Tag: CFO

Collections

On June 7, 2016

Last week I discussed Credit, today I will discuss the rest of the phrase Credit and Collection. Like the Credit process, how you run your collections process is important and deserves your attention. If you have a good credit process up front, you are probably OK on the reasonable expectation of collection criteria for revenue recognition, but you still need to collect the cash for your sales.

I will assume that you have a good credit process and you are selling to customers with reasonable credit. I will also assume that you have a good sales contract. In place, but I will discuss that in a little more detail. If your credit process is broken, you will have collection issues. That time two months ago when you caved in and said yes to make a quarter even though the customer had bed credit? This is where you face the music and have to deal with the consequences.

Your sales contract and/or invoice needs to make payment terms clear. I mean very clear and spelled out in proper terms. Incoterms or International Commercial Terms is well understood and often used in international commerce. Because these are well understood and legal interpretations are clear, I highly suggest that you use them. Make sure the terms are in the contract and either on the invoice or the invoice references the contract for payment terms. Be especially careful what the customer purchase order says. Many countries defer to the purchase order when settling disputes regardless of what the contract says unless the purchase order says otherwise. It almost can become an arms race where there is a contract, then you receive a “standard” purchase order back that does not reference the contract, then you send an order acknowledgment reaffirming that the order is accepted under contract or invoice terms. Every country is different, so I suggest you consult your lawyer here, but you do need to be careful.

I know it sounds pedantic and overly detailed for the new, strategic CFO, but every company needs cash and you are not going to be able to be strategic if you don’t collect well. Getting the contract done well, even if just contained in your standard invoice terms, is something that can be done well once up front and then just needs a little bit of maintenance and supervision going forward, something that your billing team can handle without much effort from you. I always check this process when I start a new CFO job (applies to Controller as well). If it is in good shape, then I manage on a exception basis. If it is in bad shape, I put a lot of attention to it very early.

One last tip that can help later is to try and preserve title until payment is actually received. You need to be careful about affecting revenue recognition as one criteria is title has to transfer, but a properly worded term and the expectation that you will be paid is normally sufficient. You also need to be sure that it is clear that they are responsible for losses and need to insure the goods.

The next step to good collections is to get your sales force engaged. Hopefully you are already doing all the basic things that build trust and relationship with the sales team (I find adult reviews of expense reports that allow for some discretion and paying them quickly once submitted really helps here.

You need the sales team engaged because they are the ones talking to the customer and doing the negotiations. So if you want something built in up-front, then the sales manager is the one that will do it. If you want a purchase order that resets terms caught, it will be the sales team that sees it first.

I know of two ways to get the sales force to help. The first is training. Take the time to train them in the standard payment terms the company uses and why they are important. Educate them on the main cash flow levers the company has and what the time based cost of money is for your company. Show them using examples just how much a bad debt costs the company. Show them how a side agreement can throw all the prep work and standard contracts out the window. Side agreements are import enough that I will do a blog entry just on them. If you spend time educating the sales force, you greatly increase the chance to get them on board and engaged.

However, this is just not enough. Sales people are very motivated by targets and pay associated with the targets. If their bonus is only based on making the sale, then they will not be motivated to put potential barriers in their own way by protecting the company. You absolutely should tie some of their bonus to eliminating bad debt and collecting the sale. The best way I have found to make sure they are motivated to keep following up with the customer is to only give them credit for bonus purposes when the payment is made. This is the simplest and most direct way to tie their behavior the the company’s hoped for result. More mature companies can also have metrics for bed debt and finding costs for the receivables the sales group creates, but no credit for bonus until collected is the most straightforward.

I get pushback at times from sales managers on this (I always try and stay engaged with the sales team as they are the best and earliest warning system for forecasting and customer feedback). Normally them complain that our harder terms are bad for their customers. My answer is simple, a “customer” that does not pay is not a customer. If I am being less polite to really make the point, I remind them that people that take things without paying are thieves.

I am sure that you have noticed that many of my blogs emphasize the up front process and usually I spend a lot of time explaining what I do to get it right. That is my natural instincts coupled with Six Sigma training. In a factory, the worst process to follow is to inspect quality in at the end and the best is to start with your suppliers so that you receive good quality parts. It is the same for Finance processes. One topic I did not cover here is billing, your invoices need to be perfect or whatever mistake is present will be used as an excuse not to pay, but I will discuss that another time.

I have noticed over the years that you should have very nice, persistent and organized people actually doing the collections. As funny as it is to joke about breaking people’s legs and all the other loan sharks collection methods, people do not like to pay mean, threatening counterparties. All you really can do is threaten to sue and in the USA that is not much of a threat. If there is either a cash flow issue or some form of quality dispute with the customer, they are not going to care about a lawsuit.

What actually works is polite and persistent follow-up. The customer will claim missing invoices, terms being different than what is in the contract, quality issues, moon phases, sun got in their eyes, vacation schedules of people who can sign cheques, pretty much any reason under the sun as a reason for delay in payment. Your collection team needs to document that they were told, efficiently follow-up internally for anything that is under your company’s control and then get back to the customer. They need to sound sympathetic and be very polite about identifying inconsistencies in what the A/P person at the other end is says. Quite often pure embarrassment at being caught in a lie (that is never specifically claimed by your collection staff) can cause the customer to pay.

If your team is polite and professional and keeps good records (CRM is best but a physical file works), you will get prioritized for payment. If there is a real issue, your collection team will find out because the people on. The other side will tell them because of the good relationship that has been built up. Your collections team should either work closely with the credit team or report to the same boss so that you get realtime feedback and can stop further sales if a customer suddenly turns bad. I don’t consider a company being protective of their own cash flow to be bad. If your invoice to them was incorrect then you gave them an excuse not to pay. Anything that you would do yourself needs to be responded to with polite but firm follow-up.

Finally, if a customer does not pay you need to take legal action. Your sales team will protest about relationship, but a customer that does not pay you has already broken their relationship. If you have credit insurance, your insurer may take over this process, otherwise you need to sue. The steps are always the same. First a legal warning letter then you file a claim. You need to get paid, not a future promise of payment after the legal warning letter as you need to move quickly.

By doing what I suggest in this blog, I have consistently been able to deliver industry leading collection statistics wherever I have worked. By spending the time to work more directly with the credit and collections team and build a rapport with the Sales team I have been able to keep everyone happily working towards the goal of getting cash into our bank faster.

Credit Control

By Michael

On June 2, 2016

In CFO, Finance

I have done a few blogs on some of the more public tasks and CFO has, such as Investor Relations and Earnings Releases and SEC Reporting (where the results of the process are public). This blog is about a process that if everything goes well will remain private because there is no news to report.

One of the functions that normally reports to the CFO is Credit and Collections. I will discuss collections in another blog to come, this one will focus on credit control. The whole basis of credit control is balancing reducing losses from bad debts while not excessively curtailing the ability of your sales team to sell. There is a very natural conflict point here between Sales and Finance (or Treasury as credit control often is a Treasury function, but Treasury should report to the CFO). Sales is motivated and pressured to increase sales. Credit control is motivated and pressured to reduce losses. In both extremes, you can have either no revenue (all sales are denied) or maximum losses (sales are made to anyone regardless of their ability or desire to pay). Obviously no organization wants either extreme.

Before I detail out what I think is important about Credit Control, this is a reminder of why you need it. If you want to recognize revenue on an accrual basis (when the sale is made instead of when cash is collected), the SEC has listed the rolling four conditions that need to be met (SAB 101):

“The staff believes that revenue generally is realized or realizable and earned when all of the following criteria are met:

• Persuasive evidence of an arrangement exists,
• Delivery has occurred or services have been rendered,
• The seller’s price to the buyer is fixed or determinable, and,
• Collectibility is reasonably assured.”

https://www.sec.gov/interps/account/sab101.htm

The final bullet says that before you can recognize revenue, you need reasonable assurance that it is collectible. The SEC is not often as direct when giving guidance but the four points are very clear. Since then, accounting guidance has echoed those 4 points and all US auditors and most foreign ones use those points. Revenue recognition is a key problem that can lead to either missed quarters or restatements. It is something that a good CFO pays close attention to. It is very damaging to your reputation and the company’s reputation to get this wrong.

The first two things you need to do is to ensure that credit decisions come from a fact based process and that you have a good person with sound judgment leading the team. The two best sources I know of for credit information is Dun and Bradstreet and the credit insurance companies. The other is your company’s experience which is mainly saved by the credit and collection staff but might be in your CRM system as well.
One bad source of credit information is the personal relationship of the sales manager with someone at the client. From the beginning before the credit application goes in to. The. Very end when you do the final rejection as CFO, you will hear a story of what a good guy the client representative and how far back the sales manager goes with them. Sometimes the relationship goes all the way to the top, the sales manager knows their CEO. I have never seen a case where that so called “good relationship” turned a bad credit into a good one. Even if the relationship is real, if the client does go into bankruptcy, the judge can claw back payments made to your company in advance of other creditors. I also have noted that when business turns bad for a company, the CEO is more likely to lie and exploit their relationships than lower level employees.

What is important to know is what the D&B report says and what your collections team says if they have previous experience with them. For example, you may set 30 day terms and the D&B report says that they are often late. If your staff has previous experience with them, they may be able to tell you that they always pay no faster than 45 days but that payment always arrives then. That would indicate that their credit is OK but that you need your pricing to reflect being paid 15 days past your terms.

On average, your credit team should be saying no to cases where there is doubt that the client is trustworthy. If you have 20% gross margin, every bad debt write-off needs to be replaced with 5x the revenue to recover the cost. They cannot say no to everything that is doubtful and there should be some balance struck between an outright no and lower credit limits or a mix of letters of credit, bank guarantees and deposits and pure credit. A good sales manager should be good at negotiating, so they should be able to work something out.

You have to set the right tone with your staff. Some of their decisions will get appealed to you and I have found that the credit team is almost always right. There are times where there is some factor they did not consider, but if you did what I said was important – have a good fact based process and a good leader, then when they say no it normally is justified. Almost always I end up pushing the sales manager to go back and get more security from the potential client. Sometimes I approve the request, but always only when I know something that the team did not know.

A bad reason to approve credit that otherwise would not be approved is because you need it to make the quarter. You’ll just write it off a quarter or two and make that quarter worse plus have people question your judgment.

Credit insurance can help defray some of your risk. If you are exporting, make sure you look into what government supported insurance there is. Many countries have some sort of scheme to reduce risk and will let you recover 70% or more of any loss. Agencies like that also are good sources of credit information and proper practice for the country and maybe even to potential customer. In your home country, you will have to find credit insurance from one of the several that provide it.

When exporting and selling into emerging markets, you need to be very careful when you extend credit. If there is no good rule of law and now ability to enforce contracts or payments, you probably should be requiring an L/C or payment in advance. Many countries have a very bad reputation for paying companies from other countries and in many, you cannot win in court against the “home” advantage your customer has. If you do extend credit, be careful and build up the limit slowly as the customer proves them selves.

As CFO, you have better access to banks and market intelligence than your staff does. Make sure that you communicate with them. A recent example for me was a competitor that also bought our product off of us. I felt that their business model was OK but they were not being run properly and were a bankruptcy risk. I communicated it with our sales leader and our head of credit control. They decided to stop selling to the customer and several months later they did go under. Because I communicated my knowledge, we had no exposure to them.

I wish I was always that good. In one case an Indian customer wanted credit. They were listed in India and not very strong but most of our customers (construction companies) did not have great credit. I had been convinced that extending some credit was OK but our sales leader did not get a good feeling from meeting them in person. He stopped the sale and one of our competitors extended credit and sold to them instead. That company went under and paid no one.

Finally, we were trying to do more business in China where my company’s factories were located. We had a potential customer that was public in China and had a market cap much higher than ours. Typically you get paid by bankers’ acceptances/notes inside China. In this case, the customer offered commercial notes. They were current on their debt and their balance sheet seemed ok. We made a large sale to them and they did not pay the commercial notes off, defaulted on their bonds (pretty much the first in China) and went under. It was an expensive lesson, and we did not makes that mistake again.

And please don’t forget to have your contracts, even your standard sales contracts, reviewed by a lawyer. A poorly written contract can turn a calculated risk into an unexpected disaster.

Business Entertainment

By Michael

On May 29, 2016

In CFO

Once I made it to the CFO rank, the offers from potential vendors for business entertainment significantly increased. This is something that happens as a matter of course with the position and it brings its own challenges with it. You also will do more entertainment for potential clients or lenders. Again, an area that you need to be careful with, especially with the FCPA and other rules to be followed (UK anti-bribery Act as an example, but most countries have their own rules. The rules on the books in China, for example, are quite strict).

I have one basic rule about accepting business entertainment. If it could influence my decision to purchase something, then I decline. The two different ways that could happen is excessive cost or something illegal. If it would be embarrassing to have the entertainment public, then it can be used to influence you.

I have a few other rules of thumb, but not influencing my decision is the main one.

When it comes to meals and bottles of wine that I would have, if the restaurant is a place I would go to and the wine is what I would feel comfortable paying for if I was personally paying for the meal, then I am ok with it. I will only accept sporting event tickets if the giver is coming with me. If the person wants to give tickets and not be there, I usually suggest that they be given to lower level staff and I would not take them. I just make it plain that I am passing the tickets on so the staff know it is coming from me.

If I get a gift basket that has food and wine that is too expensive, I just share it with people at the office. You can always send it back if it is really over the top, but it is not so easy and can be considered to be quite insulting in some countries.

All of the above is, of course, if the company policy allows it at all. I have influence over the rules and they should never be ridiculously tight (some places like Walmart have famously tough rules there), but you do need rules with fairly low limits to discourage undue influence.

It is very hard in countries like China to avoid receiving and giving gifts. Because you are likely to be governed by the FCPA, you need to be very careful to ensure you know who is receiving the gift and if they are a government officer. This is quite tricky as the government runs or owns many companies and parts of the economy. The local bank branch manager may be considered to be a government official. Same thing for hospital administrators and other businesses. Even if you think you are following the FCPA, the actual written laws in China are very strict. They are generally not enforced, unless the government decides that they now will enforce them. So make sure this is well understood and controlled.

Business entertainment does serve a vital purpose in that it allows you to spend time with key vendors like your bankers outside of formal meetings at your offices (or theirs). If you are going to be relying on their advice and work, it certainly is important that you get more information than just a rehearsed pitch in your office. A meal gives you a lot more time to get to know them and what you learn outside the office can give you some clues on if you should use or trust them. If you are reasonable and careful in the entertainment you accept, you also are sending a signal to them that it is the results and their cost that matters, not if they can get yiu Super Bowl tickets.

Business entertainment does not only have to be with external vendors. You can take your staff or key people in other departments out as well. At times you can break an internal impasse by taking the discussions out of the office. Obviously you should not abuse this (policies like the most senior person pays helps to reduce abuse), but the occasional meal with people from inside your company can help a lot more than another meeting reviewing a spreadsheet. Sporting events are harder to justify, but some beers and cheap bleacher seats at a baseball game are not expensive and a good way to reinforce the workplace bonds. Business entertainment also gives you a chance to relax the formal chain of command that many feel pressured to follow inside the office. I have received quite a few good suggestions from my staff over a meal after work. Suggestions that were not forthcoming inside a work conference room.

If you are entertaining internal staff, you need to make sure it is in a fair and professional atmosphere that does not exclude your staff of the opposite gender. Usually, I prefer a larger, mixed group in that case as it can reduce gossip, but if you treat everyone with respect and as fellow employees, not dating material, your reputation will be good and there will be less need to have public “chaperones”.

I do tend to watch how much I drink when I am out at a business entertainment event. I don’t drink that much anyways, but as the CFO you need to set an example. As fun as it may appear at the time, getting drunk just isn’t wise and you risk others drinking to excess with you and then later getting behind the wheel in a car. You are responsible for your company, do not forget that you are responsible for your staff as well.

That is not to say that you should not drink at all. Some countries like Korea, Japan and China seem to feature drinking a lot as part of the expectation of a business meal. Regardless of expectations, I always have been careful to not overdo it. You also need to be more careful when fighting jet lag as drinking really does not help and may make it worse.

Work / Life Balance

By Michael

On May 3, 2016

In CFO

I wish I had better news, but if you are wanting to be a CFO of any sort of larger company, it will be next to impossible to maintain any sort of reasonable work/life balance. It actually does get better in the sense that you have more control over your schedule and can plan around important family dates, but that really does not help as much as you would hope it would.

The primary accounting schedule that focuses on quarter ends is the same even as CFO. Your intensive work is delayed about a week from earlier in your career as you probably are not directly involved in the preparation of the first draft of the numbers, but once they are available you will be reviewing them and working on the earnings release. This also activates the forecast refresh cycle as you try and dial in the guidance you will release with the earnings release.

The quarter end crunch tends to be even more condensed because of prepping for the Board meeting. You will be a key presenter at the meeting and quite often you are explaining proposed company action with the need for aboard approval. As much as you may think that you are saving time by not preparing the raw numbers, reviewing them to ensure there are no errors and preparing the explanations and message is actually more time consuming and you also need the fairly final numbers before you can close it off which means you get even more crunched by any delays.

The quarterly reporting cycle in intense, but at least it happens with the same timing from year to year. If you are just having a normal year, the only other time pressure that will push your work over the top is travel. Very often you will fly on a weekend day so you can arrive on or before the Monday start of your work week. Phone calls and emails help, but you’ll be traveling to your major sites at least once a year to meet your staff there and do business reviews. You’ll also be traveling for investor relation events and non-deal roadshows. These are more instances where you will have an illusion of control over timing but actually less ability to control it than you would like.

You have to plan travel around your quarterly earnings releases and Board meetings, so the window is more condensed. Although you can pick and choose which IR events you attend, there will be major events that you really should be at with fixed dates so you do not have as much flexibility on them. Major overseas travel takes even more time on planes and causes jet lag issues as well. You are likely to be less effective in the first few days you are back and often that means going to bed earlier which takes away family time.

Again, this is somewhat manageable as you can usually control the dates of internal meetings and move them to a time that is more convenient for you. It still takes time for the travel and the follow-up, but if there is an important birthday or school event, you can plan around it.

The other time requirement is staff coaching and development. I personally never encourage too much socializing in the office and I think that professional relationships can be damaged if overdone, but you absolutely need to spend some time getting to know your staff. So even if you are home, you can be sure that there will be so,e evenings where you get home later because of this.

The real time devourers are M&A activity and capital market deals and other major financings. There is no escaping the central position for the CFO in those deals, and you have little control over when they happen. Capital market deals normally happen after you report and before it is too close to the next reporting period. So that spacing between the major reporting deadlines can be eaten up by a deal. If your company is active in the capital markets (one deal a year), then you can expect to lose a lot of personal time in one quarter. Again, you are not the junior associate lawyer, the manager at the auditor firm or the junior investment bankers that really get slammed with the detail work, but you will still be quite busy, as the documentation gets more final you will be the go to person for most final decisions and you’ll probably be running the deal. If the deal is a rated deal, then the rating companies are going to want to hear from the CFO and probably meet them in person. That means you.

Major financings like in the project world or bank debt also take a lot of the CFO’s time. They also tend to require more internal effort as the division of labor is quite different for those types of deals than one driven by an investment bank. So you are not quite so tied to the markets and probably do not have to do a deal roadshow but you will have to do a lot more review of the internal work performed.

The final and uncontrollable work demand that is likely to swing your balance quite a bit towards work is M&A activity. Even if you are the acquirer, you will not have that much control over when it starts and once the process is kicked off, you will likely be the center of it. You not only need to do due diligence, you probably will have to raise funds in a financing as well. So you will not only have to run the buying process, you will be running the funding process as well. M&A always has extra time pressure and you have to expect the unexpected. As a public company CFO you will be filing SEC documents as well if the purchase is large, so that is another task on your shoulder.

On top of all these additional activities, you will have your day job of leadership and managing the areas you are in charge of and where the company needs your attention.

You will not have good work life balance, but you need to manage it to make the most of the opportunities you do have. You need to be able to prioritize, schedule and take more add=vantage of the friend and family time you do have.

I have emphasized the importance of communication in many of my blog posts and it is even more important outside of work. You need to know what is coming up with your family and friends and you have to know what is important. When traveling, Facebook and similar social media (I recommend keeping a smaller and more personal friends list while serving as a CFO) can be used to keep up with the activities of your social circle and to let people know where you are and what is going on with you. It does sound a little sad, but you cannot spend as much time chit chatting to catch up, so social media can be helpful.

You also need to have frank conversations with your family about what is coming up or happening with work. They can also work with you to move around some activities so you can be there.

Finally, you will have to make a choice about some friends. You will only have so much time you can spend and you will be spending it a lot with your family. Maybe use this process to shed some friends that have turned out to be a negative source of energy for you. I also find that friends that also are as busy as you are more understanding.

As I said when I started, I wish I had better news, but you will struggle with this your whole career and you will not be alone.

A simple but career destroying problem

By Michael

On April 12, 2016

In Accounting and Reporting, CFO, Finance

The number one fundamental error that causes material errors and misstatements in SEC reporting is spreadsheet errors. There are plenty of technical errors you can make and there always is the risk of management override and deliberate misstatement but the number one way is to shot yourself in the foot because you make a basic spreadsheet error.

Spreadsheets are used by all accountants, and it is impossible to operate without them. We all know that they cause problems, but we use them anyways because there is nothing better. Here are some recent examples of reporting errors (taken from the link below, I have not used the product they advertise and the cases cited are public and in other articles)

http://www.audinator.com/Horror_Stories.html

Fannie Mae makes billion dollar spreadsheet error overstating gains
Fannie Mae filed a Form 8-K/A with the SEC amending their third quarter press release to correct computational errors in that release. “There were honest mistakes made in a spreadsheet used in the implementation of a new accounting standard…which resulted in increases to unrealized gains on securities, accumulated other comprehensive income, and total shareholder equity (of $1.279 billion, $1.136 billion, and $1.136 billion, respectively)”

Share price drops by a third, CEO resigns due to spreadsheet error
UK support-services group Mouchel discovered an accounting error in one of its key spreadsheets that led to a £8.6m downgrade of its profits. The company pension-fund deficit had been wrongly valued as a result of the spreadsheet error.

Shares of RedEnvelope fall more than 25 percent due to spreadsheet error
The online retailer of specialty gifts drastically reduced its fourth-quarter outlook and said its chief financial officer will resign. “They were underestimating the cost of goods sold”, said Stanford Group analyst Rebecca Jones Kujawa. “It is likely CFO Eric Wong is being pushed out because of this error, which could demonstrate a material weakness in controls over financial reporting.” RedEnvelope spokeswoman Jordan Goldstein said the budgeting error was due to a mistake in one cell of a spreadsheet that threw off the entire cost forecast.

Kodak restates income downward by $11 million due to spreadsheet error
$11 million severance error traced to a faulty spreadsheet. Kodak spokesman Gerard Meuchner said “There were too many zeros added to the employee’s accrued severance.” Robert Brust, Kodak’s chief financial officer, called it “an internal control deficiency that constitutes a material weakness that impacted the accounting for restructurings.”

AstraZeneca forced to reiterate earnings forecast after spreadsheet error
Britain’s second largest drugmaker AstraZeneca scrambled to reaffirm earnings forecasts after an embarassing spreadsheet error left investor confidence sorely shaken. The behemoth drug manufacturer said the spreadsheet gaffe occurred during “a routine consensus collection process.”

I can also give a personal story about a spreadsheet error that certainly caused embarrassment and could have been worse. Earlier in my career, when I was Controller of a company, we were being bought by another company and we had bankers advising us. At the last minute, right before we filed our last 10Q as a public company, our lawyers decided we should disclose the banking fee we would be paying to our advisors. We had hired the bankers in the past for the same potential deal and the letter from the earlier, failed deal had been updated to a current date and signed again by our CEO without being reviewed.

The formula for payment was based on a certain definition of enterprise value and the fee jumped as each major valuation range was cleared. I built a quick spreadsheet model off of the balance sheet spreadsheet that had been checked by us and the auditors so I knew all the base numbers were right. I entered the formula for the fees, all in one cell instead of stacking the different ranges in a cell for each of them. The number that came out was in the low double digits of $ millions, and I thought it was high looking but the bank had been working a long time and had not been paid for any work yet on previous, failed deals, so I used that figure in the disclosure. My boss did take a quick look at the number, but no one checked my spreadsheet.

I had made a formula error. For the very last range, I was off one decimal place in the formula and the spreadsheet understated the amount due by 50%. The actual amount was a surprise to everyone and had the CEO actually done a calculation, he probably never would have signed the letter. It ended up being an issue for me because I stayed on and the acquiring company was concerned that the fee was being hidden on purpose. Once I showed them my error, I then ended up in the middle of a large investment bank’s M&A group fighting with their country office overseas that was being pressured over the fee. It eventually was resolved, but I didn’t get as smooth a start as I had hoped in my new role and it was a big distraction for a while.

After that narrow escape, I became much more careful about the base spreadsheets me and my team use in SEC reporting. Careful review for errors has caught several that would have ended up being material misstatements. Two common places where I have found errors is in the tax provision spreadsheet and the inter company accounts reconciliation spreadsheet. Both are updated quarterly, the number of rows often changes as items are added or subtracted and both have multiple people inputting data into them.

The first and still main formal study I know of on spreadsheet errors is by Raymond Panko of the University of Hawaii. I have provided a link this site below. The conclusion of his initial study was that spreadsheets are large and complicated and almost never follow a formal software development process designed to eliminate or reduce errors. Therefore it was not a matter of if there is an error, but how many.

His site lists the common errors he found in his study and how to find them. He also describes a standard development process designed to reduce errors and find any that are created. He also reviews the results of several studies that were done around 2004 after Sarbanes-Oxely became the new standard for companies to follow. Control over spreadsheets is a key internal control that all public companies need to address.

http://panko.shidler.hawaii.edu/SSR/

This problem is pretty well known and it is not hard to find newer articles on finding errors in spreadsheets. For example, this one: http://www.journalofaccountancy.com/issues/2015/nov/how-to-debug-excel-spreadsheets.html . Even with the recognition that there is a problem, CFOs are still losing their job because of simple spreadsheet errors leading to material reporting errors, misbid contracts, improper internal reporting and analysis and other embarrassing issues. It does not inspire Audit Committee confidence if you present to them and they find an error.

I suggest that you take a look at the Planko articles and do a little search for more articles on what can be done to reduce errors. Call a meeting with your staff and review this issue and discuss what they are doing to make sure they are getting their spreadsheets right. Hopefully they all know about the danger already and you already have a robust process. If not, get one in place ASAP. Even if you do, spot check a couple of the more complex spreadsheets they use and make sure you cannot find any errors.

An ounce of prevention now can save you from a $25M fine later after an error is found and you have to restate your results.

Going beyond the headlines

By Michael

On April 5, 2016

In CFO, Finance, Investing

Every day, at the end of the day, there is a series of articles wrapping up the market. There always is some sort of facile explanation in the headline and then a few facts in the article around the headline. Every market day and usually a wrap up on the weekend. There normally are a couple of pithy comments and reference to some news item of the day. Typically there is a comment on the Fed, or the latest job news, of maybe a reference to Asian markets or some economic item in Europe.

There are similar news items on individual stocks, especially famous ones, just about every day as well. Some little news items is grabbed for Apple and attached to whatever the stock price movement is that day. Even for lesser followed stocks, when they do their earnings release any movement is attached to the market’s reaction to something in the release or a comparison to analyst expectations. Often there is a quote from the latest analyst report supporting the reasons cited for the stock move.

I can tell you, if you want to be a better individual investor, you need to learn to ignore such articles of reasoning. They tend to be very shallow and are written more to fill space than they are to offer any sort of thoughtful response to what actually has happened. Same thing for much of the instant analysis that is on the live financial news shows.

I am not saying that real news does not move stocks. If a company genuinely releases unexpected news, either good or bad, then the stock may immediately react. If there is a major geopolitical news item like a terrorist bombing in a financial or political center or some surprise currency move, then markets can and often will react and that news will be the cause of the reaction. However, news of that nature tends to be pretty rare and even rarer for an individual stock.

In my first substantial blog post for this site, I discussed my strategy of selling puts to generate income and profit. In that blog I listed several long tables of share prices that I suggested should be studied before deciding on a stock and committing to an investment. In my blogs on investor conferences and non-deal roadshows, I talked about the process the typical fund uses to decide to buy and sell and emphasized that the process tends to be slower without an immediate reaction causes by one conference meeting or visit in their office.

The same thing can be said about the analyst reports that appear right after an earnings call. Normally the analysts are rushing to get something written and they have call after call during earnings season. Their time with management is normally limited to. The questions you can hear on the call and about 15 minutes afterwards are all the time they normally get with the company and then they publish. Quite often what is written is a rewording of the press release with a highlight or two from the conference call. Earnings calls can be catalysts but they are more of a retail investor or a fast trading hedge fund play than the longer term investment trends that give stocks their underlying values.

If you want to learn about the market or a company, you need to do more than just read headlines or look for one answer to what something is happening. A good example is oil prices and energy stocks. There is a connection between the two, but small changes in oil prices that are within the range of normal expected volatility are almost for sure not causing the move in one particular stock or sector. An above average increase or drop is more likely a larger investor increasing a position or decreasing a position, and the chances that it happened that day because of the news item being identified is almost zero. A .5% move in Yen value is not going to change investment decisions on a company that gets some of their revenue from Japan.

This goes back to my advice to CFOs on doing the outlook section — you need to look past your spreadsheets and listen to the other functions and what they are telling you. When you are making long term capital commitments, you will a lot of simple answers to questions. These answers may sound right, but when making an investment decision you need to think a little more on it. Make sure that your question was really answered. Try and look at the question from a couple of more angles and ensure that you are making the right choice for your company.

Of course, most individual investors don’t have the training or the background to understand what is happening with the markets. From reading books like Flash Boys by Michael Lewis, even my understanding of the trading in the markets is somewhat shaken. With all the “Dark Pools” and algorithm based trading that is happening and the speed and velocity of dollars being committed, even the basic fundamental reasoning for stock valuation might be broken down. Individual stocks may get caught up in this trading and change pricing for no reason other than it was traded.

I try and keep my financing deals as simple as possible and avoid derivative collars or enhancements to them because even after I study carefully I cannot account for all of the factors that might move their deciding valuation factors more than expectations. If I cannot reasonably assess risk, then I do not commit. It is the same for me for investing decisions. If I do not understand and agree with how a stock is being valued, then I do not invest in it.

This blog entry is the reasoning I use when I encourage people that ask my advice on what to invest in to avoid individual stocks and buy low cost index funds. You have little chance of getting rich quickly but you’ll at least make the market average returns which are quite compelling. If you want to gamble with a stock, accept that you are doing no more than buying a lottery ticket or pulling a slot machine handle. Nothing wrong with dreaming, but recognize that you are dreaming. As a CFO, you need more than a dream. Lottery tickets are not a good strategy to make sure that you can meet payroll and pay suppliers.

I am not saying that you should not invest in individual stocks. With careful reasoning and some luck you do have a good chance of beating average returns. As a CFO you will be asked to greenlight new products or business areas. In the short run saying no is more safe but you may not have a long run if you say no to everything. Just make sure you understand the ways you can lose money on the deal and what you would do if that happened. If it does happen, you will at least have a plan. No different than if you were acting as CFO. You can take the risk and say yes to a new area of business or a new customer, but have a back-up plan you can execute on.

If you do want to invest in a particular stock, investing in something you know and maybe not in the industry you work in (to avoid concentration risk). Try and understand the product you like and other investing reasons for the company. Try and figure out who owns the company and why they would want to own it. A classic example of this for me is Hasbro. They own Wizards of the Coast and they own Magic the Gathering and Dungeons and Dragons. I play and like both games and think that Magic is important to Hasbro and I can at least tell if that game remains popular. They pay a dividend and raise it annually which I like. They have the rights to Star Wars for toys. They have been able to monetize their other properties in the form of movies that have done well at the box office. All were good reasons to buy. That stock is up almost 100% for me and continues to pay a good dividend. Every quarter there is a news article of two update based on the earnings release but because I keep track of the company, I know that the news articles are very superficial. I think I understand the main valuation drivers and what causes short term swings in value (short term is usually tied to movie releases).

Musashi tells you to study well. Not just your sword work and strategy, everything you do. Don’t be fooled by what is on the surface and easy explanations. Understand your decisions and make them as well as you can. People are depending on you.

Non-Deal Roadshows – what happens on them?

By Michael

On March 22, 2016

In CFO, Investor Relations, Working With Investment Banks

Last week I covered investor conferences, this week I will discuss non-deal roadshows (NDR). In a typical company, NDR are the second highest source of in person meetings with investors (conferences tend to have the most meetings).

In many ways, NDR are very similar to investor conferences, they are another form of corporate access run by the banks that being management to meet with clients of the banks. Their difference is that the meetings are in the offices of the investors instead of at the conference site, but otherwise the meetings are similar in format to those at investor conferences. They are either questions and answers directed by the investor, a review of the standard investor relations presentation by the company or usually a combination of both. Regulation FD (fair disclosure) is still in full effect, so no material, non-public information can be discussed. You need to be extra cautious on any answers related to disclosure as you cannot confirm guidance as the SEC considers that as giving new guidance.

The main reason for doing a NDR is that it greatly increases the chances of you talking directly to portfolio managers or other key decision makers. These are the people that make the buy or sell call on your stock and they normally do not go to conferences on a regular basis. Normally they send their analysts to conferences. Another important advantage is that the larger firms with multiple funds often send multiple analysts or portfolio managers to your meetings where in a conference they normally only get one slot. So you directly access more decision makers at once. For the large companies, who and how many attend can be a good indication of how deep and broad the general interest at the firm is.

Logistics

Banks normally ask you to do a NDR for them. If there is significant demand, you may even get requests from banks that do not cover you. I recommend sticking to the banks that cover you as a courtesy and payback for the effort they make, but there might be a specific reason to use another bank. If no one has asked you and you want to do one, reach out to your covering analysts yourself or the investment banker that covers you.

Meetings are normally arranged by the sales force with the assistance of the analyst. If you remember from my blog on working with investment bankers, the sales force works for “the desk”, so your banker can help give a push inside the bank. So even if the analyst asked you to go out for them, there is no harm in mentioning it to your covering banker.

You can arrange your own meetings or suggest investors that you are targeting or that have requested a face-to-face meeting. The bank will want to limit the meetings to their clients and different banks have different tiers they service (large banks do not have many small clients while smaller banks will have more small clients). Even if you are suggesting a meeting, it is good practice to tell the investor to contact the bank and ask as well. The sales force may appreciate a chance to pitch to a client and start a relationship.

You are expected to make your own travel arrangements and pay your own hotel and meals expenses. The bank almost always provides local transportation at the city where the meetings are happening. Meetings are typically booked in 1.5 slots with 1 hour of meeting time and 30 minutes of travel time. In some cities the travel time is reduced and sometimes when there is big demand for meetings the meeting time gets crunched down to 45 minutes. Expect a long and tiring day, so try and get rest before the meetings. If demand is really large, expect a group lunch or dinner. Otherwise, make sure you eat.

Typical cities

This will vary, and I am writing as a USA-listed company CFO. I have lived in Asia, so I have more experience there, but not as much in Europe and none in the Middle East.

New York and Boston

These two have the most funds and have the most investment dollars available to invest in US companies. When you are offered an NDR, the analyst, who is at least partially paid based on trading volume run through his firm, will wants to do meetings in these two cities. I don’t mean this to be a travelogue, and I would assume that most people are familiar with the cities. NYC is bigger and even with the high density of funds, there can be lots of travel time from place to place. Very often you will get to a meeting faster if you walk. Traffic can a very, very bad. When the UN is opening a session or the President is visiting (or another major leader like the Pope), bad traffic can turn into a nightmare. Boston is a little easier to navigate as the central core where most of the funds are is smaller. There are several very large funds in Boston where you could draw a large crowd if they are interested.

There are a few pockets of investors outside in the greater NYC area, but normally the time it takes to get to New Jersey, Connecticut or Philadelphia is not worth it. NYC tends to have more hedge funds. Boston a bigger concentration of more traditional mutual funds. Both cities draw lots of management teams and the funds are not as excited about that as other cities are.

If you are traveling between the two cities, I suggest the Amtrak Express train. Much less affected by weather and the stations are right in the middle of where your meetings are. One major fund company is a cross the street from South Station in Boston.

Give yourself extra time, especially in NYC, to show ID to enter every building. Security can be tight. Make sure you bring picture ID.

London and Europe

This is probably the location with the largest concentration of investors. A few other cities like Zurich and Frankfurt have a good amount as well, but London is the biggest. My experience here is much more limited, but I have been to both conferences and NDR in London. Not too different than NYC where the concentration is good but traffic and the sheer size of the city means that getting from meeting to meeting can add delays. I was stuck behind the Queen in a horse drawn carriage once in London as some ceremony in the Parliament had her traveling and the traffic loop in from of Buckingham Palace is a main route to and from the City. You can end up with a few meetings pretty far apart and the Tube is the best bet to avoid traffic in that case.

Zurich, Geneva and Edinburgh are other cities that may be worth a visit. I have not been to Frankfurt or Paris but both have fund managers there as well. If you are already in Europe anyways, it may be worth an extra day or two to visit cities other than London.

Hong Kong

Like NYC, this is the city with the highest concentration of investors and probably the one where you are most likely to walk from meeting to meeting. The walking is through a maze of shopping malls, so a local guide is good. A lot of American and European funds have their Asian office here, so if there is an Asian connection to your company it is a good place to visit. Many hedge funds here that are either local money or branches of other Western hedge funds.

Singapore

I lived here for a few years and was CFO of a company listed in the USA but HQed here, so I did quite a few NDR there. You probably will not do too much walking here because of heat and humidity but the central core with most of the funds is not that large. For the most part, the funds here also have an Asian theme so not as much demand for pure American companies but if you have flown to Hong Kong it is not that far to Singapore. The sovereign wealth funds here can be good, long term shareholders if they are interested.

Smaller USA cities

One you get out of NYC and Boston, it does get harder to fill a whole day with meetings in most other cities. However, there are probably 10 other cities that have enough funds that a visit is worthwhile. One big benefit is that management teams do not travel to these cities anywhere near as often and you are much more likely to meet with a portfolio manager or other investment decision maker in a smaller city than a larger one. Smaller cities tend to have smaller accounts and make a good match for any smaller banks that cover you.

The meetings themselves

As always, I suggest that you do not go to the meetings alone. Running around NYC or other cities can be a logistical nightmare, and having a friendly person in the room with you can help protect you should strange trading happen while you are doing the NDR and people wonder what you said.

Your covering analyst will often go to meetings with you. They will write a report after the NDR, usually after giving their clients a couple of days to act themselves. This is a good chance to make sure they know you story better and can articulate the points you were making in the meetings. You also will get to spend more time and develop a better and more personal relationship with your analyst. I have never met one that was not overworked and understaffed, and spending 2-3 days with you on an NDR is a pretty big commitment. Understand that and try and return the favor, even if it is a few kind words about the analysts to the accounts they cover.

The other person that may attend your meetings in the sales person that covers the account. It might be tempting to think they are not as important as the covering analyst, but they are the ones with the day to day relationship with the people that may be buying and selling your stock. Many are very experienced and meet management teams all the time. Saying a thank you for their help and asking them what their clients are worried about might give you a good tip or two. I do know a good sales team makes a difference for your covering analyst and it doesn’t take much effort to show appreciation for the meetings you set up. If you ask in advance, the sales force will print your standard presentation out and make sure that their accounts have a copy. When they can’t attend the meeting, they might give you a copy to leave with their client.

Some accounts, especially in Boston, do not allow banks to attend unless on a deal roadshow.

The meetings with the investors themselves are quite different than at conferences, if only because they are in their office. You probably are meeting with some of the most senior people at the firms you are visiting, so listen to what questions they ask and ask a few questions back to them as well. I have always found the very big funds in Boston are the most courteous and respectful but they are also super professional. The notes from your meeting will go into a database and they keep track of what you say and what happens. The meetings are very much part of judging you as well as the company and the person that could be pulling the trigger on very big investments in you is asking you questions.

Like any marketing speech, you need three to five key points you want to leave at each meeting. Make sure you know what they are and deliver that message each time. You really only have time to do a few NDR a year at most, so make it count. Unlike investor conferences and talking to analysts, talking to portfolio managers at their offices can lead to quicker decisions.

Beating the Street

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What does it mean to be a strategic CFO?

By Michael

On February 23, 2016

In CFO

I think that the term I hear the most often when a recruiter calls me for a CFO opportunity is that their client is looking for a “strategic CFO”. I also see a lot of articles in Finance trade press on the importance of being strategic or on the new CFO that goes beyond the traditional roles of the CFO.
I’ll start by saying that many of the definitions used by those articles of a “traditional CFO” are quite narrow and probably apply to a Controller or Head of Accounting more than that of a typical CFO. I can forgive that, it makes for a more likely to be read article if you are claiming to provide some new insight, but I do find many of the articles to be shallow and they often do not seem to understand what a CFO has always done.

Quite often one of the main things claimed to be needed to be a strategic CFO is to be forward looking. That is probably the claim that puzzles me the most. Even basic accounting and reporting needs to be forward looking because the very basis of accounting for most companies, that they will continue as a going concern, requires forward thinking and analysis. Preparing budgets and forecasts is a core Finance skill. Some are better than others at building relationships outside of finance and get better insight, but that skill is a basic finance skill. Finance usually sits in the middle of the information flow for any company because Finance monitors cash flow, so building relationships is even easier. So I don’t think being forward looking alone makes a CFO strategic.

Other articles encourage CFOs to go beyond the traditional Finance work areas. This is also somewhat puzzling advice for a CFO because is seems to be part of their job to begin with. A CFO is a member of the senior leadership team and often one of the main outside and inside faces of management. Most of us have worked with a variety of functions as we moved up the ladder earlier in our career. A few of us even came over from other functions and hopped over to Finance.

With all of that good experience, trying to run other functions can be disruptive to the team. Everyone already has one clear boss, the CEO. They really do not need another boss. A good CFO will keep the company accountable to the goals everyone is shooting for, especially the financial goals, but be someone that enables success, not trying to run everything and make some sort of success themselves. You’re often in the role of risk control and doing reality checks if goals are being missed, so the CFO is often trying to overcome the bearer of bad news role that is natural to them.

This type of advice varies with the size of the company and what stage it is in, of course. In a smaller, earlier stage company, the CFO (if they are even called that) often have all of the admin functions under them. It is not uncommon for IT to report to the CFO as well. However, as a company grows and becomes more mature, you typically have several clearly defined functional heads. The CFO role usually gets more complicated as well, first with VC fund raising or with investor relations if the company is public. Treasury and fund raising consumes a lot of time as well. So there is limited usefulness in trying to do every function under the sun while CFO. A well structured expansion of roles can work well as part of career progression towards becoming CEO. I don’t think it is the best option when that is not the case and even when it is the intent, the CEO must back it and be clear about why it is happening.

That does not mean that the CFO cannot be deeply involved in areas outside of Finance. You can help the sales team close deals and reduce currency risk via hedging and ensure smooth revenue recognition by getting the contracts right day one. That only happens when you have a good working relationship with that team. You can help Purchasing in negotiating contracts with suppliers. CFOs make excellent bad cops and you might be able to bring financing contacts to the table that can ease the pain of pushing out terms. You are usually the natural ally for IT and the Legal department. Your COO will probably greatly appreciate any help you can give to drive down costs and help in choosing a location for a new plant. CFOs are often made the leaders of large, corporate-wide initiatives, so there is plenty of opportunity to lead teams with other functions under you.

All of these sorts of activities will make you a better CFO. You will make better informed decisions and your team will also make better informed decisions. Communication will increase and improve. You certainly will be much better regarded and that will make difficult tasks easier. So I suggest that you get out of your Finance department comfort zone and expand your horizons. When you complete that big, strategic M&A , you will be able to integrate and get synergies much easier because you work better with all your company’s functions.

I don’t think all of this will make you the “strategic” CFO your boss and the Board is looking for. You’re probably a pretty good CFO but somehow might be missing the “strategic” designation.

I think to have a proper understanding of what is meant by strategic, you need to go to the root of the word and then go from there. From what I can tell from some quick research, the use of the word strategy in a business context only became popular sometime in the 1960’s. Until then, it was meant only in the context of war. The root is a Greek word that means General or battle leadership.

Wikipedia has a good compilation of the meaning of strategy, from a pure definition standpoint to several noted military strategists and writers such as Carl von Clausewitz and B.H. Liddell Hart. The definitions can be boiled down to using all available and appropriate military resources to achieve political goals.

Sun Tzu said in The Art of War “If you know yourself and you know your enemy, you will not lose one fight in a hundred.”

I prefer Miyamoto Musashi’s discussion of strategy in his Book of Five Rings. His Earth Scroll (the first of his 5 scrolls) contains a long discussion on strategy. He even discusses strategy in business (in the 16th century, well before the 1960’s commonly described as the beginning of using strategy in business):

“In the way of business, there are cadences for making a fortune and cadences for losing it. In each way, there exist different cadences. You must discern well the cadences in conformity with which things prosper and those in conformity with which things decline.”

That is quite a profound statement by someone who was mainly known as a sword master. He tells his readers that a businessman needs to see the rhythm in their business and when you can prosper and when you would tend to decline. If you think about it, the CFO sits in the middle of everything as cash converts to reporting and is analyzed. That gives you the base for understanding the cadence of your business, but only by going outside your own department will you fully comprehend the cadence as numbers tend to lag reality. They are easier to see patterns in, but getting in front of the patterns normally comes from something more outward looking like Sales or Purchasing. So it is not being multi-disciplined or leading many departments that matters, it is understanding the rhythm of your business and when you need to act.

Musashi lists 9 things to keep in mind when trying to be strategic:

“
1. Think of that which is not evil.
2. Train in the way.
3. Take an interest in all the arts.
4. Know the way of all professions.
5. Know how to appreciate the advantages and disadvantages of each thing.
6. Learn to judge the quality of each thing.
7. Perceive and understand that which is not visible from the outside.
8. Be attentive even to minimal things.
9. Do not perform useless acts.”

I think these are all very valuable if you want to be a strategic CFO. He again stresses the need to keep a broad mind and not just learn sword fighting (finance in our context), not to do evil or useless things, and pay attention to details and learn to look beyond just the outside. I find the instructions to not think of evil things and not to perform useless tasks to be advice that all leaders should consider. Don’t step over the legal or moral line when plotting strategy of the consequences may derail all the company’s plans and you will put yourself and your career in jeopardy. Don’t do useless busywork, spend your time on actions that add value.

Musashi’s advice to learn the ways of other professions was meant more in the 4 professions framework he used (warrior, the peasant, the artisan, and the merchant) but in his own life he certainly farmed and mastered several arts himself. He was a big believer in doing instead of just reading or thinking about something, and he thought that the path to master the way of strategy was not just by becoming good at fighting with a sword. It was a primary activity, but not the only one. I first read his book when I was in my late teens when I first started sword fighting, and it is an excellent book to help make you better at that. However, once I finished school and started my career, I found his advice to be much broader than just sword fighting and he intended it to be broader.

In the context of a large company, Musashi gives good advice on strategy as well:

“Regarding grand strategy, you must be victorious through the quality of the people you employ, victorious through the way in which you utilize a great number of people, victorious by behaving correctly yourself in accordance with the way, victorious by ruling your country, victorious in order to feed the people, victorious by applying the law of the world in the best way. Thus it is necessary to know how not to lose to anyone—in any of the ways—and to firmly establish your position and your honor. That is the way of strategy.”

He makes it clear that you can take knowledge of individual combat and apply it to larger fights, but you cannot rely on just your individual victory. Rather, you need to take the same foundation you developed to win a sword fight yourself, against one of more enemies, and then use the greater resources your army gives you to win a bigger fight. If you are good yourself, think of what you need others to do to leverage your strengths and their own strengths. He says you need good quality people and then you need to lead them well.

Musashi says “It is necessary to know ten thousand things by knowing one well. If you are to practice the way of strategy, nothing must escape your eyes.”

His advice goes back to this theme quite often. He tells you to see, not just look. To understand and use your understanding in a broad way.
“You should not have a predilection for certain weapons. Putting too much emphasis on one weapon results in not having enough of the others. Weapons should be adapted to your personal qualities and be ones you can handle. It is useless to imitate others. For a general as for a soldier, it is negative to have marked preferences. You should examine this point well.”

With this advice, Musashi tells us that we should not have only one weapon or way to solve problems and not just to blindly copy others. He tells us to be versatile and open to what is the best technique for the problem in front of us. Far too often a CFO will try and use numbers to win, and sometimes it takes something different than numbers. Even if you don’t like leverage, borrowing money might be the right thing to do.

Finally, Musashi makes it very plain what the purpose of strategy is, to win.

“Generally speaking, when people contemplate the heart of warrior thought, they consider it simply a Way in which a warrior learns to be resolute toward death. But this is not actually the essence of the Way: what distinguishes the warrior and is most basic in the Way of the Martial Arts is learning to overcome your opponent in each and every event.”

“The true Way of swordsmanship is to fight with your opponent and win.”

“Your real intent should not be to die with weapons worn uselessly at your side.”

If you want to be a strategic CFO, you must be able to help or make your company win. There are no shortcuts or avoiding this. You may not have to leave your opponent on the ground bleeding to death or already dead like Musashi did, but you do need to win.

Business can be very black and white. There are winners and losers. No company consistently wins over time without the right strategy and culture. I will address company culture in a blog in the future, but the management team needs to be able to develop a winning strategy and execute on it.

I think there is nothing more that you boss hopes for more from his CFO is for them to help him be a winner. No one likes to lose, so the basic risk control and proper reporting skills of a good CFO are appreciated, but not losing is not necessarily winning. A winning strategy might be to survive a down cycle, to understand the market cadence that says you cannot prosper right now so you save resources for when you can, but more often winning is marshaling your internal resources and leveraging the external resources you have available to you.

Musashi says the heart of strategy is winning. He says to fight with what you have, not to leave weapons unused. No company is limited to only Finance tools. A strategic CFO knows how to enable or lead other functions when they are needed to win.

Assuming that you agree with me that the heart of strategy is to win, then you might be wondering what you can do to become a strategic CFO and to become a winner. I can tell you that I personally am not 100% sure how to answer that question from my own experience. I have done well at the various companies I have worked at and in all cases we grew and won. However I know that I am still on the path, I have not arrived at the destination. I do think that the advice that Musashi gave on this is quite good.

“See to it that you temper yourself with one thousand days of practice, and refine yourself with ten thousand days of training.”

When you are not doing, you need to be practicing. Develop skills, develop staff, debate and fight practice battles with your team and the senior management team. Experience helps. When the moment comes to execute and you need to make a decision that leads to victory, if it is something you have practiced or at least thought of in advance, then you will be quicker to act and more likely to make the right choice. Even practicing choosing helps.

This has just been the broadest overview on what strategy is and how you can use that understanding to be more strategic in your career. I plan on delving deeper into this topic in future entries in my blog and try to use some specific actions and examples I have encountered in my career. For those that care about my hobby posts, I will also go deeper into Musashi and how his book can make you a better sword fighter. I have a few other topics I want to discuss first, but feel free to contact me and ask to move up these discussions.

Strategy Books (all of which I personally own or have visited)

Website with an online, free copy of The Book of Five Rings

The Book of Five Rings

Books, either in paper or on Kindle (all links go to Amazon.com)

The version I quote here:

The Complete Book of Five Rings

The Complete Book of Five Rings – Kindle version

The translation I first read

A Book of Five Rings: The Classic Guide to Strategy

A Book of Five Rings: The Classic Guide to Strategy – Kindle Version

An account of Musashi’s life

The Lone Samuari: The Life of Miyamoto Musashi