Tag: CFOs

CFO’s Ode to Gross-Profit-Based Commissions


Commissions (in all possible forms, including percentage-base bonuses and even royalties) are curiously contradictory – they are revenue-driven expenses.  Unlike other costs in the value chain, they don’t precede, but follow commercial transactions of converting products and services into business returns.  These incentives are basically wages calculated as a percentage of one or another base.  And it is the selection of the base that, unfortunately, hurts most of the companies using this type of remuneration.

In many industries commissions are traditionally based on volume – sales, purchases, collections, etc.  Employing a system like that stimulates the race for big numbers – the more you sell (procure, collect), the higher are your commissions.  The sales force, or procurement team, runs down every single order without any concern for its contribution into the company’s bottom line.  Of course, returns, allowances, price discounts are all accounted for in the calculations, but otherwise volume-based payees don’t care whether the company looses or makes money on their deals.

This eats away profits of many organizations.  Even if a company consistently doing well, even if you have a system of pre-approving deals by projecting their profitability, there are always some transactions that will end up loosing money for one or another reason: the freight rates, for example, have a tendency of  suddenly going up all the time due to the spikes in oil prices.   Yet, the commissions on those sales will be paid anyway, further deteriorating the bottom line.

Of course, some good CFOs and controllers try to absorb the possibilities of losses into their calculations and fight for reduction of rates.  But the truth is that most of the time, especially in smaller businesses, the companies stick to industry standards and you need a revolution to change them.

The only way to avoid this multiplication of losses is switching your company to commissions paid based on the transactional gross profit.  The reason I use the term "transactional" here is because, unless you have one person receiving commissions for the entire volume, you will have to enter the world of segmenting your business into portions that correspond to all recipient's sectors: countries, regions, products, and even transactions.    

I will not deny the fact that it is a pain: there is a lot of work involved into all that, including the process of allocating shared expenses and overheads.  Moreover, I can guarantee you that your calculations will be severely scrutinized by all interested parties. 

Over the years of my career I was able to implement such systems in two companies.  The matters were further complicated by the fact that procurers and sales people cooperated on different transactions, in different combinations.  Can you imagine dividing all those shared credits?!  Both times I had a dedicated analyst assigned to the task and personally dealt with complaints from the traders.  But the benefits to the businesses were undeniable – no commissions were ever paid on loosing deals.   Think about it.        

Cautionary Tale About Artificial Intelligence Progress


Don't you worry, dear readers, I am not planning on retelling "The Terminator" plot.  As the matter of fact, the two technological developments I want to discuss are related to the CFOs' and Controllers' supervisory responsibilities.  On the surface (!), they seem to serve a good purpose and could be attractive solutions to some of our common problems.

Every exec with subordinates communicating with financial institutions, investors, key vendors and customers, is vulnerable to their emotional whims, diplomatic abilities and verbal skills.  This is especially true with out favorite mode of communication – emails, which remove the recipients' faces and voices thus making the expression of aggression easier.

I have a list of actual stories to be told about relationship damage caused by employees' spiteful writing.  And it is not like I don't employ prevention strategies.   I give training talks.  I impose a sense of supervision by requesting to be copied on all important communications.  I even write Post-Its and stick them on the worst offenders' monitors, "Please re-read ALL your emails three times before sending them out."  Still, once in a while something happens that requires damage control.

Lo and behold!  In NY Times Year in Ideas I read about ToneCheck – "an e-mail outbox filter that works as a sort of emotional spell-check, offers typists a chance to reconsider their words before" sending their missive.  I watch the cute animated video attached and my first reaction is like "Finally!!! Hooray!!!" 

Then I read further and I forget that I am a CFO with unruly subordinates who require monitoring.  I remember that I am a Person and that Freedom of Speech is an important issue for me.  Yeah, it's useful in the office environment, but this dangerous program has a capacity to be tuned to ANY CONTENT.  I imagine it being installed without my knowledge by my ISP and checking my personal emails for "inappropriate" content as defined by… whoever has the power to do so.  How do you feel about it now?

Here is another common problem and even scarier solution for it.  How many times we catch our employees attending to their personal business or even playing online games during working hours?  We wonder about the hours they waste the costs of it.  Frustrated, we think we should like to watch them.  So, here you go Computers That See You and Keep Watch Over You.  This "wonderful" program sees you and analyzes your facial expressions.  And it can be installed on your personal computer without your knowing it. 

You know what?  I don't want these "solutions." Not even in my office.  Let me work harder with my employees on their work attitude, verbal skills and aggression management.  If boycotting these products means that we can keep them away from invading our personal privacy, then be it.  I hope you click on the links, read about it and agree.    

It's like what Benjamin Franklin said,"Those who would give up essential liberty to purchase a little temporary safety, deserve neither liberty nor safety."

CFO Folklore: My “Favorite” Questions


Ah, the Holidays!  They put you in the mood for remembrance.  Families get together and stories of past times and lives start pouring out.  My grandfather was a brilliant man of the WWII generation.  He died when I was a baby.  Hence, I cannot remember this myself, but I've been told quite few times about his main pet peeve: he couldn't stand what he called "idiotic" questions.   Apparently, I've inherited this familial trait.

His being the times way before the political correctness permanently  stifled us, he had the luxury to call things as he saw them.  Nowadays, I use more neutral words.  I call them nonsensical questions.  I even trained myself to ignore stand alone occurrences.  However, there are two questions that pervade my professional life.  As all pet peeves do, they cause undue frustration.

The first question is consistently asked by my subordinates and peers.  You see, unless I attend to a confidential business matter, I always keep my office door opened.  I believe it is good for employees' morale to see a CFO working as hard as I do. 

So, these people see me all day long attending to my scheduled tasks, addressing issues, solving problems.  I am consumed by work.  Yet, EVERY TIME one of them needs me and comes to my door, they ask me THE SAME question, "Are you busy right now?"  In response I want to scream, "Of course, I am busy.  Can't you see?" 

It doesn't mean that I am not available to discuss their problem if it is of higher priority, or scheduling them for a later time slot if it can wait.  But why do they have to ask that question?  At staff meetings, I teach them to approach this situation in a more sensible manner: come, don't ask the damn question, instead state your issue and let me decide if it requires immediate attention.  Some learn, but the rest just cannot help themselves.

The second question is similar but essentially different in its nature.  It's usually asked by the boss.  And, as we already discussed, there is nothing you can do, but to bite your tongue.  He has something on his mind, so he comes to your office.  Here it comes, "What are you doing right now?" 

The involuntary first reaction is, "What do you think?  I am doing nothing.  Just sitting here enjoying myself."  But he does not imply you are not working.  This is how their minds work: whatever is on his mind is the most important thing to him right now and in his opinion should be to you as well (even though you don't even know yet what it is).  This attitude renders your current preoccupation irrelevant.  Now, it is up to you to navigate the situation properly into the safe harbor.  Over the years, I've developed an arsenal of methods.  I am sure you have too, but if you need my help, please, don't hesitate to email.

Sloppy Accountant Steals From Lorne Michaels and Tina Fey


American+Museum+Natural+History+Hosts+Museum+MhOXuAo6hyZl Well, technically he stole from NBC Universal who bankrolls the production of 30 Rock, but Lorne Michaels and Tina Fey helm the show.  I guess, if it has something to do with the creator of Saturday Night Live and the show's former Head Writer, even the embezzlement case must have a bizarre skit flavor.

The media-released facts of this "grand" scam, which yielded the schmuck, formerly employed as an "accountant" on the show, a $13.6K "fortune" in stolen funds, are sketchy (pun is always intended), so I will have to apply my financial forensic expertise and speculate about some of the details. 

The way I see it, he caught on the fact that when expense reports/envelopes are submitted for reimbursement, nobody checks the actual receipts inside.  It is also possible that he was the very person responsible for checking them.  Either way, there were obvious holes in this internal control plot.  So, he decided to pad a few envelopes with fictional expenses, personal use of the business credit card and even altered receipts.  On top of that, he did it stupidly and sloppily: used whiteout to falsify the receipts, faked the NBC Comptroller's initials.  He thought nobody would ever notice. As far as he could see, from his limited to one season and inexperienced point of view (how do these people get employed?), nobody was looking.

Nobody in accounting management did!  Judging by the timing of his employment and arrest, it seems the independent auditors were the ones who discovered the receipts with the whiteout!!!  In a business with big-shot executive producers charging all kinds of perks (limos, flowers and whatnot) to corporate credit cards, the reconciliation of expense accounts is a sensitive area.  That's where diligent auditors would look.  And the SLOPPY WHITEOUT – how can anyone possibly miss that?

So, now he is facing up to 7 years in jail.  That's a year for every $2,000 he stole.  Pretty severe.  However, The Frustrated CFO is the most curious about the consequences of this ordeal for the NBC's Comptroller.   In my book she is ultimately responsible for the lack of proper internal control procedures and the inadequacy of the budget variance analysis.  If those functions were correctly established and executed, this small-time offense, blown out-of-proportion by its show-biz relation, would never have occurred in the first place.  Both her and the arrested one are sorry excuses for accountants.        

What was the perp's self-justification?  Did he think that "it was not fair" for Tina Fey to spend $200 a day in limo charges?  IMDb Pro reports her current 30 Rock salary at $300,000 per episode.  That must've killed him.

However, we are accountants, so let's count.  The show reportedly has 6 million viewers.  That's only in the US and doesn't count reruns or DVD sales. So, on the evening of each episode's airing Tina Fey makes 6 million people laugh and forget their worries.  (Please, appreciate my objectivity here as I personally don't find Tina Fey's comedy funny, intelligent or entertaining.)  And for that she gets paid 5 cents per person.   I think that's reasonable.  Who did that "accountant" make happy?

The Curse of Private Business: Nepotism


My friend, a fellow career CFO and frequent correspondent, MJZ urges me to write on nepotism. Her acute sensitivity to the subject is understandable: over the years, she's had more than a few encounters with this practice and I intend to use some of those shared with me as examples.

The dictionary gives a definition of nepotism as "the practice among those with power or influence of favoring relatives or friends, especially by giving them jobs." Nowadays, a lot of people confuse nepotism with networking. Let me correct them. Circulating a resume of someone you know because you can attest to their professional achievements is not nepotism, but a favor to those seeking good people to hire. If you do the same for someone who is a poor worker and a nitwit, it's not nepotism either, it's just your own stupidity. Merit is the key.

The people who mistake networking for nepotism also miss an important element of the definition – "those with power." In monarchical states and dictatorships (such as Kim dynasty's North Korea) the passage of power from parents to children is a given. And in my post on The Distortion of the Bill of Rights in closely-held businesses, I have pointed out that these companies are not democracies, but absolute monarchies. Yet many of us, who still crave the illusion of meritocracy, still cringe at the unfairness of the "family" business arrangements.

It's not always that nepotism has a poor impact on business. For example, it would be a great relief for the media world if strangely progressive Lachlan Murdoch, son of Rupert, got a chance to  overhaul his father's empire. His departure from News Corporation has only deepened the company's regress. However, that's a rare exception: 99.99% of nepotism cases are bad both for commerce and morale.

In her early career, MJZ held a Controller position in a manufacturing and distribution company. She was responsible for all accounting, trade finance, and credit functions. As the matter of fact, she was the one who transitioned them from manual into computerized accounting. She was revered by the business owner. But when his daughter with a marketing degree hit the ceiling in her career at now defunct telecom company, MJZ's job went to her. The company went out of business within a year.

At her more recent job, MJZ had to suffer an onslaught of owners' children (all recent college graduates) being appointed as Presidents of the company's subsidiaries. As the conglomerate's CFO, she was forced to educate them, tolerate their shortcomings and listen to her peers and middle managers complaining about the kids' laziness, time in the office they spent on personal matters, and unlimited PTO. These stupid people made a terribly destructive impact on the business.  Yet, MJZ was unable to voice her opinion, because, say it with me, there is no such a thing as Freedom of Speech in a place of one's employment.

Curiously enough, the industry where nepotism is the most prevalent is the one that suffers the most from the lack of fresh talent – the entertainment business. But that's a subject for other posts.