Most business owners and CEOs I work with have a very good idea of the top-line sales numbers for their companies. Generally, that is a number they get from the CFO or in a sales report. However, the number who know their current and trending bottom line profit is drastically smaller. While that number will have the most significant effect on their yearly compensation, it is a much smaller and less impressive number, and so the top-line sales number is how most companies compare themselves to others. Not by how profitable they are, but rather by how much they collected in gross sales. Of course, it is important to keep that number growing, but not at the expense of all other financial considerations.
Sales are great! But sales that cost as much money to generate as they bring in are vastly different from sales that have a healthy margin resulting in a higher net profit. So when comparing sales from one company to another, keep in mind you are most likely comparing apples to pears if not oranges. If we dig deeper into financials, most CEOs happily shrug off any expectation of knowledge about the state of finance to the CFO. They assume the CFO is managing things well and that he will advise the CEO of any hiccups. I see this “what me worry?” attitude quite often. The reality is, all employees – including executives – have an incentive to minimize the appearance of problems and maximize positive appearance. It’s human nature to do that. However a diligent CEO, and for that matter, any thorough manager will review and understand financials for the company or at least their department on a regular basis. The job of the CFO is to answer the WHY questions relating to financial health. Their job is not to magically ensure financial health.
How can I say that is not their job? Isn’t that exactly their job? Well, let me explain the “unconventional” perspective here. The executive tasked with ensuring money is coming into the company is usually the VP of Sales, or the recent en vogue title, Chief Revenue Officer. They focus on increasing sales. That is the number by which they will be judged. Marketing may or may not be a separate department from Sales, but either way, their job is to increase the lead flow for Sales, so they are judged predominantly on lead generation. Production Management or Service Management is responsible for providing the things or services at the least cost to the company, that Sales sells to the customer. Customer Service is responsible for maximizing customer satisfaction by converting unhappy customers to happy repeat customers and ensuring happy customers stay happy. HR is responsible for finding the best employees at the best prices and keeping them from leaving, as long as they are performing well. The COO is responsible for the smooth and efficient operation of all production/delivery departments.
So every one of these departments has a more significant impact than the CFO on the amount of money coming in as well as the amount of money spent by the company. Indeed the CFO does not decide how much money comes in, how fast it comes in, how much is spent, or how quickly. Certainly, they have an opinion about these things and can sometimes pull the emergency brake, but ultimately the office of the CFO is there to be sure that invoices are sent out, bills get paid, and the company does not miss payroll. The CEO needs to use the recommendations of the CFO to align the company vision with the costs that all the departments incur in realizing that vision. The CFO comes up with strategies and suggestions to finance these activities. Leaving the decision on marketing spend or product acquisition costs solely up to the CFO would just as quickly bankrupt a company as ignoring the advice of the CFO.
My primary recommendation for CEOs and all other department heads is to become familiar with the central accounting documents of your business or department. Learn to read the P&L, Balance Sheet, and Cashflow Statement and do so on a monthly basis. Understand the cost of operations, cost of goods, and cost of sales. Be sure you can understand financial decisions and their impact on the company today, as well as in the future. Spending money today to achieve better sales tomorrow may be a great idea or a horrible one depending on where your company is and where it is going.
With the small exception of well-funded Silicon Valley unicorns, businesses exist to generate profit. Even Not-For-Profit businesses need to generate a profit; they just use that profit to further a cause – a different mission statement – rather than passing it on to stockholders. Become more familiar with the drivers in your company that can affect profitability and don’t leave it to the CFO to tell you when there is bad news.
I had a client that was losing money even though they had very healthy sales. Their expenses were eating away all profit, and in fact, the business was projected to run out of cash reserves if something didn’t change. When I came in, my first action was reviewing the financial documents. My second action was to fire the CFO. Having done that, I chastised the CEO for not paying better attention to the economic state of the business. I explained to him that hiring a CFO does not mean he can ignore everything related to the financial health of the company. In the course of my tenure at that client, I was able to not only stop the financial bleeding but reverse the trend toward profitability. In fact, while sales were down 18% one year, I was able to increase net profits by 220% in the same period by putting in more stringent controls on spending.
But it’s not all good news, as a year later I ended up hiring a new CFO for the company and unfortunately, I trusted the CFO too much. I took him at his word on the financial state of things and eventually found out he had been neglecting his job resulting in a mess of accounts that had to get sorted out. Had I heeded my own advice back then, I would have been able to catch the problem sooner. Of course, that is the benefit of hindsight.
Learn from your own mistakes, but better yet, learn from the mistakes of others. This is the wisdom of past mistakes I mentioned when talking about hiring seasoned employees.
Excerpted From The Original
Foreword by Roy H. Williams
Gene isn’t a journalist, but he is most definitely an investigator.
I was talking to a friend who employs about 250 people in 3 different companies when he mentioned that he had hired a specialist to figure out what was wrong with a company that was underperforming.
“Who did you hire?”
“A fellow named Gene Naftulyev.”
“He’s going to figure out what’s holding you back?”
“Yeah. He’s famous for it.”
“Procter & Gamble. American Express. Kraft Foods. Target. They’re all clients of Gene’s.”
“What does he do, exactly?”
“He improves profits without spending money.”
“Process re-engineering, operational optimization, making business units autonomous, negotiating employee and consultant contracts and a hundred other things like that. It just depends on what you need. He refines the core of your business so that you become more efficient, have fewer frustrations and make more money. Naftulyev can always spot the problems and his fixes are famously quick and easy.”
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