Hacking the CFO Profile

In my professional network, I know about a dozen CFOs, and as my ambitions after my MBA also go into that direction, I thought it would be a good idea to have a good look at their CVs. And…what better place to check people’s profile than on Linkedin? Thus, nerdy as I am, I copied their profiles and look what I got: CFO profile Of course, I took out a lot of nonsensical stuff, names of people and places, and obvious terms like ‘Finance’ and ‘Management’. After this sifting, this is what I am left over with. Let’s have a decent view on what this tells us.

  • Titles: Obviously, anyone’s keen to call themselves CFO. What is very clear in this picture, is that most CFO’s have had multiple roles. Most frequently as directors, sometimes as VPs or just ‘leaders‘, very often in a ‘group‘ function. What is quite baffling, is the low frequency of the ‘controller‘ profile, which is no more important than an ‘accounting‘ job.
  • So 2 takeaways: if you want to become CFO: have some proof of leadership and seek to lead a ‘group’ of businesses.
  • Skills: secondly, let’s look at the skills these people portray to have. Most prominent are ‘planning‘ and ‘development‘. Secondly, everything connected to ‘analysis‘ and ‘strategic‘ apparently adds to the CV as well. ‘Reporting‘ as well as ‘administration‘ seems to be a less crucial skill. Also ‘projects‘ rate alarmingly low on the CFO profile!
  • So the takeaway from this is: make sure to be doing consistenly forward-looking tasks.
  • Profile: finally, what else do we see? Hobbies seem to be absent in a CFO’s life, although that might be due to the discreet nature of the average finance guy. More importantly, a ‘University‘ degree comes in handy, as well as having done an ‘International‘, ‘Responsible‘ and ‘Technology‘ related role.
  • Big losers in this popularity contest? ‘Legal’, ‘board’ and any mention of ERP systems. An occasional mention of sales or customer occurs but clearly the cross-over to other roles or functions does not happen. Also, any M&A related task seems to be less important as well.

There you go, now I shared my holy grail to pimp up that CV and get that CFO job. As usual, share, retweet and comment the h*ll out of this article. Let’s all learn something today!

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Reading Malcolm Gladwell’s ‘David & Goliath’ Part 1

Why do underdogs do so much better than expected? That is the main question in Malcolm Gladwell’s newest writing, ‘David and Goliath’. As I am a fond reader and a big fan of Mr. Gladwell, I’d like to take a moment to share my thoughts on this.

Part 1: the advantages of disadvantages. We dive into a few examples where perceived disadvantages could be turned into advantages:

  • David vs Goliath: the ability of David, a shepherd, with the sling, leads to the defeat of Goliath, who was prepared for a classical heavy battle only.
  • A nerdy girl basketball team: though the team was a very inexperienced bunch, they weren’t really very good at dribbling or shooting. So they overturned their tactics and focused on guarding every player in the other team so that passing became impossible. Also they compensated their lack of skill by building tremendous stamina.
  • Lawrence of Arabia: instead of winning on firepower versus the Turks, they applied their speed of moving to fight a guerilla war.
  • Large classes: scientific evidence is surfacing that small classes do not necessarily lead to better results. The idea is that children in large classes will feel less vulnerable. In small classes, the teacher will not always spend more time-per-child. Very often he will just work less.
  • Parents earning too much: when children grow up in a poor family, they don’t ask for ponies; they know their parents can’t afford it. In a rich family, they will, and that moment requires a real conversation between parents and children. But often parents are not used to that or don’t make the time, which leads to either spoiled children or a worsening relationship
  • Too fancy a university: every good student aims to end up in an Ivy League school, where the competition among the best and brightest push even very good students in the lower quartile. These students feel like losers and often struggle to keep motivated. Research shows it is sometimes better to go to a lower-tier school and excel there. The same student will end up with better grades, more confidence and a good career.

Next post will elaborate a bit on Part 2 of ‘David & Goliath’, the ‘Theory of desirable difficulty’.

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How to manage Net Working Capital

Any manager, financial or not, will have heard the term ‘Net Working Capital’ and its impact on cash flow. More and more, this metric is narrowed down to ‘Working Capital Requirement’, the operational brother of NWC. Many people often confuse the two. It is essential for a non-finance guy to have a basic notion of Working Capital, when in business but also when planning on it.

Have a look at how I look at this and if this is relevant for you:

What?

In short, net working capital is ‘current assets – current liabilities’. Take a balance sheet, subtract the two and see if you have a positive number. You do? Good – it means that, if needed, all short term (‘current’) liabilities can be covered by liquidating all current assets.
BUT these assets need to be financed out of other sources than just the current liabilities!

Closely related to NWC is the Working Capital Requirement. To be precise, it is ‘Accounts Receivable + Inventory – Accounts Payable’. So in essence, it lifts all the operational items from the NWC definition and tests just that. If the sum is positive (and it generally will), it means the business has a need for capital to fund the AR and Inventory – the Working Capital Requirement. This is cash ‘trapped’ in the operational cycle of purchasing-holding inventory-selling-collecting. We pay our supplier, but see the money of our own invoices only months later – that is the WCR that we need to manage.

Why?

As menial as it may seem, all the fiddling with payment terms of customers and suppliers, and the mismatch of it, results in a long-term capital requirement. In fact, since these items are so closely related to the day-to-day business, a problem in financing this capital requirement might well send a company in acute liquidity problems and into bankruptcy.

Estimating and following up on this requirement is essentially a task for the finance manager. With sloppy management, or less focus, the WCR can grow quickly and could result in the entire company needing additional funding!

How?

Let’s unravel this WCR and see what we can do to minimize it.

Accounts Receivable. Depending on the business, this often is the biggest part of WCR. This is the sum of all accumulated invoices sent to customers. So minimising this means getting paid quicker:

  • Assign follow-up of invoicing to a member of your customer service. Don’t make it a finance problem, it is an operational responsibility!
  • Link prompt payment of invoices to the bonus scheme of the sales rep – a sale isn’t over until we have the money!
  • Clear, centralised and yet details DSO reporting: the ‘days of sales outstanding’ per customer should be communicated at least once a month. Why not make a race out of it, with the ‘Top5’ best and worst performers.
  • Think twice to outsource this part of financial reporting to a third party. There are many tasks in finance that can be done by any accountant, but AR management, given the customer interaction part, is pretty close to the business!
  • If large enough, hire a collection officer or credit manager
  • Organise ‘credit committees’ with finance and commercial teams involved. Have them look at which customers show erratic payment behaviour.
  • Set credit limit: a customer can buy up to a certain monetary amount, but then it stops; have him pay before you send out any more goods.
  • Set payment terms per customer. And load them into your invoicing system so that deliveries are blocked, or overruns are flagged, automatically.
  • Factoring: you sell your receivables to a bank at a discount. Usually this is a ‘basket’ of invoices (banks rarely will accept you only sell them the bad payers and try to collect the good payers yourself). Watch out you define who takes the risk if the end customer does not pay up! Also, customers might not like it to have a third party collecting their dues, as it happens a lot more forcefully.
  • Instead of giving the discount to a bank, why not give it to the customer? Stipulate a 3-5% discount for early payment (typically within 10 days). Some cash-rich customers will take the bait!
  • Documentary credit; this is more for export-related businesses. Basically, you set up a system with your bank and your customer’s bank that you get paid as soon as good receipt is acknowledged by the customer. It is then the customer’s bank problem to get the customer’s payment as per contracted payment term. Costly, of course.  

Inventory.

  • Supply chain management is essential – just in time is a good practice here.
  • Ask your suppliers to play a role in it. Could VMI reduce the burden on your working capital?
  • Forecasting needs to be as accurate as possible – set up a process to have it monthly updated and follow up on products/units with a large error margin
  • Do however realise that stock-outs are usually much costlier that excess stock

Accounts Payable.

  • In many ways, do the inverse of what you do with your customers. Obviously, try to pay as late as possible. With a bit of luck, your supplier has bad AR management
  • Incentivize your purchasing manager to extend payment terms
  • Or ask for discounts for when paying early

Final words

  • Optimizing working capital does not necessarily hurt margins.
  • Reducing WCR is the cheapest form of funding you can have.
  • Often WCR eats 20% of your company’s funding
  • Don’t take your sector’s benchmark for a given – think Ryanair!

Like this post? Please share it – and leave your comments!

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5 pitfalls of outsourcing financial tasks

More and more, outsourcing financial tasks is becoming standard among companies. It allows for cost savings and FTE reductions. Sourcing from experienced service providers often increases the quality of work, helps complying with international accounting standards and focuses the company on its core activities. However, there are some pitfalls one should be aware of when outsourcing finance;

  1. If financial tasks are outsourced too much, you will find yourself are at the mercy of the third party. As soon as the service provider knows you cannot do without him, the balance of power will tip. Sure, a customer can always change to another provider, but there are significant switching costs related to a move like that.
  2. You are no longer among colleagues: flexibility in a service provided can actually drop. Your counterpart now has his own P&L to take care of, and like any consultant he will always try to charge more for any additional small item you need help on which is not covered by the contract.
  3. When announcing and executing the project, people in the affected department will almost invariably lose motivation. No one likes a change like that. Like with any of these projects, a clear communication is key. Redundancies need to be made clear from the start, that way these employees can prepare for a job search, internal or external. For the remaining employees, a clear time line showing what is expected from them when will help to find their new purpose. Identify a fewer early adopters and promote them to ‘change agents’ that help to show their colleagues there is life after outsourcing.
  4. In my own experience, an initial dip in quality is unavoidable. Depending on how much time is invested beforehand and on the complexity of the outsourced tasks, count in a number of months where you will suffer a lack of clarity, have a surge in work in the own finance department, and will have to set up additional communication lines with the other party. A way to cope with this is to organise the outsourcing in waves – only when a first set of tasks has been properly executed and signed off, the next wave can follow.
  5. Clearly define roles as early in the process as possible. The sooner everyone knows what he/she will be responsible of, the better. The easiest way is to map out the process and go through it with both parties, and step by step assign who does what. Additional with that, a communication matrix can help to clarify who needs to be contacted on what, which avoid certain individuals being showered by emails.

There are different levels in outsourcing. Depending on the tasks you give out to third parties, you will lose direct control but will be compensated by cost benefits. Apart from the classic story where an American company will offshore an entire department to India, there is a possibility where certain processes are kept in-house or where the service provider resides in the next building (near-shoring). These are de-risking alternatives which often bring the same benefits and are easier to get buy-in for.

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What you should remember from a B2B marketing seminar

In addition to my previous post, these are some notes on B2B marketing;

True customer orientation should work through:

  • vision & mission
  • company culture
  • STP strategy – being organised around customer segments instead of around product groups
  • structure, systems & incentives – and their implementation
  • front-line behaviour – the dealing with the customer
  • customer relation capability – how to keep a customer
  • market learning capability – pick up on signals of change

Targeting strategies can be mass marketing, niche or multi-segment strategy.
What is so different about B2B marketing?

  • customers are relatively more important – there are less and bigger ones
  • the customer has a customer – demand is indirect
  • buyers are professional and use more complex procedures for a purchase
  • decision making units

On this last item: a DMU can be diverse and very hard to reach: a person can have a role as buyer, influencer, decider, user, gatekeeper, prescriber etc. What is important is to find the most important in the buying process. This is defined by who benefits the most of a transaction. The best segmentation you can make is by decision maker.

Push and Pull: as a marketing manager you might decide to change the DMU to influence, and move from a push to a pull strategy.

Back to the segmentation: for B2B this is a good additional segmentation:

  • Company technology
  • Product and brand-use status
  • Customer capabilities (how sophisticated is the customer)
  • Product application
  • Benefits sought
  • Manifest needs, latent needs: sometimes you can segment and target according to needs that the customer does not even knew he had

After segmentation, let’s look at these 3 levels:

  1. Features: which are the features the company has and can offer
  2. Benefits: What benefits do the above-mentioned features bring to your customer. Which features are irrelevant to the customer?
  3. Values: Understand what the above is worth to your customer

Finally there are three ways to do a value proposition. From less to more effective:

  1. All benefits are listed in a value proposition to a customer
  2. Favourable points of difference: comparing to the competition, the company lists the most favourable benefits to the customer
  3. Resonating focus: you bring out the one point with the greatest customer value. This obviously presumes a correct segmentation, a very well understood set of values of the customer and flawless communication.
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What you should remember from a marketing course

Recently I have been getting a marketing course, here are the most important concepts.

  • Single most important concept in marketing: the process and implementation  of segmenting, targeting and positioning. This should be done on your entire market, not just the customers you have.

1. SEGMENTATION

Segmentation means grouping customers on similar parameters. Groups should be big enough to matter, small enough to be distinct, collectively exhausting and mutually exclusive. Possible segmentation could be:

  • Demographic: certainly the most easy and objective way (think of baby boomers, Gen X, Y, Z etc)
  • Geographic
  • Behavioral: what benefits does a customer seek, what is the usage rate and its context, on which occasions? This is often revealed through focus groups/in-depth interviews.
  • Psychographic: which social class, lifestyle, personality, affiliation, character type (intro/extravert)

2. TARGETING

Targeting is nothing more and nothing less than matching the company’s capabilities to the chosen segment.

3. POSITIONING

How do you position your products/services in the market? What do we have the competitors don’t, what makes us different? There is a trap where companies want to tailor their products too much towards segments and actually reduce the operational effectiveness of the manufacturing. This negative trade-off of customer value and cost position will need to be balanced. The choice what to compete on will be lead by a good decomposition of the customer needs, and by finding out what differences are relevant.

Customer needs fall in two categories, the satifiers and the qualifiers. Qualifiers are an ‘olympic minimum’ that need to be attained in order to compete. If it is not attained, customers will be dissatisfied. But if a company overachieves on this, customers will not necessarily reward this. (A hotel room needs beds, but who will pay extra for a room with 5 beds in?)

Satisfiers will positively influence customer’s experience, a supplier then needs to choose to be at par with competition or make a point of difference with them -> where do you want to be famous for? Usually we see that 1, sometimes 2, unique features should be enough to outpace competition. If the Segmentation, Targeting and Positioning have been done well, 1 satisfier allows you to win the race.

Value proposition results in positioning. A Unique Value proposition, made through the right Product with the right Promotion in a Place and at a Price, will

  • put you apart from competitors
  • create customer value
  • be relevant to the target segment
  • drive your customer communication

So long story short, marketing looks at the different customer groups, decide who is the company’s customer and determines what to offer to that customer.

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Corporate treasurer: the real job description

Recently I got a question about the function of a treasurer. So let’s take 5 minutes to have a closer look at the typical task list of this financial officer.

The main task of a treasurer will be to manage liquidity risk. This sounds too basic to be true, but a company, even of considerable size and even when very profitable, can simply run out of cash for a period of time. The cash outflows (investments, salaries etc) exceed the cash inflows (customer invoices being paid). This can happen with an unexpected payment (lawsuit, fine, severance payment) or when a big customer delays payment for some reason.

Secondarily, a treasurer may be asked to manage the cash. In the typical situation where a company sits on an excess of cash, it may be a good idea to invest the cash in some short term funds with a return. Of course the fund will need to be risk free or almost risk free, and that judgement is up to the treasurer to make.

Thirdly, if a company has international operations, currency risk can hit the company’s earnings hard. The treasurer is uniquely placed to design hedges against fluctuating currencies. It is quite possible he actively steers the planned cash in- and outflows in a certain currency to coincide. Also, he can buy large positions in a currency today to eliminate the time risk until the real cash inflow comes.

In real life, there are a few more things worth knowing:

  1. Cash only: as opposed to a controller, a treasurer will focus on the cash flow only. So no accrual accounting, depreciations or asset revaluations for him! Added to that, financial and accounting knowledge does not need to be as deep as with eg. a controller or credit manager.
  2. Short to mid term future: a treasurer is no analyst. He will not be interested in historical data. His only focus is on the future. While the financing strategy is the realm of the CFO, the treasurer will have a time frame of not much more than 6 months. Apart from a few highlights in the corporate annual agenda, he is not interested in the budget as such (too long term). In my experience, it is often even limited to 6 weeks-3 months.
  3. It’s very corporate. With that I mean, it can be very remote from the day-to-day company reality. You are operating in a very specific role, usually alone, often with opposing interests than most of your colleagues. Eg. a sales manager will not understand if you object to business expansion in a certain region as you will be the only one understanding the cash drain this will cause.
  4. Technical, but communications is key! Being the chief treasurer obviously brings a huge responsibility. Technical knowledge, including on financial derivatives, is required. But a good cashflow can only be planned with the help of others, especially A/R collectors and controllers. By regularly connecting with them the treasurer will have to get an idea of what is going out in the business side of things.
  5. Not everyone does it: one would be surprised at the number of sizeable companies that lack a treasurer. Usually this means that a controller, internal auditor or the CFO takes that responsibility on him. It would be irresponsible to ignore the task for a long term, because running out of cash, even temporarily, can be detrimental to a company. No matter how profitable its sales and how much it grows, lack of cash for a few weeks can put you out of business, or saddle you with a bank loan with strangling interest costs.

Thanks for reading!

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