This blog is the culmination of our series on the CFO’s role in the management of construction companies. I have been attempting to lay out the “Best in Class” management practices that apply to the CFO. The feedback from the accounting profession has been overwhelmingly positive but most contractors still seem a little vague on their CFO’s proper role. So, I have decided to step aside in this last CFO blog and let a construction CEO explain his thinking on the matter. I think you will recognize his perspective.
Finally – The Right Question
From Our guest Contractor:
I have been as guilty as the next guy of not understanding my CFO’s proper role. In fact, the following quote from your new book (Which I was honored to review.) was quite an eye opener for me where is said:
In more than half of the construction business failures the authors have studied or dealt with, the CFO or in-house accountant stated, “I knew there was a problem” or “I knew we were in trouble.” When the authors ask the CFO or accounting staff, “Why didn’t you tell them?”, they responded with some version of, “I did, but they wouldn’t listen.” In one particular case, a CFO responded to the question by saying, “The CFO that I replaced told them and got fired.”
This blog series inspired me to ask myself, what turned out to be, the right question:
What do I want my CFO to do?
Not – What is the CFO supposed to do?
Not – What is the CFO’s proper role?
No. I finally realized the only real question for me was – what do I want my CFO to do?
The simple answer that I came up with was:
I want my CFO to make sure I never run out of cash.
Risk management
The King of Cash
After that inspiration, I thought about it for a couple of days and realized that your last book on risk factors and the causes of contractor failure had planted some seeds in my mind. I didn’t care what my CFO was supposed to do. I knew what I needed him to do. He is not only the CFO of my company. He is the King of Cash.
I remember thinking, imagine if you had an expert on the payroll whose sole job was to make sure you never ran out of cash? Period. That was it. My CFO and I discussed this at length, and I explained that what our company really needed was for him to concentrate his abilities and efforts to ensure the company remained solvent through up and down markets. I told him I would like his position and job description to include being in charge of cash flow and seeing to it that we never run out of cash.
Risk Management
Sounds simple. Problem solved. Make sure we always have ample cash and don’t let a cash shortage sneak up on us. Then my CFO gave me an education. He said that he would gladly accept his new “finger in the dyke” mission, but only if I would commit to allowing him to exercise some control over the following areas of our business.
- Estimating and bidding – He explained that the first area of cash hemorrhage that needed to be plugged was underestimating costs and preparing bids that were designed to be competitive rather than profitable.
- Planning – Too often we seem to let our ambition cause us to try to grow too fast. This puts too much pressure on company capital and cannot be reversed once it is set in motion.
- Work in progress accounting – We have got to receive accurate percentages of completion information from the field because cash flow problems can be obscured by optimistic work in process accounting.
- Finance – Lines of credit and surety relations are critical to liquidity. The CFO must have input into the capital structure and the banking relationships.
- Billing and Collection – If billing and collection are not carried out with a high degree of self-respect and professionalism, these two functions can often deal cash flow a fatal blow.
- Contract Execution – Too often operations will negotiate contract terms that leave the company begging rather than collecting what is due in a dignified and professional manner. Operations sometimes assumes risks that the company is unable to finance. The CFO must have input into all contract execution.
A New Respect
In other words, if my CFO was going to take responsibility for my company’s liquidity, I was going to have to let him participate fully in all management decisions. I learned a good lesson and that’s what we are doing now.
Summary
When I asked this contractor how all this was working out, he said: “I am sleeping better.”
A review of this series on construction company CFOs describes some much-needed advances in the use of and respect for our in-house accounting professionals. This series represents best-in-class management and much-needed risk control in our industry.
For more information on risk management, read more at: https://simplarfoundation.org/?s=risk+management
For a broader view on role and duties of a CFO, read more here: https://simplarfoundation.org/?s=cfo
To receive the free weekly Construction Messages, ask questions, or make comments contact me at research@simplarfoundation.org.
Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you.
