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Are You Wearing Too Many Hats?

Do you sometimes feel that the value you bring to your company is worth more than your salary?  In the business world, often expectations exceed compensation, especially with financial leaders. What does the role of a CFO actually look like?

Before we dive deeper, it’s important to ask some questions:

Are you the person that your CEO contacts to “fix the problem”?

Have you been told to figure it out even if you don’t know how to fix it?

Are you responsible for learning the skills to fix that problem?

If you answered “yes” to any of the above questions, you may be someone who is “wearing too many hats.”

Wearing Too Many Hats

Often, CFOs will find themselves wearing too many hats due to problems within the company.  The CEO’s solution is usually to generate more volume, but resources don’t generally increase proportionately.  Most of the time, this means that the CFO takes on more responsibilities in response.

This isn’t always a good thing. Sometimes the company depends so heavily on the CFO, that the CFO feels unappreciated or that he/she deserves more money or esteem.

This past Friday, I moderated a panel of 3 financial leaders in various industries to discuss the issue of wearing too many hats. I’ve put together a summary of what issues were raised among our panelists as well as the Houston CPA Society’s Conference attendants.  The discussion was so interesting and enlightening, we’re dedicating the next few blog posts to the highlights of what the panelists shared.

Life Cycle of a CFO

At the heart of this juggling routine is what we call “the life cycle of a CFO“.

too many hats

The notion that CFOs had a “life cycle” came to me through observation over 25+ years of consulting with entrepreneurs and their companies. This cycle is comprised of 4 stages: a problem arises, cleanup occurs, new duties are assigned, and the CFO burns out or looks for greener pastures.

Problem

The life cycle of a CFO begins with a problem within a company. The company has grown beyond the capabilities and skills of the current employees. To solve these problems, the company hires a CFO on the team (either temporarily or permanently).

Clean Up

From there, the CFO cleans up the company’s financial processes and gets the systems up to speed. The problem is fixed – so now what?

Often, the CFO finds himself/herself filling time and justifying their existence once a problem is resolved.

New Job Duties

The CFO will pick up new job duties, help out other departments, etc. It’s only a matter of time until the CFO realizes that his or value is worth more. The real question becomes how to add value as a CFO.

At this point, the CFO is wearing the janitor hat, the insurance agent hat, the HR hat, the banker hat and the CFO hat (and possibly others depending upon how good/willing they are).

You can probably guess what happens next.

Say Bye-Bye!

So the CFO leaves, either for a more challenging position or, if they’re too stressed out with multiple duties, settle for something less. Most companies won’t rush in to fill the void left in their wake, and so the cycle begins anew…

What Hats Do You Wear?

As I mentioned, I recently moderated a panel discussion at the Houston CPA Society’s CFO/Controller Conference. During this session, I asked the panel many questions including what hats they wore within their companies, and how that posed challenges in their work experience.

Determining your Role

One panelist, Derek, mentioned that he had to balance both operational and financial roles in his company. They hired Derek to handle both of these roles. This illustrates how the role of a CFO has evolved over the past 25 years. As the role of a CFO changes, the relationship between the CEO and CFO changes.


Learn more about how to guide your CEO as a trusted advisor by downloading your free guide on How to be a Wingman.


Derek mentioned that the job was particularly difficult because he had no definitive role or expectations. He found it challenging that he didn’t know how the typical day is, what reports were required, or where to find the information to solve these issues.

Determining his daily role within the company become a task in itself. Especially as he stepped into higher levels of financial leadership, there were more moving parts that hadn’t been defined.

Finally, he concluded that delegation was the hardest because he was bogged down in cleanup.  He felt like a janitor; going behind people and literally cleaning up their messes. Delegation is extremely important as a financial leader.  In Derek’s words, “Delegation was important to me to further my role in the company, and to take on multiple other jobs.”

“The Job Man”

The next panelist, John, had a different situation than Derek. John is the CFO of an engineering firm. Rather than working an operational job, John calls himself “The Job Man.” He receives all the jobs that nobody else wants.

John looked at this from a positive standpoint. In order to continue working as a valued asset to the company, you must learn not to say no. In this ideology, there is nothing in your realm that you cannot do. This stance is interesting; not everyone is usually as optimistic.

If there is a problem left unaddressed, it will grow into something uncontrollable. John commented that he prefers that the issue is resolved so he can go on with his business. Take action; address it; knock it out.  John’s thoughts, “I’m the one that gets all the jobs that nobody else wants.  You’ve got to learn not to say no.”

How high can you stack the hats?

Paul, the third panelist, mentioned a great point: in any small to medium sized company, you’re always going to stack hats. The questions is, how high can you stack them before they fall (or your neck snaps under their weight)? 

Upon hiring a CFO, a company interviews to see what you can bring to the table (i.e. the right amount of relationships with banks, the IT skills required to be a financial leader in the company, knowledge of your financials).  You’re sharing everything in your bag of tricks not realizing that they are listening most attentively.  How can you be surprised when they take you up on your special skills?

Despite your amazing skill set, you can’t do it all.  So to keep the hats from crashing down, which hat would you give up?

The Most Important Hat

No matter what hats you wear in your company, the most important hat is wingman to your CEO.  Business owners care more about the value you help them bring to their company and your financial leadership than they do compliance and caution.

To extend the life of a CFO, it crucial for the CEO and CFO to partner together.  As a CFO, you are in the unique position to understand all that is necessary to keep moving the company forward.

Conclusion of Part I

Our panelists highlighted the importance of determining your role, taking action to learn new skills, and focusing your skills within the company.  While you may sometimes feel like you’ll topple over under the weight of all the hats you wear, remember to focus on what’s really important – having your CEO’s back.

Next week, get the panelists take on what millennials bring to the table!

If you’re interested in becoming the trusted advisor your CEO needs, download your free How to be a Wingman guide here.

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Risk-Taking | The Emergence of the New CFO

Generally speaking, financial-minded people are taught not to take risks. CEOs and sales-minded people are taught to take risks. This stark difference between the two roles (CFO and CEO) can cause friction if not addressed.

Risk can be expected within any organization, regardless of how much due diligence you do. Someone once described risk and uncertainty this way…

risk-takingYou are a football player and have the ball in your hands. You throw the ball to another player who is wide open. You’ve evaluated and concluded that this is the perfect opportunity to take a risk (letting the ball go) because it’s an open field with a clear path. But unexpectedly, a player from the opposing team comes between you and your teammate. Risk-taking is full of inevitable surprises.

With risk becoming a bigger conversation starter, there is a new role set emerging for CFOs and financial leaders alike.

Risk-Taking

Risk-taking and being a realist are not really compatible. Financial-minded people typically see themselves as realists and, consequently, tend to avoid risk.  The challenge is to combine the view through both of these lenses in order to decrease uncertainty from risk and increase opportunity.

Realists

A realist can be defined as someone who identifies things for what they really are. Most CPAs, financial analysts, financial leaders, and CFOs can easily relate to the “realist” role.  Realists tend to predict the future based upon past results.

Risk equates to uncertainty. Risk means making assumptions that may not be based upon reality, but on what could be.  Realists prefer to deal with the certainty of reality rather than the risk involved with dreaming.

Types of Risk Takers

Like it or not, risk is unavoidable.  Everything we do involves risk; whether you’re crossing a road or investing in a risky stock. Since you’re taking risks whether you know it or not, let’s investigate the type of risk taker you are.

Avoider

Have you ever met someone who tries to avoid all risk? This person likes to identify all outcomes and won’t make a decision unless it results in absolute certainty. They take the “cautious approach” too seriously.

The avoider is someone who truly believes that taking any action is the biggest risk. What they fail to see is that refusing to make a decision is a decision itself.  By not taking any action, they expose themselves to the whims of fate.

Think back to the emergence of the Internet. There were countless companies that assumed that going on the Internet was a risk because it was a new fad that would eventually go away.   Their decision not to take a risk definitely put them at the mercy of early adopters.  Avoiding the elephant in the room will not make it go away.

Mitigator

A mitigator typically does not take any risk unless he or she has compiled and vetted a significant amount of research to rule out any uncertainty. This type of risk-taker is only one step removed from the avoider, and is subject to the same consequences from their inaction.  But for those who do not have the experience or wherewithal to make a snap decision, this is may be their comfort zone.

Manager

Like any typical manager, a risk manager simply knows what’s going on.  What often separates the mitigator from the manager is experience.  Since they’ve had experience that the mitigator might not have, a risk manager is better equipped to make a quick judgement call when evaluating risk. They are a lot more comfortable in their decision-making and risk-taking roles.

Embracer

risk-takingSome people simply enjoy jumping out of airplanes, going all in at the poker table, or quitting their nine-to-five to start a company.  There’s a certain aura around entrepreneurs that just screams “RISK!” To financial leaders, risk means bad.

An embracer typically seeks high-risk for a high-return. They don’t do a whole lot of research before they act. The embracer can be compared to an adrenaline junkie, or someone who does crazy, dangerous things for the adrenaline rush.

The risk-embracer is at the extreme end of risk-taking.

helicopter-983979_960_720What type of risk-taker should I be?

As with everything, it’s important to find a balance between the two extremes. Do avoid dangerous risks. Do recognize that there is going to be uncertainty in your actions. Do embrace calculated risk-taking.

As a financial leader, your job is not to avoid all risk, but to help your CEO calculate risk, have their blind side and determine the best course of action. In short, it’s to be their wingman.  Learn more about how to guide your CEO as a trusted advisor by downloading your free guide on How to be a Wingman.

Enable Your CEO

Enabling your CEO is simply the most important part of your job as a wingmanCEOs generally like to take risks. CFOs generally avoid risks (which begs the question, can a CFO be a CEO?).  Your job is to help your CEO calculate the risks.  And I know you’re good at calculating…

Embracing risk isn’t always easy or comfortable, but creating a controlled environment will allow your CEO the creative freedom they need while still giving you a measure of certainty.

Risk Management and Control

So how do you create this “controlled environment”?  Through risk management and risk control.

Business Insider defined risk management as a practice of “creating economic value by the qualitative and quantitative identification and measurement of risk sources and the formulation of plans to address and manage these risks.” Risk-taking is an expected function that a financial leader has to manage.

They defined risk control as a “support function for financial risk takers and risk managers… [involving] the measuring and monitoring of risks versus pre-determined limits…”

In order to bridge the gap between the realist (You) and the risk-taker (your CEO), you need to re-examine your role.

The Emergence of a New CFO

brene-cc-880x1320Over the course of the past 25 years, I’ve spoken with hundreds, if not thousands, of CFOs, Controllers, and financial-minded people (financial analysts, accountants, bankers, CPAs, etc.). When I tell them that I work with entrepreneurial companies and that I’m an entrepreneur myself, they begin to get nervous. Why?

Dr. Brené Brown, research professor at the University of Houston, studies vulnerability, courage, worthiness, and shame within people, relationships, and organizations. She concisely puts it, “vulnerability is basically uncertainty, risk, and emotional exposure.” Taking risk in financial decisions or business decisions or even personal decisions is exposing yourself to uncertainty, more risk, and emotional exposure.

Today’s CFO cannot just be the person who always plays it safe. To stay relevant it’s important to become more than an number-crunching realist.

Manage and control the financial risk of your company by being a wingman to your CEO. If you’re interested in becoming the trusted advisor your CEO needs, download your free How to be a Wingman guide here

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Can a CFO be a CEO?

dollar-544956_1920One question I get often is, can a CFO be a CEO?

After being in the business of working with CFOs for over 25 years, I’ve learned one thing… CFOs and CEOs under historical contexts do not understand each other. Because of that, it’s been my sole mission to transition the role of a CFO into a financial leader and thus a wingman to the CEO.

Can a CFO be a CEO? is a great question, but it’s difficult to answer whether or not a CFO can be a CEO without comparing the two roles.

CFO vs. CEO

Before we get into the differences, we want to explain that while we may draw broad conclusions about these roles, there are always outliers that defy the stereotypical role.

Over the past 25 years, I’ve come to a realization about financial leaders turning into executive leaders… A typical financial-minded person will sometimes have a harder time becoming a CEO because of the differences in the way they think.

Chief Financial Officer

A person in a financial leadership role, such as a CFO, often uses more of the left side of the brain. Biologically, these types of persons are logical thinkers, reasoners, and analysts. This all makes sense when you are sitting in a room full of financial-minded people!  The conversations and body language are different. The type of person best suited for a CFO position needs to have the ability to point out the problems and figure out a solution to fix them.

Some characteristics and skills that effective CFOs possess include:

  • Logical
  • Analytical
  • Improving Profits and Cash Flow
  • Finding the Problem and Fixing It

Chief Executive Officer

Cerebral_lobesWhile the CFO tends to use left side of the brain, the CEO often relies more on the right side of the brain where the imagination, creativity, and intuition centers lie.

The CEO’s role is to think outside the box, lead the company forward, and set an example. Some characteristics and skills that effective CEOs have include:

While the list above does not fully encompass the characteristics that a CEO needs, it highlights the difference in the role of a CEO from that of a CFO. It requires more people skills, communication skills, and creativity.

Creativity is the Biggest Difference Between CFOs vs CEOs

Probably the most striking difference between CFOs and CEOs is their level of creativity.  Problem solving is crucial in either role; to solve problems, creativity is needed.

Rice_University_Athletic_Mark.svgI once took a class at Rice University about “Creativity.” The professor drew a stark comparison between Creativity and creativity by explaining that every person can be creative. Each person though has different views on what creative means.

Big-C

Big-C creativity can be easily spotted. They are the people that when given a problem to solve, they immediately start thinking of off-the-wall ideas to fix it. This form of creativity is needed for those in a position that requires a little bit of risk taking, pioneering, and creativity. A CEO, creative director, or President of a company should have the capability to draw from Big-C creativity pools.

Little-C

Conversely, Little-C creativity can be seen as someone trying to create something within the confines of 4 walls. It’s against the rules to walk outside those 4 walls, build onto them, and think outside the box. This type of creativity can still return some incredible ideas, but it can only go so far.

Sound familiar? If you’ve ever sat in a room full of accountants, the ideas thrown on the table are often limited due their view on what being creative means.

So what?

So often with clients, I find that the CFO often attributes financial woes to a slowdown in the market. When I come into a company to consult, I almost always find that there are greater issues than what’s being looking at. These issues can be found in other departments such as marketing or sales. Inventory could be backed up for some unknown reason. It is the CFO’s job to put on the hat of a Big-C creativity personality type so that they are able to dig to find the greater issue at hand.

Can a CFO be a CEO?

So how can a CFO become (or at least think like) a CEO?  By evolving from a financial person to a financial leader.

Look at what you can bring to the table. By having the ability to oversee and impact the financial side of the company, the CFO is better able to understand the financial implications of any decision made. Already, the CFO interacts with multiple departments, such as IT, risk management, HR, compliance, and administrative duties. This variety of work requires matured people skills, a little bit of risk taking, and strong decision making skills.

People Skills

Yes, we accountants have people skills.  Do you know the difference between an introverted accountant and an extroverted accountant? The extrovert looks at the other person’s shoes instead of his own. 🙂

Long gone is the age of just looking at the other person’s shoes and demanding results. The goal here is to demonstrate that you have people skills and that you aren’t just a numbers person. People skills are required to be a good CFO and a CEO. Step out of our your office or cubicle to start getting to know everyone you work with. Learn how someone on the other side of the office building is doing with anything.  It’s so important to start talking to all different kinds of people in order to get the bigger picture.  Everything that happens in a company winds up in accounting at some point, so get to know the players along the way.

Risk

CFOs and other financial-minded people are typically averse to risk. They want to know all the consequences of their decision before they make it, but that’s not realistic to expect.

You’re good at calculating, so transition into taking calculated risks.  How do you do this?  Start by going into the field to get experience from which to make decisions. If you know the nuts and bolts of how something works, then you’ll be more informed and more comfortable taking a risk that an idea will boom rather than bust.  As you get more comfortable taking calculated risks, your colleagues will see you as as the CFO rather than the CFnO.

Decision Making

Decision making is a crucial role in either the CFO or a CEO position. The real difference between the old financial person and the new financial leader is in making decisions that are not based solely on numbers. Try to key into some of the CEO’s Creativity and let yourself out of the box.

Great decisions are useless without communication. Recognize the importance of having emotional intelligence. Start off by setting an example through remaining positive during risky periods. Take complicated and intricate problems and narrow them down to a few key drivers. Facilitate open forums to discuss issues and decisions among team members. Actively listen to everyone you come in contact with.

Think Like an Owner

The first step towards becoming the new financial leader is to start thinking like an owner.  Owners are hyper-focused on making money.  You have the knowledge and ability to help them get to their goal.

Start with the basics. Something as simple as documenting your company’s economics and making sure that everyone in the company understands them and uses them in day-to-day decision making moves you out of the role of CFnO and helps you take more calculated risks.

Knowing your economics is the foundation for risk-taking, decision making, and understanding your business. Need help  shaping your economics to result in profit?  Check out our free Know Your Economics guide by clicking here.

Take ownership in your company. Think like an owner as you sit in your financial position. This act of creating your own personal culture of accountability, purpose, and profit will increase your value to your company and help take you to the next level.

And to answer our question, Can a CFO be a CEO?… I believe the answer is absolutely yes! If you want to learn more about how to become a better financial leader, click here.

Can a CFO be a CEO

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Optimistic Projections

By publishing overly-optimistic projections, your company could be at risk for internal financial problems, misleading investors, miscalculating inventory and staff, and more. As we reach the halfway point in the year,  it’s time to revisit whether your company has realistic or optimistic projections.  Are your sales projections still on target?  Now is a good time to review your projections and adjust them if need be for the third and fourth quarter.

Optimistic Projections

Recently, a client met with one of our consultants. When the consultant began preparing their sales projections using our Sales Genie Tool, the client started complaining:

Our CEO, Ryan is too optimistic. He comes from a sales background, so he consistently over-projects sales whenever I, the CFO, ask for them. I don’t want to deal with sales!  I’m not the salesperson.  But our bank is frustrated that we’re not meeting our sales.  I can’t trust Ryan to make smart sales projections goals anymore. 

Sound familiar?

Having overly-optimistic projections is like waving a loaded gun… bad things will happen.  Stakeholders in your company rely on these projections and it’s important not to mislead them.

Why are CEOs and salespeople so optimistic?

Sales-minded people often set “stretch” goals…  an appropriate way to move a company forward, but it can shoot you in the foot.  Basing projections upon stretch goals can create problems when getting financing and allocating resources.  Your banker will wonder why you fell so short of your target and your inventory manager will be scratching their head wondering why there’s excess inventory.  In short, what starts in sales can lead to issues in operations and finance down the road.

The “Bullwhip Effect”

Bullwhip_effectThe Bullwhip Effect is a term coined by Stanford University to refer to supply chain changes. The same theory can be applied to sales projections.

A financial leader who doesn’t want to (or doesn’t know how to) project sales typically trusts that the sales team is projecting correctly forgetting that they are prone to cockeyed optimism when it comes to their performance.  The financial leader then submits projections based upon those forecasts to the bank and company management thinking that they’re completely accurate.

But in this example, sales overshoots the forecast by 15%. Operations has hired a few more people to manage the incoming sales and acquired more inventory. Sales sees the numbers coming in, still believing that those numbers are accurate; they give discounts freely and don’t collect in a timely manner. Accounting recognizes that the sales have happened and accounts receivable builds to an unmanageable amount.

All of a sudden, the financial leader is in a bind. Sales aren’t meeting the goal of a 15% increase; it’s more like 2% growth. Operations has tied up all the cash expecting increased sales.  Accounting is attempting to collect all of the sales as quickly as possible. The company is out of cash.

Things have spiraled out of control due to one small, well-meaning error.

How can CFOs or other financial leaders counter over-optimism?

Unfortunately, most sales projections fail due to a one-faceted (sales only) approach to forecasting.  When projecting revenue, it is imperative that you as the financial leader set guidelines and boundaries for your sales team to prevent optimistic projections from becoming gospel.

Here’s how you do it…

#1 Set Expectations

Schedule a meeting time for the financial leaders in your company to meet with your sales team. Set expectations as you move forward in creating sales projections.

These expectations could look like:

  • Review projections quarterly and adjust them if need be at that time
  • Have sales submit weekly reports to accounting to track trends
  • Schedule weekly or monthly meeting to discuss projections

#2 Create Projections Together

The biggest cause of optimistic projections is the accounting department asking sales to provide a number without any validation or input. Without any questions, those numbers are blindly put into the forecast.

There are two different types of sales numbers you should ask for from your sales team: the actual projection and the goal projection.

The goal projection, or a stretch goal, is often what causes these optimistic forecasts. Their purpose is to set a number high enough to motivate sales team to reach it. Oftentimes, it is set higher than is possible to reach. But this sometimes results in sales improving over the previous month or year.

For example, ABC Company’s sales were $20,000 in 2015. When forecasting sales, ABC set their goal projection to be $30,000 or a 33% increase in sales. Historically, there has only been a 5% increase over the previous year. The actual goal should have been a 5% increase as that has been the trend over the past 7 years.

In a meeting, explain the difference between the two types of goals. You need to actual sales goal for your projections, not the stretch goal.

If you’re still not sure how to accurately project your sales, click here to access your free Goldilocks Sales Method tool. This tool allows you to avoid underestimating or over-projecting sales.

#3 Communication

As we’ve said multiple times, there are three essential pillars within a business: accounting, operations, and sales.  Communication between these departments is critical to the success of your company.

Set expectations between accounting and sales that communication should be a priority. If your sales team indicates that they underestimated sales, then it is their responsibility to report that adjustment in sales.  Ask sales to track sales. They should have a weekly average of sales that they need to hit. If there is a trend that they are not meeting the projections, then it’s time to adjust.

Make communication an absolute priority. There is no shame in not meeting projections;  the trick is to adjust expectations going forward.

Conclusion

By proving that you as the financial leader or CFO can add value to a company through setting realistic and accurate sales projections, you’ll be better equipped to set yourself up for success.

For more ways to add value to a company, download the Goldilocks Sales Method to start projecting accurately and building credibility through your sales forecast.

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A Forward-Thinking Driven Business

We are halfway through 2016 and, as technology rapidly progresses, the expectation for financial leaders to be practicing forward-thinking driven business is growing. It’s easy to fall into a habit of valuing historical data over forward-looking information.  So how can you go from being historically-minded to forward thinking?

First things first… Would you drive a car only looking in the rear view mirror?forward-thinking driven businessOf course, you wouldn’t! That’s dangerous.

So why would you drive your company only looking backwards at historical information?

There are two ways financial leaders can use historical information:

  • those that use historical data and put it to work
  • those that use historical data but don’t put it to work

Don’t get me wrong, historical data is important. It’s used to project sales, calculate trends, etc. You can use it for a number of things. But it can’t be the only thing that you use.

Particularly as technology advances seemingly every 6 months, you have to be forward thinking and analytical.

Historically-Minded vs. Forward-Thinking

Let’s look at the difference of being historically-minded versus forward-thinking.

forward-thinking driven business

Historically-Minded

A historically-minded financial leader would look at the financials to the right to learn that this month, they lost $2000. This type of financial leader would go through Weeks 1 through 5 blissfully unaware that trouble was brewing.  They might have a feeling that things aren’t going well, but they aren’t really sure.

However, it isn’t until Week 6 when they receive the financial statements that they realize that the company lost money this month. If only there was a way that they could have known about the losses sooner…

Forward-Thinking

forwardForward thinking starts with forward-looking reports.  A forward-thinking financial leader notices in his or her flash report for Week 1 that they are struggling. Instead of waiting until Week 6 to find out that month end would show a $2000 loss, they could take corrective action to fix the problem before it got any worse.

This thought process allows you to adjust projections for sales and inventory, manage your human capital, and address any cash flow issues.

Forward thinking also adds value to your position as a CFO

Technological Advances = Automation

So why should you care?  You aren’t responsible for the financial results of the company, just reporting the numbers, right?

Not if you want to stay relevant (and employed).  We’ve seen automation take the place of humans in factories for years.  But what you might not realize is that automation is quickly coming (and in some cases, is already here) to the accounting world as well.  In the not-too-distant future, look for smart accounting systems that can capture financial information and produce financial statements with the push of a button.  Not good for you if all you’re doing is cranking out financial reports…

Here’s what we’re seeing about how automation is affecting the workplace.

forward-thinking driven businessCertain roles, such as bookkeeping and accounting, are becoming automated jobs. It’s expected that these services are delivered accurately and on demand, something computers are great at.  The work can either be cognitive or manual.

Non-routine jobs are those that cannot be automated. They either require skills that can’t (at least for now) be accomplished by technology or take a great deal of skill, talent and independent thinking.  Again, the work can be either cognitive or manual in nature.

Example 1 – Routine Jobs

A CEO has to make a decision about whether to continue paying a bookkeeper or to onboard a new accounting system to automate financials. The bookkeeper has made several mistakes over the past couple of months that could have severely impacted projections if not caught early. The new accounting system automates every invoice and payment before a single person can touch the invoice. This position is routine because you can easily replace it with an automated system while still ensuring the accuracy and efficiency for a lower cost.

Example 2 – Non-routine Jobs

A chief of staff in a hospital is facing a decision about whether or not to automate neurosurgery. If the chief of staff decides to automate the role of a neurosurgeon, she risks losing customizability and efficiency as a robot cannot see every cell of a cancerous tumor. Sure, a neurosurgeon is human and will make mistakes. But a neurosurgeon has approximately 8 years of school with 4 more years of training and probably have 5-15 years under their belt. In this case, the neurosurgeon’s skill and ability to adapt to conditions on the ground is what makes them valuable and their job difficult to fully automate.

So what should you do if you find yourself in a routine role?  You should assist in automating those tasks that you can. Then, shift over to non-routine tasks such as analysis and problem-solving.  Adding value in this way will ensure that you stay relevant despite advances in technology.

Pyramid of CFO Value

forward-thinking driven businessThe Pyramid of CFO Value demonstrates how you can move from the routine tasks of accounting and compliance to the non-routine task of being a trusted advisor to your CEO.

People often look at the CFO as an accounting and/or compliance figure in the grand scheme of a company. As we start from the bottom of the pyramid (accounting/compliance), we find that this type of job function is most likely going to be automated.

Particularly as continuous accounting becomes more widely used, this financial function will progress into an automated system. Continuous accounting is just the start of new automation processes that pertain to large sources of data. Accounting technology such as continuous accounting establishes a precedent for timely, cost-effective, and/or high-quality improvements for business.

As you move up the pyramid of value, your role becomes more difficult to automate due to the training and experience necessary to successfully carry out these tasks. Since a good CFO improves profits and cash flow by 1-2%, you can essentially make yourself un-automatable (yes, I made that word up).

Where You’re Going

It’s all about where you’re going, not where you’ve been. A Flash Report is an excellent way to look into the future. It assesses KPIs, or key performance indicators, in order to create a periodic snapshot of key financial and operational data. This weekly assessment gives you the capability to not solely rely on historical financial statements to run your business.

As a management tool, it enables you to monitor and review profitability, productivity, and liquidity on a weekly basis.

forward-thinking driven business

Start driving with your eyes open. Discover why your KPIs are so important to be forward thinking. Download your KPI Discovery Cheatsheet today to start managing your financials as a forward-thinker. 

forward-thinking driven business

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Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to create a dashboard to measure productivity, profitability, and liquidity of your company.

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Why do most sales projections fail?

One common perception is if most sales projections fail, why do it? As you probably know, sales forecasts are used to predict a certain amount of revenue over a given period of time. Whether this is based on a gut feeling or on historical data, the worst thing you can do is over-promise and/or under-deliver.

Remember: “What gets measured gets managed.”

Why Do Most Sales Projections Fail?

Projecting revenue is essential. Two weeks ago in our blog, How does a CFO add value?, I mentioned the three legged stool analogy. If your sales fall short of projections, you’re going to run into some issues with respect to cash flow, inventory, or a lack of resources. Whether you are releasing a new product or are continuing to project growth in your sales, it’s imperative that your sales projections are accurate.

Sales Manager vs. CFO

Sales managers and CFOs normally have different perspectives, mainly because their roles contrast greatly. The sales manager is often more concerned about his or her team and maintaining customer relationships. They’re also generally fairly optimistic (sometimes overly so) in their projections.

The CFO looks at the bigger picture. They move 3-5 months faster than sales people or accountants, because they’re forward-thinking and continuously making plans on how to improve the company as a whole. This often leads to conflicting predictions with the sales force.

For example, Bill (the CEO of ABC Company) asks Steve (the CFO of ABC Company) what he projects sales to be in the next quarter. Based on previous performance, Steve predicts about $3.8 million, because last quarter they generated $3.7 million. That’s about 2% higher than the actual revenue generated, which is reasonable considering their historical record.

But then Steve the CFO asks Ben, the Sales Manager, what he thinks. Ben’s top salesperson, Lillian, performed over 40% better this quarter compared to the previous quarter, and he expects her to positively influence the sales team with her success over the next quarter. Ben optimistically projects $4 million, which is almost 8% higher than last quarter’s revenue, and 6% more than Steve’s projection.

When you increase revenue by just 2%, the bottom line also increases by a substantial amount. When comparing the bottom lines of a 2% increase in revenue versus an 8% increase in revenue, which would you think is more realistic? And which number would you accept as a CFO?

Let’s look at a more recent example.

Case Study: The Apple Watch Dilemma

Let’s refer to the Apple Watch situation last year… Apple optimistically projected to sell 41 million watches. Shortly after releasing the product, analysts altered that projection down to 31 million. Pretty soon, Apple decided to be a little more realistic in their projection. Thus, they reduced it yet another 10 million. Why do you think that is?

1. Their “gut” feeling was poisonous.

It’s natural for a company to be excited about the release of a new product.  They were absolutely ecstatic that this product was finally going to launch. This positivity created a bias for future projections because they were the only ones formulating this prediction, not an outside group of differing opinions.

2. The idea that a new product equals new data.

“We don’t need to check our historical figures because this product never existed in our company before, right?” Wrong. True, this is a new product. However, there are other ways of comparing and predicting your sales.

For example, if I was the CFO of Apple, and Apple Watch decided to launch a new app, I would look at similar, previous apps that cost the same for marketing, production, and other direct costs associated with the app. It’s common sense – how much can you usually afford to produce?

projections fail

Apple quickly saw that their projections were wrong and just as quickly adapted. But companies that are worth $10-100 million can’t necessarily afford to be 20 million units off of their projections. A projection that wrong could have easily put a company without the resources of Apple into the grave.

How to Prevent Your Sales Projections from Failing

projections failNate Silver, author of  The Signal and The Noise (pg. 19-20), generally spoke to the failure of projections…

“The most calamitous failures of prediction usually have a lot in common. We focus on those signals that tell a story about the world as we would like it to be, not how it really is. [Then] we ignore the risks that are hardest to measure, even when they pose the greatest threats to our well-being. [Thus] we make approximations and assumptions about the world that are much cruder than we realize. We abhor uncertainty, even when it is an irreducible part of the problem we are trying to solve. If we want to get at the heart of the financial crisis, [then] we should begin by identifying the greatest predictive failure of all, a prediction that committed all these mistakes.”

Although Silver is analyzing financial crises, the same analysis applies when we look at sales projections of a mid-size business. The most important factors you have to calculate are risk and uncertainty. If you neglect to consider risk and uncertainty, you are most likely over-shooting your projections.

Risk & Uncertainty

People often overlook risk and uncertainty when projecting revenue. However, life happens every single day, leaving you with failed projections.

Most projections fail due to inability to calculate these two factors: risk and uncertainty. So where do you start in assessing risk and uncertainty?

For risk:

  1. Identify any risks that could occur (events, etc.)
  2. Calculate the probability of each risky event occurring
  3. Create alternatives and figure the cost/benefit analysis of each response
  4. Choose a response that would best allow you to reach your sales projections
  5.  Reassess after your company responds
  6. Continue to monitor those risky events

For uncertainty, identify those events or situations that you are not sure of. Acknowledging your ignorance is key in this situation. It allows you to put focus on places where you are not sure. Uncertainty is not the same thing as inaction as many business or financial leaders like to define it. That’s an important distinction that you must continue to remind yourself of when analyzing what risks and uncertainties your company is facing.

By completing a SWOT analysis, you’ll be better equipped to understand where risk and uncertainty is found within your company.

Conclusion

If the problem is either over-shooting or under-delivering sales in their projections, then the answer is relatively simple but is often overlooked. The Goldilocks Sales Method will help you project revenue that is not only more accurate, but will help you utilize your projections.

projections fail

Strategic CFO Lab Member Extra

Access your Sales Genie Execution Plan in SCFO Lab. The step-by-step plan to build your sales pipeline and project sales that will improve profitability and cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

projections fail

See Also:

Projecting Revenue

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How Does a CFO Bring Value to a Company?

See also:
Role of a CFO
5 Ways a CFO Adds Value
EBITDA Definition

How Does a CFO Bring Value to a Company?

Most CEOs don’t understand how a CFO brings value to their company. They see CFOs as overhead rather than income-producers. CEOs typically see the role of a CFO as a CPA or a regular accountant role. So, how does a CFO bring value to a company? In actuality, the CFO is responsible as a financial leader to determine whether the company is successful or unsuccessful. A strong CFO knows how to add value to an organization. There are numerous tactics such as reviewing tax information or analyzing every financial statement involved with the company, but from a strategic standpoint, it’s very simple how a CFO brings value to a company.

According to our 5 Ways a CFO Adds Value article, the CFO of a company should be able to perform in five ways: 1) growing the company faster, 2) improving profitability, 3) improve cash flow, 4) obtain increased leverage from banks, and 5) provide leadership and direction throughout the company. A good way to measure profits and cash flow is to follow your bottom line — your EBITDA.

So why EBITDA? Why not simply check cash flow or sales? Investors prefer to use EBITDA because EBITDA allows bankers to compare and monitor performance over time. EBITDA is the best measurement for the value of a company.

How Much Value Should a CFO Add?

How much should a CFO be able to contribute, and what is the reciprocating value proposition? Having worked with hundreds of companies over the past 25 years, I’ve noticed that there hasn’t been a solid financial leader set in place initially. The ultimate goals for a CFO are to improve profits, manage risk, and free up cash flow.

Let’s assume that EBITDA equals net income. This is so we do not miscalculate interest, taxes, depreciation, and amortization. If a CFO is hired to improve a business, this means that the CFO should configure a way to optimize cash flow and costs to the point of increasing EBITDA by 1-2%.  It is a general expectation that the CFO should improve cash flow and profits by this percentage. Improving business right away by 5-10%, for instance, as a CFO is much more difficult than expecting 1-2%, which is why that is the general rule of thumb.


NOTE: Want to learn the 7 habits of a highly effective CFO for free? This provides a step-by-step guide on how to improve your role as a CFO.

Download the 7 Habits of Highly Effective CFOs


The CFO Value Proposition

The EBITDA improved in a company is equivalent to the salary the CFO is paid. If a company generates $20 million in sales, then that company would typically pay the CFO $200,000-400,000, depending on the size of the company. From this theory, CFOs should be able to pay for themselves the first year by identifying ways to free up profits and cash flow.

Revenue ($20,000,000) x Value of CFO (.02) = CFO Salary ($400,000)

                                        underline
                                         Value Proposition

The same concept applies for larger companies that generate $100-200 million and pay the CFOs a salary of $1-2 million. CFOs of larger companies are typically paid a higher salary than middle-market or smaller companies. On the other hand, start-ups typically don’t pay their CFOs until they have generated a certain amount of revenue. Most companies under $10 million don’t even have a CFO, because value proposition is nonexistent.

How does the CFO Drive Business?

How do we equate the value of a CFO to the value of a business? The answer is simple: Most companies sell 3-5 times EBITDA. 

If a CFO comes into a $20 million company and increases profits by $200,000, the CFO creates anywhere from $600,000 to $1 million worth of value within the first year.  A CFO driving EBITDA not only frees up that cash flow, but sets a precedent by increasing the value of the company for the future. The investment of $200,000 in a CFO is worth the payback of  a $600,000 to $1 million constant return.

For example, a client I worked with hired a CFO, and within the first year, he generated an increase in business of 72%. The second year, he added another 20% on top of the previous year’s improvement. After 3 or 4 years, the CFO was then in charge of expanding the company and finding new opportunities for growth, such as opening another location for the business.

So how does a CFO add value? It’s a mutual relationship. The CFO of a company separates from title of “overhead,” and evolves into the financial leader for a company.

how does a CFO bring value to a company

how does a CFO bring value to a company

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LEARN THE ART OF THE CFO