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February 6, 2013

Cut the CFO some slack!


At a Forbes conference some years ago, Peter Drucker is said to have remarked, "I have just one thing to tell you today...No one, but no one in your company, knows less about your business than your See Eff Oh!" Whether you agree or not with the statement, it's impossible to be indifferent to it. If anything, it is one of the most provocative (thought provoking?) statements in business, bordering on blasphemy for some.

The key premises on which the renowned management guru made this statement are two-fold - that a CFO is primarily concerned with accounting and that accounting is inward and backward looking, akin to driving forward while looking in the rear-view mirror.

We've all seen companies run by CFOs and the pains they have brought to the management, employees, customers and investors. It brings to mind scenes of nit-picking for travel bills, petty expenses, focus on a 0.001% margin dip against a 'softer metric' such as customer satisfaction or simply closing the deal. CFOs have traditionally been the financial gatekeepers and have almost always been accountants. Their Key Result Areas (KRAs) have been maintaining the books of accounts meticulously for the internal and statutory audits and little else. Over time their roles expanded to include maintaining profit margins, which they translated as 'policing the spenders' to ensure margins.

The role of the CFO as a partner to the CEO in shaping the culture and strategy of the business is a relatively recent one that necessitates a shift in focus from costs to revenues.  Or put another way, looking forward while driving instead of backward.

That change in focus is a characteristic of modern CFOs who truly partner with their CEO and the rest of the C-suite towards a common vision. They use their accounting skills for strategic financial management, leading up to strategic business management. The lines between the CFO's role and those of business and other functional heads have blurred, so much so that finance is no longer a dedicated career path. For instance, Apple's VP of Retail Jerry McDougal, who has recently quit is being replaced by none other than their VP of Finance, Jim Bean.

Good CFOs help keep the brainstorming, strategizing and decision making groups grounded, without being penny-wise and pound-foolish. However sexy an idea may sound on slides or the whiteboard, if it is not going to make money, it is best put to rest sooner than later.
Remember what happened to Facebook soon after their IPO? The company had over 800m subscribers and was hailed as a leader that revolutionized the social networking space, and rightly so. Like the story of the emperor's new clothes, however, nobody seemed to be asking how the company planned to make money. Only when their share prices began tanking did investors start asking the question!

Whether or not Zuckerberg has gotten his act together now remains to be seen.  Facebook's share price still reflects investors' skepticism about the company's business model and money making ability. In my opinion, this story is a master case where not only did a CFO not run the company, the CFO did not (or was not allowed to?) do his job adequately!

A good CFO uses accounting, financial modeling and analysis skills as tools and means to an end, not as ends themselves. Historical financial statements are like a student's interim report card that can be analyzed to identify strengths and weaknesses of the business and strategize accordingly for the future. And that's where their utility ends.

It's missing this point that has earned this fraternity the wrath of critics. Having said that, nothing takes away from the fact that any business - its strategy, sales tactics, marketing prowess, etc. - is relevant only so long as it has the ability to earn adequate returns in the long-term and generate HARD CASH!

Does your CFO play the devil's advocate, show the mirror to the C-suite when required and participate in profit generating ideas and strategy? I'd like to know your thoughts about what you think a CFO's role should be and if that indeed is being played out.