Who CFO’s report to

Not long ago I had a Board member of a company where I am the CFO inform me that I work for the Board, not for the CEO.  My impression is that it’s somewhat more common in larger companies to have the CFO report to both the Board (in particular, to the head of the Audit Committee) and the CEO.  I think it’s rare in build-stage businesses.

I am not a fan of this kind of reporting either.  I think the CFO should report to the CEO and only the CEO, full stop.

First of all, I am a believer that in a company, there are 2 kinds of people: the CEO and everyone else.  Others can skip the holiday party, not be on the phone with the most important client, ignore unflattering press mentions, not attend Board meetings.  The CEO cannot do any of these things.  Their jobs are demanding in a way that no others are.  So, they need to trust their teams implicitly.  It is much more difficult to do this when reporting structures are unclear.

Relatedly, the CFO role is challenging for a number of reasons I’ve outlined in other posts.  For one: you’re often held responsible for the numbers but don’t sell, develop products, handle customer service or make ad buy decisions.  It’s hard enough without serving 2 masters.  I have been in situations before where Board members, usually inexperienced ones, will approach the CFO to provide numbers to them without letting the CEO know.  I have made this mistake before and will never do it again.  The damage this does to trust all around is not worth the seeming expediency of getting certain information.  Transparency and trust are everything.

In a similar vein, I want members of my team to feel like they work for me.  There is formal reporting and there is how it feels, which are not always the same.

When they have a question, CEOs frequently go directly to the person with the answer.  I give them a lot of latitude to do this, because as mentioned above, their jobs are hard enough (see above).  However, when this inevitably happens with someone in the G&A structure, I’d hope that they would let me know, and the CEO would know that they were going to let me know.  It is more difficult to insist on this as CFO when your own reporting structure is vague.

In some cases, the investors in my companies have wanted to make a change at CEO and involve me in the process without letting him (it’s been a “him” each time) know.  This is  governance at its worst and I will never do this.  My response is always that if they are looking for a CEO exit and want my help during a transition, operationally or otherwise, first make the change and then we’ll discuss how I can help.  Until then, I work for the CEO and that’s it.  Under no circumstances do I ever want a CEO looking over their shoulder at the CFO wondering what he and the Board are up to.  Once that trust is violated, it is nearly impossible to get it back.

I’ve been fortunate not to have worked as CFO in companies where the CEO has committed some kind of fraud.  My main deliverable is integrity, so if that’s being violated by doctoring results, I’d probably react badly.  Short of that though, this rule of thumb on reporting has always served me well, and I plan to stick with it.

 

Choose your words

Recently I’ve had to get particularly pedantic with a couple of my clients about language. Specifically, how they talk about certain metrics in the business.

A common one things that young companies conflate are bookings and revenue. It’s not just an accounting nuance that they aren’t always the same thing. It’s an important business problem to be solved. My client that sells fashion online? The credit card swipe is nice, but until we ship, it’s not revenue. It’s actually a debt: we owe someone a hat. In the SaaS world this debt is called deferred revenue and it sits on the balance sheet for a long time.

Another is on the opposite side: cancellations and churn. Or for my co-working client, cancellations and move outs. If someone cancels on November 10th, their move out is December 31st. Without getting into which one is more important to track, they are different and tell you different things about the business.

These distinctions matter a lot when you’re looking at unit economics (more on this topic later). Put simply – per widget that I sell, how am I doing? A widget can be a hat, or a square foot, or for a staffing company, an hour. My new client services cars in mobile trailers. Our unit is the trailer (like a store). It makes sense to know how each trailer is doing. But I could argue, and might continue to, that once the trailer exists, it’s the appointments that matter. Optimizing those is the whole ball game.

My point is that this stuff actually matters. Once you choose a unit, it becomes the root word, so to speak, in the language that your team and your investors are speaking.

What CFOs do

Often I am asked what a CFO does. Usually this happens with a smaller (build stage) company that doesn’t have one, or has hired a part-time CFO who mostly focuses on being an excellent controller. There is nothing wrong with this – but it’s different from what a CFO does.

In build stage companies, CFOs first and foremost help predict and manage cash. This means some level of forecasting of the future (finance) which controllers can but don’t often do.

Side note; CFOs are not credentialed, unlike (say) licensed service providers like plumbers or electricians, so it’s not surprising that many controllers hang a shingle and call themselves CFOs. Some are excellent. Some manage that transition less well.

CFOs also help drive understanding and optimization of unit economics. In retail, this is almost always on a square foot basis. In staffing, it’s on a per hour basis. Getting to this point requires some insight and continual honing. CFOs should be good at constant, incremental improvement and knowing how to fine-tune what comes out of the accounting function. The result is that they should be helpful on the top line, in addition to managing costs.

Finally, a CFO needs to be able to build a team. I use the term ‘team’ expansively as this includes not only employees and contractors, but also insurance brokers, lenders, auditors and outside accountants, systems gurus, benefits experts…. on and on. Litmus rest: If you are taking to one of the top growth company lenders in town, a CFO probably will have them on speed dial already. This is part of what you are paying for.

What is a build stage company?

“Build stage” companies are the adolescents of the growth company world: not cute infants whose mistakes are still sources of joy and amusement, and not quite fully grown adults in full command of their faculties and their identities.  They’re somewhere in between, like teenagers.  It’s a phase that is exciting and a little dangerous.

These companies, by and large, have found product-market fit, meaning that they have made sales and have some idea of who their early customers are.  Their product exists, it works, and they’ve sold it for money.  In the world of high growth startups, they likely have some institutional backing: seed financing, or a modest Series A of about $5M or less.  And they are starting to professionalize; there is a great Medium post on this phenomenon from earlier this year.  One sure sign is that in “prove” mode, there are no swim lanes.  Everyone does everything because that is the nature of things at that stage.  In “build” mode, you want to start to establish swim lanes, while making sure that the entrepreneurial mindset of the prior phase is accessible.

I tend to focus on the G&A stack for these types of businesses.  Usually when a CFO arrives on the scene in a company just maturing into build phase, he or she finds some combination of the below:

  • Bookkeeping is done by a relative of one of the founders, or a local accounting firm
  • Benefits are scarce – until now it hasn’t affected the ability to attract talent, but in the back of everyone’s mind, they know it will soon
  • The financial forecast is either (a) numbingly complicated or (b) comically simple, and almost always lacks a cash flow forecast so that everyone can carefully track when the money might run out
  • “Sales ops” capabilities are limited – spreadsheets, not Salesforce
  • There is minimal understanding of the company’s “unit economics”, and how to really track this effectively
  • The economics of acquiring customers is not yet well-understood (see above on sales ops).
  • Very expensive lawyers from the company’s top-tier law firm are doing everything for the company
  • There might be some insurance, or there might not
  • HR hygiene (signed handbooks, travel policies, etc.) are minimal.
  • Board meetings, if they happen, likely lack cohesion.  Decks are distributed less than 10 minutes before the session begins
  • The cap table is kept in Excel, and/or by the aforementioned very expensive lawyers
  • The company uses Google Drive (great), but there is no structure to it (not great)

This is a natural phase of a company’s evolution.  This blog is about how that evolution progresses, how CFOs in these companies can add value and thrive, and some of the particulars of the industries in which I’ve seen companies in this phase.  Put another way: adolescence is exciting, but no one wants to stay there long.