Monday, June 22, 2009

On FT/com: Good CFO

Numbers guys you can count on

By Luke Johnson

I have hired quite a few finance directors over the years. Some were outstanding; others did not work out so well. Inevitably, I have acquired some views about what makes a great numbers guy.

I prefer working with someone fundamentally conservative. Bullish chief finance officers are dangerous. The leader of a business needs to be an optimist, and sales-oriented. But every business needs at least one person at the top alongside them to worry about the downside. I insist that the senior finance person is a qualified accountant. Whether they are a certified public accountant or a chartered accountant, they will have been taught how vital prudence is when preparing accounts, budgets and so forth. I am always astonished at how huge US corporations, like Enron and leading investment banks, can hire go-go MBAs as their CFOs. No wonder they got into trouble.

The CFO must be able to assemble and analyse financial statements themselves: I do not want a quick-talking professional who has risen so far that they do not understand the business’s accounting systems. But they must also be able to see the whole picture and not get so immersed in detail that they overlook major issues – a surprisingly common failing.

The CFO must also be able to explain treatments, policies and consequences so that every executive can understand them. The best accountants do not hide behind jargon or technical mumbo-jumbo. Great accountants are so familiar with the company’s books that they can swiftly identify each entry, liabilities and assets, every item of income and expense, flows of cash, margins and all the rest, where material.

Some CFOs get bored with things like management accounts, and really want to be corporate financiers. They would rather be doing deals, having power lunches and indulging in the whole merry-go-round, rather than crunching the numbers. Those tasks have their place, but they are not the first order of business. Principally, the CFO must be in absolute command of the figures and financial basics, such as tax, debt and key ratios. Only once they have total mastery of vital administration should they be thinking about the sexy stuff like M&As.

As well as highly numerate, a modern CFO must be something of an IT expert. There are still a surprising number of finance professionals who struggle to use even unsophisticated accounting software. It must be a devastating disadvantage for anyone performing a high level finance job in the 21st century. Similarly, a rounded CFO will have a thorough knowledge of property – leases, financing and the rest – and insurance, as well as a good grounding in corporate law and company secretarial affairs.

The best CFOs have a close, mutually respectful, but not subservient relationship with the chief executive. Those who never disagree and do not stand up to their boss on key matters are not worth having. Ultimately, shareholders and the board place huge faith in the CFO. Whoever fills the post must be independently minded and a strong enough character to deliver the truth to the owners and non-executives – no matter how unpalatable. While every CFO should be a partner to the CEO, they should always believe they report to the board and owners of a corporation.

As with every senior role, an ability to manage people and a sense of humour are critical. But with a CFO, absolute integrity and a capacity for hard work are even more important. During difficult times the role cannot be executed in 40 hours a week and a holiday entitlement of six weeks. Periods of crisis call for all hands to the pump. CFOs are the ones who are managing costs, coping with foreign exchange risks, dealing with pressing bankers and covenants, collecting overdue money and ensuring the auditors do not qualify the accounts. A proper company cannot function without a decent finance director at the helm, supervising, informing and warning.

They may not win all the applause as corporate heroes, but without their contribution even the sexiest business would soon be in trouble.

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