The Frustrated CFO

IBM Predictive Analytics, or Are We There Yet, Watson?

I have no clue what a Venn diagram for conjuction of this blog's readers and tennis fans would look like - probably unnoticeable to human eye, but whether you care about professional tennis or not, bear with me and I'll explain its relevance to the subject at hand.

Those who watched Australian Open during the last two weeks of January on ESPN2 (or any grand slam in the past few years) incidentally exposed themselves to various elements of IBM's "Let's Build a Smarter Planet" promotional campaign.  IBM has been sponsoring ATP and WTA tours for years. They don't limit themselves to the ads that run during commercial breaks, but it's a good starting point for our topic. 

The current versions of these TV spots are a lot of fun - very slick, very futuristic, very high-tech, very white-surface, and they feature Dominic Cooper (whom I first saw on stage [I cannot help myself, can I?] back in 2006 as Stuart Dakin in Alan Bennett's The History Boys)!  Handsome, in the contemporary sense of the word, and serious, but tongue-in-cheek, British actor promotes IBM's cloud, smart day in the office, and... PREDICTIVE ANALYTICS. 

Aha!  Very interesting:  Did IBM branch out into Astrology Charts and Crystal Balls?  The advertisement's copywriters are appropriately non-specific and vague so not to bore an averagely challenged viewer, but let's look a bit closer at the core issue here.

Predictive Analytics belong to the realm of other popular concepts, such as business intelligence and performance assessment - none of them new ideas, by the way.  Data warehousing may sound like a novelty, but collecting and organizing records in a particular order for easier access existed for centuries. The concept of information as a key to business success is millennia old.  In ancient times tribal chiefs were estimating how many spearheads their craftsmen needed to make in order to win a battle.

Yet, in the past 10-15 years, the obsession with gauges, graphs, and all other forms of Key Performance Indicators (KPIs) have become pervasive to the point of silliness, especially in business, financial, and data-management spheres.  Everyone and their mothers are absolutely convinced that they MUST have KPIs or they will be running a danger of failing, while analysts and software developers just know that they MUST provide KPI capabilities or their services will be deemed obsolete. 

Truth be told, the escalation of urgency is totally understandable.  The pace and
vulnerability of the business environment and entire human existence have increased exponentially.  Today, more than ever, we need to have timely and valid data that has a power of springing us into immediate corrective actions. 

Of course, as it always happens, the form obscures substance and common sense.  In most cases, the procurers of reports with colorful dials, bars, and pyramids end up just staring at pretty pictures, nothing more.

Now, the Predictive Analytics are a very special brand of information manipulation because they claim that on the other side of chewing up and digesting tons of historical data they can poop out specific recommendations for WHAT NEEDS TO BE DONE IN ORDER TO SUCCEED, i.e. an action plan for a prosperous future.

And I have to say, when it comes to chomping massive inputs of data, while allowing flexible and customized outputs, various IBM Business Intelligence Suites, including Cognos, are probably the best performance analytics software out there in the land of information management - terribly expensive, of course, but awfully powerful in terms of the facts-and-figures consumption (imagine Coneheads at breakfast).

And as noted, IBM wants to take you a step further on the road to the future of business intelligence.  In 2009 the computing giant bought SPSS, which stands for Statistical Package for the Social Science, a software product that was created in 1970 to deal specifically with the analysis of what I personally call “data with a psychological twist.”   In other word, it digests information that doesn’t necessarily have dollar signs or volume units attached to it.  It was widely used in sociology, marketing, health care, education, and government. 

In its current developmental stage SPSS has become an integral part of IBM's predictive analytics solutions, which presumably  can be applied in any field.  According to IBM’s own description, the SPSS’s mission is “to help organizations to predict what will happen next, so that they can make smarter decisions to improve business outcomes."

Are they succeeding in this futuristic endeavor?  It’s hard to tell, because there is not enough readily available feedback: everyone’s KPIs are proprietary.  Even public companies will not disclose how IBM’s predictive analytics compare to the actual results.  Fortunately, there is one application of IBM’s analytical intelligence that is very public.  Here's where tennis comes back into the picture, offering us an opportunity to look at the system’s predictive aptitude. 

Nowadays, IBM's sponsorship of the Grand Slams also includes the powering of the websites of individual tournaments, including the Wimbledon, Australian, French, and US Opens.  And so, if you go on one of these sites’ home page you will see right there, in the top-right corner:  Smarter Analytics by IBM.

Well, right now it says “Completed Matches” above it because we are still almost 7 months away from the US Open 2015, but if you were to track a live match during a tournament, you can observe the IBM’s predictive functionality in real time:

This here is one of the most important predictive KPIs provided by Smarter Analytics - it is designed to show most important milestones one must achieve to reach one’s goals, and supposedly it is applicable to any data set. 

In tennis application they call them Keys to the Match.  Right there on the screen, in just two sentences IBM delivers the gist of the chart, explaining both the terminology and the methodology: “Keys to the Match system identifies key performance indicators – what players need to do to succeed in a match.  Each player’s performance is measured against their keys and updated in real time.”

This one in particular was for the 2014 Championship match between our very own champion extraordinaire Serena Williams and Caroline Wozniacki.  The system isolated three performance keys for Serena: 1^st serve points, medium rallies, and the returns of the opponent’s 1^st serve. 

According to the system’s algorithm these parameters are the most impactful in terms of the winning statistics.  The calculated "musts" are in blue and according to the statistical analysis of the historical data, Serena won 74% of sets when she won more than 61% of points on her own serve; 87% of sets when she won more than 49% of medium rallies, and 81% of sets when she won more than 38% of points returning her opponents 1^st serve.  

The red sectors show where Serena was in this match.  She exceeded all requirements: reaching 62% in the first parameter (very close), 54% in the second (also pretty relevant), and 68% in the third.  It is no surprise that she won the Championship match, but that wild discrepancy between the prediction and the actual in the third indicator (38% vs. 68%) makes me question its relevance.

We will come back to my doubts about the validity of the entire model in a moment.  Now, let’s see how we would apply the same approach to a business.  Here is a chart that identifies AZ Company’s Keys to a Successful Month: what needs to be done to achieve sufficient profitability and positive cash flow.

These are very familiar to all business runners and highly vital parameters.  Product mix is a crucial profitability factor.  The same goes for the portion of the gross profit eaten up by the overhead.  And, of course, the speed with which we manage to turn our inventories into receivables and receivables into cash determines whether we can generate more cash than we disburse during a particular period, in other words, produce a positive cash flow. 

The green bars represent the levels of the parameters at the moment this snapshot was taken.  Orange ones are the objectives that simply must be achieved, and pinks are desirable targets that supposedly guarantee a financially successful performance. 

According to the model’s algorithm the share of the highly profitable product X in the
trading mix should be at least 39%, because 69% of the months when such mark
was achieved were profitable. Obviously the overhead has far more definitive impact on the bottom line - the model confirms it by calculating a higher probability of success (79%) at its relatively lower levels.  There is even closer interrelationship between receivables and inventory turnovers on one side and the positive cash flow on the other – respectively 80 and 85 percent. 

Many business owners and executive managers, when they see a chart like that, get very excited by the prospective of having a system that can “see the future” – they think they’ve got the ultimate solution in their hands.  The widespread assumption is that Technology is smarter than a human, calculates everything faster and with higher accuracy.  And this application presumably eliminates the need to process information yourself - analyze, ponder, be anxious, listen to your gut feelings, or rely on anybody’s expertise.  Just follow the model’s suggestions and everything will be fine. 

If you sense sarcasm between the lines it’s because I am very resentful to such a blind reverence of computing technology.  And coming from me it’s a very serious statement, because I love progressive computerization.  But I cannot tolerate the lack of common sense.

Look, the selected parameters themselves are great – no question about it, but do we need a fancy program to tell us that the business is going to be okay if we push sales of a high-margin product to nearly 40% of the volume and turn most of our beginning-of-the-month AR into cash?  I don’t think so.  The years of our own expertise will kick in and reassure us – we don’t really need the statistical confirmation of the possibly successful outcome.     

But I have even more troubling concerns about this “keys to success” model.  Let me show you that the examples we just reviewed are fraught with at least two serious problems. 

The first one is the size of the statistical sample.  In quantitative research, you need a sufficiently large sample in order to be able to pinpoint trends with an acceptable level of realism.   Did you notice that Serena’s KPIs were related
to sets rather than matches?  That's understandable.  The Smarter Analytics uses just 8 years of grand slam performance.  In the period from 2007 through 2014 Serena Williams played 157 matches in the four major tournaments of the year.

Women play “win-2-out-of -3-sets” matches. Sometimes it’s 2 sets, sometimes it’s 3, and sometimes your opponent retires before you get to finish the first set. Serena has a high percentage of straight-set wins, so we can safely estimate her average at 2.25 sets per match.  This means that the predictions produced by IBM are based on a pool of
data collected over 353 sets.  It’s not US census, of course, but it's an okay sample size.

Now, in business, to approximate the tennis-model’s reliability of conclusions we would need to look at least at 30 years of a company's monthly performance data.  And that's a lot to hope for: 25 years ago the majority of small to mid-size companies were not even computerized and the paper journals and ledgers are either rotting in some storage unit or gone!          

But the bigger problem is the quality of the historical data, its relevance to the very specific, very present moment in time.  We operate in remarkably dynamic environments.  Business conditions change every moment.  One day everything is going great and another day everything falls apart.   Labor costs grow exponentially in every corner of the world.  Foreign exchange policies force one currency to soar and another currency to drop below everyone’s expectations.  Cyclicality shifts all the time: what was true for February of 2005 may not be applicable at all for this month.  And there are multitudes of industry-specific stressors. 

For decades Kodak was competing with BASF, TDK, etc. for the worldwide market share of film distribution.  Who knew that the biggest challenge would come from the photo and video equipment that didn’t need any film at all? 

20 years ago American agricultural sector exported nearly 3 million tons of frozen meat and poultry to Eastern Europe.  Then came 1999 and protectionist governments in the region declared US produce unsanitary.  Prices tanked and multiple industries contracted. 

15 years ago fashion industry had six major seasons.  Today it operates in micro-cycles with styles changing every two weeks. This dramatically altered the landscape of apparel importation. 

Well, business insiders live and breath this knowledge, but does the prediction model take into account all these factors?  It simply cannot – any mathematical algorithm can only account for a limited number of time-proven constraints.  How can we presume then that what might have been true historically will apply to our current conditions?

Even Serena’s keys to success, as far as I am concerned, are not too trustworthy, even though they are based on the game that have been played by the same rules year after year, on exactly the same courts, tended in exactly the same way.  But was it the same winning Serena Williams in September 2014 as she was in 2007, when she fell away in quarterfinals?  Or was she even the same in January of 2014, at Australian Open?  Can you spot the difference that made a significant improvement to her swing?

Can IMB’s "social" software comprehend that?  I don't think so! 

There is no way I'm putting away the years of expertise and my business instincts to start relying 100% on some computerized predictions in my strategic and tactical decision-making.  It may be a good contributing tool (again if you can afford it), but a computer is nothing more than a sidekick to the human brain; even if it's the IBM’s star artificial-intelligence child Watson.  Hence, the appropriate name it's given.  Yes, it can answer questions posed in natural language and wins Jeopardy! thanks to the 4 terabytes of information stored inside its metal guts.  Yet it's not able to intuit the right response to a simple clue “This hat is elementary, my dear contestant!”  My mind, on the other hand, serves up the answer instantaneously.

An expert with a common sense should be able to formulate her conclusions and make fast decisions herself, without any magical software, as long as she is steadily provided with timely and relevant information - whatever it is: business, sports, or arts.  It's as I always say: give me sensible data and I will tell you what needs to be done.

    

 

You Are the Most Knowledgeable CFO EVER... How sad!

Let me explain to the handful of readers who actually noticed my absence from these virtual pages that this is what it takes for a small business to close a $20 million three-year capital financing deal with a global bank (such as Citi):  You basically have to put your entire fucking life on hold. 

That is, of course, if you are someone like me - a CFO who rolls up her sleeves and plunges herself into the nitty-gritty of negotiating every single definition, every single term, every single condition, and every single covenant of the Term Sheet and then the  Credit Agreement in a pursuit of getting the best deal possible; someone who has the grasp of a fox terrier, who can shove pushy bankers and lawyers right back where they belong, who is not afraid of the ambiguous formulations, obscure terminology, and legal jargon.

But that's it, isn't it?  In order to be able to get exactly what you need out of any deal that involves money-holders and their supporting infrastructures you need to know your business better than anyone else and their business better than they do.  You need to speak their language and your comprehension of it must be more nuanced than theirs.  It's nothing short of a battle for the business survival, and if you don't prevail you and those who rely on you lose.  It's like in Game of Thrones: Tyrion's Champion, Prince Oberyn, mortally forfeits the battle to The Mountain, and that spells really bad news for Tywin Lannister's youngest son.  

The problem is that most corporate financial executives don't see it that way: just like many other salaried employees, they don't care to know anything beyond bare necessities and they don't feel fiscally responsible for their companies' wellbeing.  Hence, the low levels of professional awareness and circumvention of sophisticated issues is observed in most CFOs and Controllers today.  And it ends up costing employers a pretty penny in unnecessary legal, accounting, and consulting fees.

Hey, you don't have to take my word for it.  By the way, all numbers below are real and quotes are taken verbatim from various communications. 

Let's see.  When the bankers presented us with the Term Sheet back in March, I did not get either our corporate attorneys nor independent CPAs involved at all.  The bank's credit risk group and I spent two months going back and force, until I got the document into an acceptable shape (estimated savings on legal and financial consulting fees - $50K).  As a part of the Term Sheet, I insisted on the bank's due diligence and legal expenses (changeable to us) being capped (estimated savings - $35K).  

The Citibank people, stuffed to the gills with data and reports I've provided to them during this process, kept telling the other members of my Board of Directors things like, "Oh, that Marina, she is amazing! She is the best!  She is so tough!"  They would write emails like: "Thanks, Marina.  This is very helpful, plus your expertise is tremendous!"  As if I was performing some magic tricks - I was just doing my job... thoroughly.  When the Term Sheet was signed and sent to the bank my future relationship manager asked me in confidence (referring to the owners), "Do they understand that the only reason they are getting this deal is you?"  Hmm...

After successful due diligence and final approvals from the bank's Credit Committee, the Agreement package (186 pages of documents) was emailed to me by Citi's lawyers.  The lead attorney asked me in the cover email to provide him with the contact info of my legal representation, so that lawyers could start dealing with each other directly.  I was like, "Fuck, no!" 

You see, as soon as you officially appoint a lawyer as your representative, the other side is not allowed to discuss anything directly with you.  Here's what happens:  Let's say the bankers propose an additional clause or some adjustment; they call their lawyer; their lawyer contacts my lawyer; my lawyer, who doesn't know much about the intricacies of my business and is not allowed to make any decisions on his own, delivers the request to me.  And then in the opposite direction: I formulate my response; now I have to explain to my lawyer all details in a digestible format so that he can deliver them to his legal counterpart; the latter than communicates them to the bank.  

Are you counting the connections?  We are talking quadruple billable hours on both sides!  And it's like that for every single issue and point.  I'm not doing that! I say, "Excuse me, sir, but for now you will be talking directly to me - at least until all business and financial kinks of these documents are ironed out.  Okay?"  

Professionally lawyers are just as obnoxious as doctors - they think that their diplomas make them better than other people (yet, they discuss economic matters with me as if they too had a PhD in the subject and an MBA).  So, at first the bank's attorney bristles, but, as I start beating him up on one point after another, he gets quite tamed and develops respect.  He actually says, "I hold you in high esteem," which is very nice, because the majority of these assholes don't ever want to admit that you are their equal (estimated legal fees savings - $30K).

Finally, I was satisfied with the contract and introduced my attorney into the mix.  He literally had ten comments on the legalese and after that the process turned into technical preparation of documents between the two legal firms. 

 

Total closing fees savings upon signing: $115,000. 

 

I am his client, so my attorney feels free to make a frank comment: "I have to say, you are the most knowledgeable CFO I've ever met, and I'm not even talking about your understanding of the contracts.  It's everything.  Most of the time I talk to your peers and they are like...  I'm sorry...  They don't know shit."

On the day the deal was closed one of the shareholders wrote to me: "...Your performance transcended what could reasonably have been expected from a typical CFO."  

Well, that' nice, isn't it?  Except that all these praise-singers probably think that I'm flattered by their compliments (as if I live for their approval).  But I am embarrassed: I keep thinking how all those ignorant CFOs and Controllers taint the image of my profession.  And everybody thinks that you are just like the rest of them until you prove otherwise. 

People say to me, "What difference did it make for you personally?  Did you get a deal-completion bonus?"  And some ask, "Why try so hard?  You don't even care about 'business' things as much as you do about art!"  

They are absolutely correct: Yes, some music passage, or a scene in a play, or an image, or a hand-written poem will make me cry; yet, most people with whom I work can't even imagine tears in my eyes.  And no, I didn't get an extra bonus.  And I don't consider this my personal vocation.  But the circumstances of my life made this into my paying occupation and I have to measure myself by my own standards: as long as I must waste a huge chunk of my life on making other people rich, I'd better do it to the best of my abilities.  Why other CFOs don't feel like that?  Well, everyone probably has her own story, but mostly it's that plunging-quality-of-everything effect I like to write about so much.  It's pervasive.                             

CFO Folklore: Don't Let the Boss Argue Your Case for You

In a small business with a flat organizational structure, where every exec performs 10-15 jobs, there is always a possibility of timeline conflicts.  It's like cooking ten dishes on a four-ring range: eventually you run into a point when the same burner is needed for two pots.  Which one to put on?  There is really no such a thing as a right decision at times like that - you must simply follow your instincts.

Let's say your are in the final stages of negotiating a Credit Agreement renewal with your main institutional lender.  It's Thursday, 03/13.  You have scheduled a meeting with the bankers, their attorneys, and your own esteemed corporate lawyers for tomorrow afternoon to press on with a few remaining crucial changes before the deal is released for the approval by the bank's Credit Committee on Monday, 03/17. 

At 5 pm your phone rings:  It's your tax attorney hesitantly letting you know that his team must meet with you urgently tomorrow, because they just figured out that the company may have tax exposures in Illinois and Wisconsin; the extensions are due on Monday, 03/17 (somewhat hysterically); and, he is very sorry to tell you, but he is not quite sure about this and that's why they need to seat down and read you into the details of the Code, so that you can express your opinion, because nobody understands the business better than you do.  No, it cannot be in the morning, because it's tax season and everybody's schedule is full as is; only the afternoon is workable for everyone who needs to be there (except you, of course, but who cares).

By the time you hung up, it's too late to reschedule the bank - most bankers leave at 5 pm, just like the government.  Now, you've got a dilemma.  Bank or taxes?  Of course, you can tell the tax lawyers to suck it up and do their well-compensated jobs without getting you involved.  Yet, you cannot - that's not how you do.  But the bank is incredibly important: the last stages of negotiations are the hardest, because nobody wants to give up the last frontiers.  On the other hand, you are literally the only person in the company who can express taxation opinions.  At least the owner has been in a tandem with you on the contest of wills with the bank.  However, he is easily mauled by financial predators if he is left on his own.                  

But what are you going to do?  It's the balancing act - you have to optimize.  You cannot be in two places at the same time.  So you decide that the tax meeting is the one you must attend and send your boss to the other one alone.  And, of course, you prep him on Friday morning.  You go over all important points of the agenda with him and outline your position on every issue (in writing, for better retention).  Then you silently pray to Hermes/Mercury, the patron god of all CFOs, and go on to your appointment.

You don't disturb him during the weekend, but as soon as he shows up at work on Monday (around 1 pm) you pull him into your office.  "Well, tell me," you inquire.  He beams at you: "Oh, it went very well.  They practically accepted all the conditions on the list you gave me.  You should have the amended Term Sheet by tomorrow morning."  You are cautious: "Practically?"  And he clarifies, "There is one item.  They said they couldn't do anything about migrating from weekly reporting to monthly.  But I figured that was okay, right?  Just this one thing?  And what?  It's like a nine-line report, or something?  Probably a few buttons on your system, right?"         

Well, it's actually a 52-line statement with 5 supplemental schedules. It takes two of your staff accountants several hours to update all raw data and 2.5 hours of your valuable time every Friday to compile the reports. This was one of the top 10 most important items you've introduced into the negotiations right from the start.  Of all items that's what he decided to let go?  And what is it with bosses?  Why do they always assume that everything you do is effortless - fast and easy?  Just because you are toiling away without making any fuss?! 

You feel like Zorg from The Fifth Element.  "I am very disappointed!!!" growls Gary Oldman inside you.  If you want something done correctly, you'd better do it yourself!  Unfortunately, you don't have his powerful ZF-1 under your desk.  So, instead of simultaneously throwing flames and blasting freeze-rays, you grab your phone like a weapon and calmly explain, "These weekly reports end up costing you a lot of salaried hours that can be used more productively otherwise.  So, let me call and talk to them about it again."      

Tech-Savvy CFO vs. Technologically Inept Owners: A Boardroom Chronicle

Premise:  

Based on true facts, this present-day farce unfolded right after the company at the center of the story signed a new office lease.  The entity's CEO, an infamous procrastinator and a successful decision-dodger, has delayed the execution of the document to the point when only 60 days remained before the moving-in day.

Up until now, the fairly young business always occupied a full-service furnished office suite, where everything from pen holders to receptionists is supplied by the landlord, including all telecommunications and IT administration.  However, by this point the successful business outgrew the little rooms and the shared common space of the suites - it was time for the company to obtain its own residence.

As all logical people know, lease signing is only the beginning of a relocation process.  A lot of work needs to be done before a company can feel at home and be fully operational in its new place of business.  And nowadays, the IT infrastructure becomes a prerequisite to everything else.

This flat-structured small business has a misfortune of having a board of directors that consists of three technologically clueless owners (the type who cannot connect a printer to a PC) and a CFO.  The latter has been combining her financial and accounting responsibilities with those of a CTO throughout her entire career.  Needless to say, she understands what needs to be done, knows how to go about it (nobody else does in this company), and is more than qualified to make all necessary decisions.  Yet, the Board has a rule: anything that involves spending money must be approved by all four members.

So, here is the chronology of making a single decision under the described circumstances:

Motion 1 - 60 days till D-Day.  Upon receiving the fully executed lease from the lawyers, the CFO writes an eMemo to the owners requesting a Board meeting in order to develop an action plan that would ensure successful and painless relocation.  The plan should assign responsible parties and establish deadlines for each task.

The owners don't acknowledge that the issue was raised and two weeks pass in a complete silence regarding this matter.

(Side Note: All four executives are actually heavily involved in their day-to-day responsibilities.  They communicate extensively every day discussing various commercial concerns, while avoiding difficult extraordinary topics.)

Motion 2 - 46 days till D-Day.  Recognizing that the owners have fallen into their typical pattern of pretending that the problem doesn't exist (this happens every time an issue lies outside of their comfort zone), the CFO makes another attempt to mobilize the Board to set up an action plan.  This time she speaks to each of them in person.  They all nod in agreement - "Tomorrow," they say.  The CFO squeezes a two-hour time slot into her crazy schedule.

Three days pass without anything happening. 

Motion 3 - 43 days till D-Day.  The CFO feels the time pressure - at the very least she must start working on IT components, regardless of the owners' ostrich behavior.  The business will be simply paralyzed without an adequate infrastructure.  She really has no room in her schedule for all research, comparison, and optimization of  various ISPs, telecoms, and IT administrators...  But who else is going to do it?  So, instead of pestering the owners again about the "action plan," she writes a very specific inquiry:  "Please confirm your agreement with my taking charge of the groundwork for obtaining the Internet service, telephony, and IT administration support."  Without waiting for replies, the CFO starts working on the subject of the highest priority, i.e. the Internet connection, by reviewing nine ISPs whose services are available in the new building.    

Motion 4 - 41 days till D-Day.  At different hours, the CFO receives messages from the owners - all three are worded very similarly: "Thank you for asking and forward thinking.  Please go ahead with the projects." She can almost hear their sighs of relief - somebody else has made the decisions for them!!!  The CFO closes her eyes for a second and thinks, "The same shit every time.  I wish at least once I would let things run their course - just to see what would happen if I didn't worry about all of this, if I didn't jump in."

By carving little chunks of time in her schedule to deal with this shit, the CFO manages to come to her final ISP conclusion in 5 business days: to accommodate all of the  company's needs (including VoIP) she needs a reliable fiber-optics broadband.  She narrows down her choices to two ISPs - the award-winning Cogent with dedicated connectivity and Verizon's newest product FiOS Quantum ran through communal cables shared with all other users in the vicinity. 

Motion 5 - 36 days till D-Day.  She immediately gets quotes from both: Cogent values itself highly - $700/month with a three-year contract, plus $1,000 installation fees; Verizon's rate is only $129/month with a two-year contract.  Even with such a disparity in pricing, it's a simple choice as far as the CFO is concerned - she knows that Cogent will provide uber-fast, uninterrupted connection, and if something happens, she can be on the phone with an engineer within 30 seconds.  Verizon, on the other hand...  well, we all dealt with Verizon at one point or another.  Yet, for the owners all this technical staff is as difficult as Icelandic; the huge price difference, however, that's easy.   So, the CFO goes back to Cogent's salesperson and dangles FiOS Quantum at $129/month in front of his nose (virtually, of course).  He is taken aback - he had no clue that Verizon had started offering this brand new service in that building.  He cannot stop himself from uttering, "That's a compelling alternative."  The CFO doesn't dissuade him from this train of thought; she waits.  And he says that he would go to his director and try to get her a better deal.

Motion 6 - Same Day. Cogent wants the business - the salesperson reverts in two hours, dropping the price to $500/month with a three-year contract or $400/month with a four-year contract.  Both rates are exclusive of taxes and charges.  With this reduction in hand, the CFO immediately prepares a presentation for the Board, breaking down her selection process step-by-step and making a strong case for Cogent through detailed comparison and scoring of all providers.  She sends it out to the three owners and requests a board meeting to make the final decision.

Four days of silence passes.  The CFO understands: it's too fucking much for them, they don't want to deal with this, they are hiding.

Motion 7 - 32 days till D-Day. The CFO has no choice but to write to the owners again: "Let me remind you that installing the Internet connection must precede all other IT and telecommunication actions, including setting up the phone system, the computer network, etc. - basically everything that we need for the business's operations.  And it will not happen overnight!"  This gets CEO's attention.  She comes over to the CFO's office and says, "Let's decide by tomorrow the latest."

Two days passes.

Motion 8 - 30 days till D-Day.  One of the owners (already in possession of the previously distributed detailed presentation) sends an inquiry, "Can you make a comparison for me between Cogent and Verizon?" as if he just woke up to the issue. 

Motion 9 - Same Day.  The CFO prepares a simplified comparison chart intended for a 4-year-old audience.  Meanwhile, she tells Cogent that the decision is not settled yet and that she will appreciate if the provider gives up something else - like do away with the $1,000 installation fees and make rates flat, all-inclusive (taxes, charges, etc.)  The salesperson conferences in his Director and they yield.  The CFO simply cannot lose this deal: she goes around and collects the owners' consents in person. 

Motion 10 - 29 days till D-Day.  The CFO signs the contract with Cogent.

Curtains 

And this is just Act I.  Ahead, there are still decisions on a VoIP system, an IT Administration service, furniture, equipment... 

The Knee-Jerk Reaction to KPI's Showing a Loss

I fucking LOVE how every time you give small business owners, who are usually personally responsible for commercial side of the business, bad news about the company's performance (i.e. report losses), the first thing they do is start looking for faults in accounting instead of strategically correcting their own buying/selling practices.

"Are you sure no extra/double costs were somehow recorded by accident?"

What the fuck is that even supposed to mean?  And yes, I am fucking sure!  I've only been doing this shit for 25 years!!  You, on the other hand, found out that accounting exists only 2 years ago, and I was the one who told you!!!

The same shit - company, after company, after company...  It's like a fucking natural instinct - the goddamn knee jerk.   

CFO Folklore: A Dumb Boss Can Ask Questions That Will Leave a Wise CFO Stunned

A Boss comes to his CFO.  In his hand he carries a report bound into a vinyl cover with a clear front.  The CFO recognizes the presentation booklet she prepared for prospective institutional lenders and private financiers (the company is in the process of restructuring its operating capital).  This particular one is the Boss's personal hard copy: the CFO notices his doodles, scribbles, and squiggles right there on the title page.

The Boss gives the booklet to the CFO, "I've met these two guys yesterday over drinks at the Harvard Club.  I didn't quite understand what they do, but I want to send them this.  They wanted it electronically.  Can we send it as a whole?  I forwarded you their email addresses."

"Of course," she replies, "It's been combined into one file."

"But I've added a few pages."

The CFO skims through the presentation and sees that amid her slick statements, tasteful tables, and vivid charts, there are three pages of text she's never seen before.  She feels the habitual wave of anger she has learned to hide deep inside a long time ago.  She bites her tongue and doesn't tell him that the unprofessional pale blue arial font he chose clashes with the aesthetics of her report and that his text is too verbose.  She just looks him in the eyes and says, "Just send me your Word file and I will incorporate the pages."

"Files," he corrects her.       

The CFO nods silently.  It's clear to her: a separate file for every page - three pages, three files.  If they were all in the same file, he wouldn't be able to print them separately.  It would be too difficult for him.

The Boss still lingers.  "But are the pages all going to be, like, that scanned type?" he grimaces.

"I'm not planning on scanning anything, but yes, I will convert the Word pages into the PDF and insert them into the presentation, which is a PDF file itself."

"But then I will not be able to edit my pages if I want to," the Boss's tone is a mix of whining and irritation, as if the CFO makes his life difficult.  (Which she does, by the way: He always thought of himself as a brilliant man, but this bitch knows too much, understands everything quicker, and her level of expertise and professional standards makes him feel inadequate in HIS OWN COMPANY, for crying out loud.)

"Well, technically if you have Adobe® Acrobat® XI you can edit any PDF file." She thinks for a split second whether she should go on, then continues: "We can also insert the PDF as an object into Word.  Then you can edit your pages.  However, it will most likely, screw up the entire layout of the presentation, which is not good in case someone decides to print it.  I really do not recommend this." 

It all sounds like Chinese to the Boss, who, shockingly, doesn't speak a word of it, even though he used to have a business and lived in Hong Kong - for 25 years, no less.

"I don't know how to use any of that," he says, "Can't you just insert my Word pages without converting them into your presentation?" (It almost sounds as if he is about to say, "Is that too much to ask?")

This is just too funny, but the CFO keeps her face in check.  She decides that she's had enough of this conversation and it's time to stop explaining: "No, even I cannot perform that sort of magic" she says, "It has to be either Word, or Excel, or PDF file.  And PDF is the format of preference in this case."

"Oh, Okay."  The Boss leaves.

Now, the CFO smiles to herself.  And at that moment she realizes the true cause of her dissatisfaction with this job.  It's not this heightened level of irritation.  It's not even the fact that she's undervalued and underpaid.  It's the unfairness of life that forces professionals like her to work for dilettantes like her boss.       

2013 Audit Season: Joke #4

I remember a few years ago, during a business lunch, somebody was recapping an episode from one of the numerous crime series all networks are running to compete against each other.  My head was preoccupied with the business purpose of the meeting, nevertheless I do recall that the murder plot turned on a discovery that one of the characters, a compulsive gambler, bet his classy wife's sexual favors in poker and lost.  FBI questioned if the payoff actually took place.  Of course, it did: the real gamblers are "men of honor."  When asked how the pimped out wife handled it, the winner said, "She was willing, but not happy."  I bet this is the best line the screenwriter who churns out this pedestrian crap has ever written! 

Willing, but not happy...  The state of mind applicable to so many situations.  This is exactly how all corporate accountants feel about financial audits, lenders' exams, investors' due diligence, etc.  Commercial and fiscal needs of our employers throw us at mercy of the outsiders: we are forced to carve out time from our main responsibilities and open ourselves up to various poking, probing, and testing.  Oh, we totally understand the importance and the unavoidable necessity of it.  Frequently,  it's our own search for new financing resources that culminates in these proceedings.  Yes, we are totally willing, but we are not happy to go through with it.

I devoted two whole chapters (29 and 30) of CFO Techniques to advising readers on how to deal with auditors, keep yourself focused on the ultimate benefits for the company, and minimize the pains of distraction and intrusion.  It helps to remind yourself that your company needs it more than the one that sends people to conduct the examinations.

And I have to say, most of these specialists of prodding are well aware of the invasive nature of their jobs.  They understand that a financial executive abides by their standards and accommodates all their requirements, because he wants good results, and that this puts a CFO or a Controller into a subservient position. Many auditors are very apologetic for the endless interruptions, inquiries, requests, follow-ups, etc.

Of course, there are always exceptions...

For the CFO with exposure to international measurement systems from this season's joke #2, the last stage of the bank's field exam included physical inventory counts at three locations specifically selected by the bank.  This is habitually done by auditors and examiners in order to (a) establish the presence of various inventories and (b) verify the accuracy of the subject's records.  Obviously, nobody at the audited company has any impact on the choices of locations, timing, or people sent to perform the task.  In fact, the CFO, who every year faces a financial audit and three bank exams, never knows who the hell the counters (usually junior auditors) are. 

This time was bound to be different.  One of the locations the bank selected was the company's storage in Savannah, GA.  A day before the scheduled visit the CFO gets a phone call.  An agitated young man in the receiver tells her that he is from the bank's Jacksonville office and that, according to Google Maps, the drive is 2 hours and 40 minutes each way.  "And it's Friday!  This is outrageous," he says.

The CFO was perplexed: anyone who had dealt with these matters even for one month would know that she had nothing to do with the rookie's plight; that, if it was up to her, she would much rather avoid the scrutiny.  Considering her executive position and professional status, she could've just hung up on this wimp.  But she is the one with a sense of humor, remember?  So, she asked the boy, "Well, what would you like me to do?  Move the inventory to Jacksonville, or cancel your visit?"

"Could you, please, cancel it?" was a hopeful answer.     

2013 Audit Season: Joke #2

A lender's field examiner is sent to conduct a periodic review of a borrower's books and records. 

These exercises are regular occurrences in, what I call, the balance sheet financing: a company pledges its assets, receivables and inventories foremost, against a line of credit.  It's only natural that the financial institutions want to make sure, from time to time, that the collateral securing the loans, letters of credits, bank guarantees, etc. actually exists and is properly valued. 

The banks used to be somewhat lax about it and satisfied themselves with quarterly internal financial statements and annual audit reports.  Most of them would ask a client to undergo a field exam (it's always at the client's expense, by the way) only when the issue of a credit line's increase came up.  However, the neverending tittering on the verge between recession and depression has changed things.  The banks got burned by failing companies and defaulted mortgages.  Those that couldn't recover their losses got acquired for peanuts.  The remaining institutions got smarter and stricter.  Nowadays, many lenders demand 2-3 field exams a year.  

Most of these engagements are outsourced to specialized accounting firms, the rest are conducted by the banks' auditing departments.  Either way, the examiners are constantly rotated - every time it's a new team, which is very prudent as far as the auditing standards go, but a pain in the ass for CFO's and Controllers of the companies being reviewed: you feel like a fucking parrot, delivering a summary of the company's business, its operating processes, and accounting procedures over and over again.

Many companies with significant receivables and inventories to pledge against credit lines of $10 million and up are, obviously, international businesses.  The commercial globalization affects both the procurement of resources and the distribution of products.  The ancient golden rule of market success still holds true: people try to buy where the prices are the lowest and sell where the prices are the highest.    

Now, let me remind you, boys and girls, that the United States of America is a solitary customary-measurement island in the global ocean of the metric system.  (Of course, it will cost billions to convert the entire American existence into the world-wide standard. Yet, I always thought that this clinging to the 18th century  units is primarily a manifestation of our country's fundamentally puritan conservatism.  But that's another joke altogether). 

So, back to our examiner.  On the second day of the assignment she comes to her designated point person - the borrower's CFO (the best practice to avoid someone saying something stupid, especially a CEO, is to restrict auditors' access to one person) and shows her an item on the inventory breakdown.  "It says here that the cost is $1.05 per pound, but the supplier's invoice states $2,315 per em tee," she says, actually spelling the stated weight unit - mt.

Reportedly, at this moment the CFO felt like making a joke: "...You know what they call a Quarter Pounder with Cheese in Paris?/They don't call it a Quarter Pounder with Cheese?/No, they got the metric system there, they wouldn't know what the fuck a Quarter Pounder is." 

But looking at the shellac-stiff blond hairdo of this Western PA resident, she changed her mind.  The examiner looked utterly perplexed.  So, instead, the CFO said, "This product is distributed here, in the States, and we keep the inventory records in pounds to match the sales units. However, it was purchased in Korea, so all of the supplier's documentation is in the metric system.  'MT' stands for 'metric ton,' which contains 2,204.62 pounds.  So, if you divide the cost of one metric ton ($2,315) by 2,204.62, you will successfully convert it into the cost per pound ($1.05)."  She writes everything down as she speaks, so that she doesn't have to repeat it again; at least not to this woman. 

The examiner is extremely relieved and very grateful for the little lesson.  The CFO (obviously in humorous mood that day) says, "Wait until you get to our liquid products.  They are bought in metric tons, stored in gallons, and sold in pounds."  "Oh, my God," the auditor looks mortified. 

This is not an isolated anecdote.  It's remarkable how frequently this happens.  I personally never met an auditor who didn't require a tutorial on US vs. metric units conversion.  I'm used to the appalling ignorance. The question is: why is it Ok to come with your tail between your legs and your tongue out, asking these stupid questions?  Haven't these people ever heard about Google?