Tag: Business

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!     

New CFO, Same Staff: Inheritance Problems


Ok, let's leave our bosses alone for the time being.  Let's talk about us as bosses.  In our multi-functional lives as CFOs and Controllers we frequently end up with more direct reports than CEOs/owners.  There are accounting managers, finance directors, budget and analysis groups leaders, PR, AP, AR, IT, and so on.

Let's say you are making a career move and just accepted a position with XYZ, Inc., replacing a departing CFO.  In a dreamy corporate fairy tale you should be able to do what our newly elected presidents do – form your own cabinet and move in with your faithful acolytes. In real life… you inherit somebody else's staff.  Moreover, you have to quickly immerse and keep the business going.

The subsequent events can play themselves out in three possible scenarios:

1.  Without giving the existing operations a real dissection under a microscope, you simply learn how everything functioned under your predecessor, decide not to change anything even if you find the old ways inadequate or wrong, and continue in the same fashion.  The effect: good for the staff – no changes, no new things to learn, no old habits to break; bad for the company, your employers and ultimately yourself – inheriting diseases without attempting to treat them will assure your failure.

2.  If you are a responsible and knowledgeable person with an impressive background and enthusiasm for your new job, you will study all aspects of functions under your control, diligently, but without prejudice; find errors, shortcomings and blind spots; apply your expertise, and develop improvements and innovations plan.  And then you will face incredible resistance from your inherited staff.  It is very natural: humans are resentful of changes.  They will give you very hard time, no help and mountains of frustrations.  Just because you are great at finance and accounting, it does not mean that you are good at managing and educating people.  If you don't have patience and sufficient skills to overcome the resistance in a positive way, you will end up firing a third of the stuff and another third will leave on their own.  The rest will stay, but you will never gain their trust and support.  The worst part – by replacing former employees with new ones, you will loose the continuity of the departmental knowledge.  

3.  Under the best case scenario, your professional and managerial skills are equal.  While you sifting through processes, functions, policies and procedures, you must study the people.  What motivates them? Do they know their jobs well? Are their duties properly matched with their abilities?  Psycho-profiling is one of the most important managerial skills.  Try to discern the personality traits of your employees.  The personnel strategy should be part of your improvement plan.  Find people who are interested in positive progress, explain to them how the new developments will benefit them, show them the big picture (for more on this subject see my post Big Picture and Staff Training) and make them your agents of change.  Then you can claim the successful transition.    

He Looks Like an Accountant…


I was on a train a few weeks ago next to a woman reading a mystery novel.  Involuntarily I've glanced at the page and my trained eye spotted the word "accountant."  I couldn't help myself and read a couple of sentences: "Detective Jones came out of his office.  He looked like an accountant. He asked me…."

The "accountant look" has become a social and cultural cliche long time ago.  So, what do people have in mind when they say that?  They mean Charles Grodin in "Dave" and Barry Kivel in "Bound."  They mean Will Ferrell in "Stranger than Fiction" and Gene Wilder in "The Producers," etc.  The numbers of cinematic portrayals available as references is not that large, but the principle idea is clear: they mean, bland, boring, meek. 

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And yes, it is unlikely for an accountant to have a blue mohawk or to strut around in red patent leather boots with 4" heels.  An accountant is not expected to stand out even if he is clad in a $3,000 Italian suit. 

But, let me tell you, very-very frequently that nondescript appearance is just a cover.  Like Superman under his Clark Kent persona, an accountant may be hiding a secret identity, an ambition far beyond his outer image.

Charles Grodin's character cracks Presidential budget's problems overnight.  Shelly in "Bound" steals $2 million from Mafia in attempt to incite his boss's beautiful wife to run away with him.  Harold Crick (Will Ferrell) abandons his regimented life as an IRS agent to become a singer.  Both Gene Wilder in "The Producers" and Jack Lemmon in the "Apartment" get the Girl.

Let's push the movies aside for a second.  In real life the accounting profession is responsible for some fascinating alumni: J.P. Morgan, John Grisham, Bob Newhart, Thomas Pickard, Kenny G. (well, maybe we should keep that one in secret).

The front page of this blog  Raison d'etre expresses my firm believe that CFOs and Controllers regardless of their appearances are the cerebral force behind adventurous entrepreneurs.  It's just that our daredevil streaks are tamed by critical reasoning.

Let's come back to the movie references.  Standards for women are different: here we have Cher in "Moonstruck" and Kirstie Alley in "Look Who's Talking" series.

Cher+Moonstruck

 

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So, it is Ok for a female accountant to be attractive.  Well, maybe the fact that it is more difficult to stick an accounting label on women is the reason why they don't rise to the positions of the perceived "highest level of success" as frequently as men do.  According to CFO.com, Women CFOs Holding Steady: to be exact, steadily under 9% among both Fortune 500 companies and mid-cap 1500.  You see, they don't "look like accountants."

All I can say is that every time I am in the General Admission pit at a rock concert, the young people around me don't believe that I am a CFO. 


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.


Valuable Advice by HR Capitalist


I highly recommend this yesterday's post from HR Capitalist.  His behavioral insights are applicable to everyone in a senior management position, including all CFOs, Controllers and other financial professionals.

Leadership Means You Cut Out the Negative Body Language…