirements.
At the very least, your information-gathering activities should be focused in the following four areas:
Study of Corporate Structure
Economic complexity pushes businesses into multiple levels of diversification – wider product ranges, additional services, new geographical and demographic markets, related industries, outsourcing, foreign productions, etc, etc. As companies pave new ways, their corporate structures adapt accordingly: branches are created, subsidiaries are formed, and satellite offices are opened. Today, a $10 million service company may turned out to be a surprisingly complicated organism. This affects nearly every accounting and financial function: local taxation, inter-company transactions, principles of consolidation, financial statements disclosures, banking facilities – just to name a few.
Study of Operational Flow and Value Chain
During your orientation stage this study has immediate practical applications. It is a prerequisite to identifying accounting cycles, classifying assets and liabilities, pinpointing cost centers, determining analytical and financing needs, etc., etc. There are transactions happening at every stage of the operational flow that give rise to accounting events. Without full comprehension of the value chain you run a danger of oversights and errors.
Study of Organizational Chart and Functional Distribution
If the previous section is about processes, in this one we survey people and their positions. I don’t have to convince anybody that it is important to figure out the chain of command and designation of responsibilities within your employer’s organization – you just need to know who’s who. It goes beyond just knowing your peers with whom you discuss company-wide issues and inter-departmental relationships. You have to know people along the value chain – those, who are in charge of cost and profit centers, have relationships with suppliers, vendors and customers, maintain your facilities and receive your mail.
Study of Existing Policies and Procedures
If you became a CFO or a controller in a company that already has policies in writing and documented procedures in place, even if they are deficient, consider yourself very lucky. You can study the existing papers, outline blind spots and pinpoint weak or erroneous steps. It is easier to enforce changes, if employees are already comfortable with an idea of adhering to a recorded set of rules.
On the other hand, you must be prepared to deal with a complete lack of anything in writing. Important thing to remember is that it does not mean policies and procedures don’t exist. They are there like an oral folklore of an ancient tribe, passed from generation to generation. It would be a big mistake just to ignore the traditions and try to impose a new order. You have to uncover and learn them first.
Excerpted from my forthcoming book "CFO Techniques: A Hands-on Guide to Keeping Your Business Solvent and Successful" (Apress, December 2011)
CFO’s Performance Focus
I frequently talk about psychological trends and general attitude patterns in a broad sort of sense. Yes, large groups of people share similar traits due to comparability of their backgrounds, environments, occupational qualifications, etc. The very reason I write for the audience of financial professionals is because I believe that our experiences have common points and the topics would be understood and accepted; that our expert qualities unite us; that metaphorically speaking we all "have been in each other shoes." I write about our bosses, small business owners, entrepreneurs as a group of people with very strong and easily recognizable idiosyncrasies. But I never go too far with it. I acknowledge and value individuality and uniqueness of each person and each situation. That is why sometimes I describe experiences of specific people, including my own.
This separates me from organizational behaviorists, especially those who popularize their science for digestion by the masses. In their zealous attempt to fit the entire universe into a simplistic, easily explainable system, they go as far as dividing everything and everyone into 3-4 categories. And so, they manage to divide all possible motivations, intentions and impulses that guide employees' task performance focus, into just four categories (they even claim that it applies to "any given situation"):
(1) getting the job finished, which supposedly results in speeding up, being aggressive, and careless;
(2) getting the job right, which translates, according to this theory, into nearly OCD-ish fear of making a mistake and slows people down – they are just checking and re-checking everything over and over again;
Note that these two categories are placed on the opposite sides of the matrix.
(3) get along with people – I cannot offer any comments on this motivation nor its behavioral interpretations. Honestly, I don't know what the hell is that all about;
(4) be appreciated – Ah, this one all executives understand very well, that's what we strive for. But why is it associated with "being heard, being assertive, contribute to others;" moreover, why is it separated from 1 and/or 2?
This is laughable! I don't know what kind of subject group the scientists studied to draw these conclusions. Maybe these are just empirical deductions. Then, how many personal observations were accumulated to form these opinions? One thing I can say for sure – they are definitely not based on hard-working financial professionals like us – CFOs, Controllers, VPs of small and mid-size businesses. There is no possibility for us of separating "getting it done" and "getting it right." You don't become a CFO by accomplishing either one or another.
And it has nothing to do with the time frame, as some suggest. Other humans maybe can switch between the two, depending on how much time they have on their hands. Us? We live under constant pressure to get everything done yesterday and there is no room for errors. Of course, the good news is that if you are for real, if your expertise is not phony, if you got where you are through hard work and exceptional abilities, you cannot do it any other way. Your qualities and professionalism carry you through and that how you get to be appreciated. All at the same time!
The Frustrated CFO 