CFO or Soothsayer?

What is the difference between a good CFO and a great CFO?  Maybe we should start with some basics…what does a CFO do anyway?  Typically, these responsibilities fall into three general categories:

Accounting – Oversight of the Controller function.  Typically the controller is responsible for the accuracy of the reporting of financial information; in other words, accounting and accounting personnel.  This function tends to focus on activities that are in the past as well as protecting the assets of the company.

Treasury – investment of money, liquidity, minimizing the risk that the company faces, bank relationships and managing the capital structure of the company all fall under this function.

Economic Strategy and Forecasting – A CFO should be able to identify areas that provide the greatest opportunities for the company as well as those products or activities which are least profitable for the company.  With this data, the company can begin to make adjustments to help maximize profitability.

In the long run, the most important thing that a CFO does is help their companies see into the future.  When a company can see the direction that it is headed there is usually time to make alterations so that a different outcome can be achieved, if necessary.  I believe the ability to see into the future is one of the most important aspects that any CFO can provide. 

 As a W2 CFO, one of my bosses would tell me, “Mike, you’re the policeman.  You know what is supposed to happen.  Your job is to make sure it does.”   To do that, the company needed to have a couple of key items.   First, the company needed to develop a business model.  Depending on the complexity of the business and number of business sku’s, this could be a big undertaking.  Fewer sku’s or product families simplify this process. 

I’ve written earlier about budgeting for balance sheet items.  The implications for the business are enormous.  When you include balance sheet items, you begin to develop a process that allows you to forecast the effect of changes to assets and liabilities on the entire organization.  Forecasting the balance for cash, accounts receivable or the line of credit won’t be perfectly precise.  Instead, the focus should be on the general direction of those items.  This model should be able to provide answers like will there be enough cash for what we intend to do.  How much availability will we have on our line of credit?  Will inventory and accounts receivable be able to support our line of credit?  These are critical questions.  Knowing that you will be short of a key resource provides the opportunity to make adjustments and that knowledge creates tremendous freedom.

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