Given the environment today, I thought it a good time to revisit and discuss the characteristics of a great finance leader.
Revenue growth and employee growth are much less sexy metrics today than they were 12 months ago. Now ‘free cash flow’ is king. Lots of CEOs at public and private companies are bringing up this term in internal discussions with employees and in dialogue with Boards and investors.
TL; DR
- Today, free cash flow is ‘king.’ Revenue growth while still important is secondary.
- CEOs, Boards, and investors attribute more value to strong finance leadership.
- The basic technical skills (accounting, forecasting, reporting etc.) are necessary but not sufficient to excel.
- Great finance leaders bring additional functional and intangible skills to the table.
- The odds of business success increase with a great finance leader on board, especially if she has a seat at the table and a respected voice.
- This is the time in the business cycle for great finance leaders to stand out.
“People are not your most important asset…the right people are.” ― Jim Collins
Those who read VC Twitter, watch CNBC, listen to business podcasts, and peruse the business press will have noticed a huge increase in references to ‘path to profitability,’ ‘default investible,’ ‘default alive,’ ‘burn multiples,’ ‘runway months,’ ‘adapt to survive,’ and ‘free cash flow.’
Great finance leaders identify risks, ask lots of questions, force prioritization, and suggest strategies that limit upside in return for reducing the chances of big downsides. When possible they aim to identify ‘experiments’ with asymmetric upside.
They are willing to swim against the tide, challenge the conventional wisdom, bring up the topics no one wants to talk about, confront the challenging reality, and risk being unpopular.
The Basic Characteristics of a Great Finance Leader
Necessary but not sufficient.
The skills listed below are included in all CFO job descriptions. I consider them ‘must haves’ and not ‘true differentiators.’ They are like the lowest two levels in Maslow’s hierarchy of needs.
- Accounting Expertise. Including streamlining the close process, creating the appropriate chart of accounts, and collecting cash faster.
- Reporting Capabilities. Preparing the relevant reports regularly and in a timely manner. Explaining the financial performance to the LT and the Company.
- Managing Metrics and KPIs. Understand the metrics that matter, measure them and report on them in a transparent manner.
- Benchmarking. Understanding how your business compares with its peers. Uncovering inefficiencies and suggesting paths to make improvement.
- Budgeting and Forecasting. Everyone wants to know what the future might hold., although it is mostly unknowable. A good CFO uses scenarios to suggest possible outcomes and provides weightings on how likely each scenario might be.
The Extras. These are the intangibles that matter, especially during tough times.
Great Finance Leaders Also Bring these Characteristics to the Role
- Deep Understanding of Unit Economics Truly drilling into the details by segment. Understanding where the marginal new customer acquired is trending. Particularly focused on gross profit and CAC payback months. Be rigorous on how CAC is defined – many consumer facing businesses only use direct acquisition costs (paid, referral etc.) and not all the fixed marketing costs. I love CAC payback months as a metric as it informs how long before a customer contributes to paying salaries and other costs for developers, product managers and other support functions.
- Ability to transform ‘Data’ into ‘Insight’ that can be acted on. Doing this requires identifying leading indicators. Almost none of these are financial metrics. It is critical to figure out how to track these leading indicators closely. They will likely be a combination of product (user) data and go-to-market (prospect) data. Another challenge is to separate the ‘noise’ from the ‘signal.’ Not all data that can be collected actually offers a signal or is worth analyzing.
- Willingness to be contrarian (but not just for the sake of it.) The best finance leaders proactively seek out opposing points of view as well as ensure that these perspectives are heard and discussed. They recognize biases that are endemic to all of us (e.g., confirmation bias – looking for evidence that support the point of view we prefer) and call them out.
- Continual Curious Questioning. Keep pushing on ‘the why’ behind each proposal, even if that can become annoying at times. Deep questions help identify exactly what other stakeholders are trying to achieve. More questions and discussion allow for uncovering different ways to solve the problem at hand as opposed to simply optimizing the proposed solution.
- Work to make the business less “fragile.” One aspect is understanding how the business is benefitting from cyclical trends (e.g., Zoom, Peloton, and UberEats during COVID) and planning for a future when the cycle reverts. Almost all of us (and our businesses) are fragile. By which I mean, we thrive under certain favorable conditions. When those change, we tend to struggle. The great finance leader understands things that a business relies upon today for success (e.g., certain marketing channels, ability to outsource work to Ukraine at cheaper rates, reliance on a single source of quality / inexpensive supply etc.) and works with the broader teams to invest in secondary and tertiary options to reduce fragility.
- Be a risk manager. That requires taking risks and not simply avoiding them. It is critical to dive deeper into the risks associated with major resource and capital investment decisions, decide which ones to pursue (prioritize) and how many to take on simultaneously. Part of risk management is saying yes with conditions. Some of the ‘conditions’ include making the decision-making process and assumptions for entering into a decision explicit (and do so without judgment.) Conducting structured post-mortems with all experiments or risks taken to update your priors (i.e., understand why you beat or missed the prior forecast and then change assumptions if appropriate) is also critical.
- Understand and explain opportunity cost. In my experience opportunity cost is a hard concept for humans to grasp. Because it is asking about that which is unseen. The question, stated broadly and without judgment, should be: “What else could we be doing with this time or resource?” Another way to think about opportunity cost is to ask the question, that if the status quo did not exist as it does (could be anything including # of people in a department, the way a piece of software is built etc.), would we rebuild it from scratch this way. This approach makes the hidden cost of the status quo more plainly evident. Things can’t be changed or rebuilt overnight, but this thinking allows for the creation of a plan to do that.
- Teach and Learn to Sell. Explain the business model to everyone in the company. Talk through how the company makes money and what is required to continue making money (i.e., the important customer problem being solved etc.) Help people understand how their role in the company contributes to overall success, and what they can think about to drive company performance in a positive direction. By selling I mean being able to tell the vision / story to investors and new employees with metrics, financial data and facts included.
- Avoid highly leveraged situations. I don’t mean to avoid debt. Debt has its role in reducing the weighted average cost of capital for every business. I mean don’t take on too many fixed costs bets simultaneously, particularly when many of them have long term payoffs. Specifically, avoid hiring too quickly, even when the economic climate seems particularly good. Adding too many people borrows against the future, increases fixed costs, and decreases productivity a fair bit in the short term. The most surprising and spectacular collapses of business happen due to excess leverage. Even without debt, leverage can sneak up on a business when the planning only focuses on a good or best-case outcome.
Conclusion
Having a great finance leader is not sufficient to build a great business with a strongly positive financial outcome for everyone involved. However, having a weak or simply average finance leader is likely to prevent a business from reaching its goals, unless luck is on your side. Betting on luck, much like relying on hope, is not a good strategy.
I hope that the start-up ecosystem and culture will place increased value on great financial leaders. While they are not the traditional “builders” so revered in start-up land, they can help ensure the foundation is extra solid and point out potential future risks.
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