Living to work? Remember, you only live once

A few years ago, well before I joined RoseRyan, I met a recruiter who was trying to fill a CFO opening in a fast-moving start-up. The role sounded interesting, until the recruiter said the CEO was looking for a young candidate as they were less likely to want a “work-life balance.”

Immediately, I knew the discussion had just hit a fatal roadblock, because I am a strong believer in work-life balance. Someone once said you should work to live, not live to work. That is so true.

When I first started working, I did not have that balance. I would work long hours, and I definitely put work above most other activities. After a few years, I began to realize I was going down the wrong track. My social life was suffering, and I was beginning to see that some perceived benefits were not there. For example, I met people who had dedicated themselves to their companies for years, only to lose their jobs in times of recession or streamlining operations without an ounce of thanks from their former employers. Because their jobs had been their life, they were left with nothing. I felt really bad for them, and began to realize the same thing could happen to me if I wasn’t careful.

So I started to change my ways. I banished my cell phone from social events and Little League baseball matches, and made efforts to get home to be with my family at mealtimes and in the evening. I took steps to avoid my laptop on one full day out of the weekend, and instead to go do something interesting. I can honestly say my work did not suffer from these changes. If anything it got better, as I was now much sharper, healthier and less stressed.

The final vindication of my actions came to me on September 11, 2001. I was one of the people at the World Trade Center that morning, and I was fortunate to get out of there with my life. I had plenty of time that week to reflect on that Tuesday’s events. They cemented in me the need for a proper work-life balance, as you never know what’s coming next.

You only live once. Make the most of it and work to live—don’t live to work.

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What separates great audit committees from the merely good?

As a former audit partner of a Global Six accounting firm, I’ve done my fair share of presenting at audit committee meetings. I’ve noticed that when it’s time for the auditors to present, there will always be the occasional board member who turns to his or her laptop for a bit of day trading or to check email (no, this didn’t hurt my feelings at all).

More important, I’ve been able to observe what characterizes an effective audit committee. This has been on the minds of Public Company Accounting Oversight Board members lately, too. Last month, the PCAOB unanimously adopted AS 16, Communications with Audit Committees. Though the intent is to enhance the relevance and timeliness of communications between the auditor and the audit committee, the standard has little to do with influencing the audit committee’s dynamic with management.

So, here is a compendium of my direct observations on what separates a truly effective audit committee from the rest.

Risk-focused meetings. Meeting agendas should evolve with the growth stages of the company and respond to changes in the economic and competitive environment.

Challenge historical policies and practices. The key operating and financial reporting risks will never be uncovered unless the committee challenges the past.

Transparent and honest communications. It’s crucial that audit committee members talk candidly about what’s going well and what isn’t.

A dynamic chair. It’s paramount that the committee is led by a strong communicator who facilitates discussion, keeps it on track with the agenda and acts as an objective voice during heated exchanges.

Global representation. Committee members who represent the company’s foreign operations add insight into cultural, legal and tax-structure differences.

“Pre-meeting” with the finance team. The most effective audit committee I observed flew in the day before the meeting to have dinner with key finance team members. This informal setting facilitated communication and gave the committee a chance to formulate more questions. It also gave the finance team a heads-up about late developments that weren’t on the agenda.

Quarterly lunch with the independent auditor. Yes, I understand that the audit partner “takes you out” and then bills the company, but he or she can provide valuable insights, such as feedback on the performance of the management team and an honest take on accounting and internal control risk areas. The committee chair isn’t likely to get this kind of information from the formal slide presentation.

For more suggestions, check out Ernst & Young’s excellent article, “Audit Committees: Going Beyond the Ordinary.” It’s a great piece from the June 2012 issue of E&Y’s BoardMatters Quarterly newsletter.

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Credit risk: a few easy steps can prevent major headaches, even extinction

Entrepreneurs are constantly setting up companies as new business opportunities arise. It’s called innovation, and that’s what Silicon Valley is all about. VCs put their money into these companies to help them grow with the expectation that they will make a great return on investment themselves—and they perform significant due diligence and risk assessment before investing.

So it always surprises me when many of these innovative companies that have been assessed for investment risk by their backers act cavalier when it comes to managing the financial risks within their fledgling businesses. Even more surprising is that many of the venture funds that have invested their money never question the company’s approach to financial risk management.

Many companies, particularly start-ups, sell on terms without checking out their customers for credit risk or taking steps to reduce risk. They are so intent on making the sale to show they have a real business (maybe even desperate) that the quality of the sale doesn’t matter. Many have been burnt when they don’t get paid, and others have gone out of business.

Make sure a customer’s credit is good

All of this is avoidable with a few basic steps—and the most basic of all is to check the credit worthiness of a new customer. It takes a minimal amount of time to do, yet in many cases it’s seen as an unnecessary hassle. (This is rarely a problem in public companies, as a basic SOX control on revenue recognition is a requirement to assess collectability. That is one area where SOX has added a lot of value.)

If it is not possible to establish a customer’s credit competence, get them to prepay, use a credit card or provide some sort of guaranteed financial instrument. I have rarely seen a sale cancelled because appropriate terms cannot be agreed upon, yet I have seen companies suffer a lot of pain when they realize, too late, that they have made a poor sale. It’s not only the loss of the receivable that hurts. The cost in time, effort and third-party services to chase the money can be exorbitant, too.

Make sure that credit stays good—and take basic precautions

In addition, companies need to reassess credit terms on a regular basis. Often I see companies check out credit risk and give terms for an initial sale, but they never reassess the customer’s credit risk thereafter, not even when the customer deviates from the agreed terms on that sale or a subsequent sale. Sooner or later that approach comes back to haunt them.

The same is true of credit concentration. Having most of your eggs in one basket is not a good idea, yet many companies do it. Whenever possible, take basic precautions to limit credit concentration, such as selling through multiple channels, or enforcing and continually reassessing credit limits on larger accounts.

Companies that sell overseas also take on significant risk with currency exposure when they sell on inappropriate terms or when the currency risk is not hedged properly. Given the constant headlines about the euro crisis and the considerable downside risk with little upside potential, why do so few companies spend no time considering and minimizing their risk? Beats me.

What I do know is that a small amount of time invested in managing credit and currency risk can save a lot of headaches down the road. It could mean the difference between being in business and becoming extinct.

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Do you know where your passwords are?

Keeping track of a zillion passwords and user IDs is a fact of working life, made even more complicated by all the devices we use. Because I work with different clients it’s even harder, because that almost always requires using a lot of secure applications. When I started with my current client, I received a three-page Excel spreadsheet of applications I needed logins for. I tried to make the user IDs and passwords easy to remember, but there were just too many—and each application required different user ID and password conventions. It wasn’t efficient (or particularly safe) to enter login information on the spreadsheet and keep it current and portable—I work on the client’s computer as well as a laptop, and the last thing I need was another password to secure the spreadsheet.

Most of us have probably used sticky notes—in our wallet, taped to a computer or pasted into a notebook—or virtual stickies littering our desktop or smart phone. And we all know that isn’t secure. This problem has even been in the news; one recent story is NPR’s “Prevent Your Password From Becoming Easy Pickings (Or PyPfbEp).”

I solved my problem with two simple solutions.

The first is a password manager or password wallet. These cloud-based apps store login information for all sites or applications and are accessible with one master password. Log in to the wallet app and it does the rest, bringing up the application login screen and autofilling the fields. It increases security, saves time and is easy to use. It’s also portable—because the app is cloud-based, one license covers all your devices, including cell phones.

These apps have been around for several years. There are many to choose from—check out this comparison from TopTenReviews. I use RoboForms: it’s simple and inexpensive at $9.95, and it works on all my devices.

The second solution is choosing a strong master password for my wallet app that I can remember. (Amazingly, the most commonly used password is “123456.” Avoid it.) Experts also say to avoid using actual words and birth dates, among other things. They suggest using the first letters and numbers of a phrase that you will remember. For instance, for “My #2 son’s middle name is Alex” the password would be M#2smniA.

I’m not that technically savvy, and I installed my password wallet in less than 10 minutes. It saves me a lot of time and frustration, plus saving a lot of sticky notes!

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Why are stock options so difficult to account for?

I attended the recent Stock Options Solutions annual conference for executives and stock plan staff from private companies targeting a liquidity event. One of my major quests was to identify why so many companies get caught up in stock option problems, which I have found to be an issue for our small, midsize and large clients.

There were 21 panels throughout the day and about 150 attendees. The sessions covered quite a range of topics, including ESPP essentials, international equity and tax accounting. I attended these panels:

  • Stock Plan Vendor Analysis, Selection and Implementation – Perfecting the Process
  • The IPO Abyss: Splunk-ing through the Challenges of Equity and Executive Compensation
  • Get Ready to Rumble: Making Your Equity Plan Data IPO-Ready
  • Avoiding Pre-IPO Financial Reporting Mistakes that Cause Post-IPO Restatements
  • Stock Options, RSUs and Other Awards: Key Considerations for Emerging Companies

In the pursuit of my quest, these three areas stuck out to me:

  1. Executive compensation is an art and a science. There is a fine line between controlling windfalls and motivating management and employees. It is vitally important to have critical data and support (as well as documentation) for how executives are compensated with stock. The compensation committee is a complex group that balances investor control with equitable compensation. It appears that directors’ fees are up due to added regulatory risk and complexity, and the overall allocation of stock as compensation has made things more complex, leading to the potential for more mistakes.
  2. Pre-IPO mistakes in equity can be made on even the simplest calculations. In many examples at the conference, simple spreadsheets calculated options incorrectly, leading to errors in proper accounting treatment. In addition, timing of the valuation (409A) can have a significant impact depending on how often options are being awarded.
  3. The type of rewards your company will utilize requires careful thought. Should you use restricted stock units? Incentive stock options? Something else? It is critical to design a proper system that allocates the intended percent of the pool that executives, employees and investors receive. Many fear the power institutional shareholders have based on their ability to scrutinize compensation once a company files its S1.

Confusion about properly accounting for stock options is usually based on the following issues:

  • The accounting rules are changing too fast.
  • Employees administering the options leave the position or the company.
  • There are inadequate records of the grants.
  • The source information is in many different locations.

The good news is that all of this can be managed with proper systems and processes, and the proper human interaction. The key is to juggle the growth of your company with the needs of a first-class stock option recording system, and to maintain the discipline to review it on a regular basis—ideally quarterly.

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‘Investing in the business’ doesn’t have to mean embracing chaos

Have you ever been at a well-controlled company and heard at a company meeting that the board wants to accelerate the company’s development by “investing in the business”? These days, statements like this send shivers down my back. Why, you ask? Well, in lots of instances it can mean chaos has just been authorized. And sometimes it can signal the beginning of an untimely death spiral for the company. It’s ironic, because in today’s business environment where risk assessment is fundamental, investment in the business is, in many cases, not even considered a risk.

I have seen companies (both public and VC-backed) make the “we are investing in the business” announcement. Within weeks they are recruiting, or changing management, or adding infrastructure like crazy, so they can grow revenues, accelerate product development, scale up, or be in a position to scale when revenues grow. Unfortunately, in nearly all instances they allow basic controls to disappear and they no longer manage their business to the tight set of metrics that they used to get to that point. I find this incredible, but it happens so much. The effect is that after a few months, existing staff feel the company is out of control and leave, and investors get nervous. Company results more often than not tank as the desired revenue growth does not happen as fast as desired—but the expenditures do happen, and cash balances drain at a dramatic rate as the investment takes place.

Eventually, but normally way too late, the board slams on the brakes, and an exercise in picking up the pieces and bringing the company back to normal begins. In some instances, companies need to raise more funds as they have burnt through their cash balances, and they struggle or fail to do so because their metrics are now awful. That means they sell shares at a much lower valuation, get bought out at a much lower valuation, or maybe even go out of business. In nearly all cases, the company and the employees are much worse off than they were in the first place.

This whole cycle is completely avoidable by implementing a few basic controls:

  • The decision to invest in the business must have goals attached, and a cost benefit and risk assessment analysis should be performed before the proposed investment is approved.
  • The planned investment should be well defined and divided into small sequential segments with milestones. Investment in the next segment should take place only after the previous milestone is met, with positive results.
  • If an investment is not working, the board should not be afraid to come to terms with it and change course as soon as possible—not wait until a big problem arises.
  • Investment in the business should be secondary to managing the business to key metrics and fundamentals.

Smart, properly controlled investments in the business can be extremely beneficial, but poor or uncontrolled decisions can be disastrous—and everyone pays a price.

How will your company react when those decisions are made? Hopefully they will do it the smart way, or you will probably experience the chaos.

 

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No crystal ball? No worries—AICPA report crowdsources the future

What lies just around the corner? What skills do you need to be successful tomorrow?

My crystal ball isn’t any less fuzzy than yours, so I turned to the AICPA report, CPA Horizons 2025, which provides excellent advice about current and forecasted trends that will impact the profession. While the report is focused on the CPA profession (it’s based on the comments of more than 5,600 CPAs), much of the subject matter can be applied to keeping your finance department strategic and relevant to your business.

Here are two of the top themes for me.

1. New technology opens doors—and adds to risk.

Changes in technology offer incredible advantages and efficiencies, but they also introduce risks in new areas. The prevalence of mobile technology and the ability to access applications from just about anywhere have increased our expectations for the availability of information and we expect financial reports much faster. (Gone are the days of having to drive to the office to make a journal entry or run a report, thank goodness!) Not only does this quicken the pace at which the accounting team must do its work, but it also opens the door to potential errors and fraud. Electronic documents can be altered in an instant. The security and privacy of information is at risk.

The finance organization has to stay on top of changes in technology to drive efficiencies in the business. Stay alert, assess the technology, ensure your internal controls evolve to mitigate new potential risks and keep a sharper eye on potential fraud—it may be harder to detect.

2. Lifelong learning is a clear advantage.

According to the report, education will remain a cornerstone of preparation for certification and of ongoing activity throughout a CPA’s career. Strong technical accounting knowledge will continue to be a foundational requirement, but it won’t be sufficient on its own.

The AICPA report suggests that we need to devote more time to staying current with regulations and standards, both domestically and globally. At the same time, accountants must have a broad knowledge of business and soft skills and not simply focus on technical accounting.

I think this presents some challenges. How are you planning to keep up with technical accounting and rules and regulations that are evolving at a fast pace? At RoseRyan and other professional accounting organizations I have worked for, we set a goal for a certain number of training hours for the year. If your organization doesn’t provide this type of motivation, try setting a personal goal for continuing education.

What about soft skills? I see accountants placing inordinate value on technical accounting knowledge and ignoring soft skills such as communication. Yet, in my experience, the finance pros with the best-developed soft skills are the ones with the most success. They have an easier time obtaining information and working with others; and they are better able to influence people and have more highly developed leadership skills. All of that is critical in moving your organization forward.

Want to know more about strategic thinking and key finance initiatives to keep you ahead of the curve? Check out our latest Intelligence report, Strategic Finance in Action.

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Need some sanity? Try managing your monkeys

How do you manage your monkeys? I ask that question often—of myself, my peers, my clients, my volunteer colleagues and even my 23-year-old niece.

“Manage your monkeys” is my most frequently offered piece of advice, and it has been my mantra for almost 20 years. The seed was planted in my brain when I taught a course for new supervising accountants at KPMG. We read The One Minute Manager Meets the Monkey by Kenneth Blanchard, William Oncken and Hal Burrows, which provides practical tips on avoiding the trap of doing everything yourself—and becoming overworked and losing sight of the big picture in the process. Who would have thought that a pop culture book on how to be a more effective manager would register so deeply for me?

What is monkey management? When someone comes to you looking for an answer, you can do one of two things: tell them you’ll get back to them, do some work, and provide an answer; or tell them where they can find the answer and let them do the work themselves. The person with the problem carries a monkey on their back. The monkey represents the next move. When the person asks for your help, their monkey places one foot on your shoulder. If you accept their problem, the monkey climbs onto your back. If you guide them to a solution but don’t assume ownership, the monkey moves back to their back.

Monkey management is about controlling which monkeys you accept and which you delegate, and guides you in choosing the appropriate action. I’m a bit Type A, so I have a tendency to want to make everyone happy and strive for perfection. Monkey management helps guide me every day to not take on too much, to manage expectations and to maintain balance. There are a few simple steps to follow. This is how I manage my monkeys (it’s been a long time, so I’m no longer going by the book):

  1. Define the monkey. Give it a name. Identify what it’s about. Understand the situation.
  2. Identify who owns the monkey. (This is not an excuse to drop the ball. You own the monkeys that fall within your role.) If it’s not clear, assign ownership—that’s called delegation.
  3. Own up to your monkeys. For a manager, this means providing support and direction to your team so they can effectively manage their monkeys. For a team member, this means carrying your monkey and doing your part to resolve the problem or situation.
  4. Follow up on monkeys. Make sure that assigned or delegated monkeys are effectively controlled by their owners. Just because someone else owns the monkey doesn’t mean that you can let go of your oversight monkey. It is the manager’s role to ensure the overall success of their team.

The most effective monkey managers don’t simply assign responsibility; they provide the tools for monkey owners to be successful. This includes direction, training and coaching. Think of the managers you most admire. I bet they’re great monkey managers.

For almost 20 years, I’ve kept a tiny plastic monkey on my desk as a visual reminder to manage my monkeys. It never steers me wrong.

 

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New report: The dynamic company’s guide to thriving in Silicon Valley

RoseRyan’s nearly 20 years of helping Silicon Valley companies have shown us a thing or two about what it takes to make it here. We didn’t want to keep all that insight to ourselves, so we’ve compiled some of our best observations and advice in our new report, Strategic Finance in Action: How Dynamic Silicon Valley Companies Seize Opportunities (and Avoid Flameouts).

Our report recounts responses to real-life challenges that show how strategic finance thinking in action can make the difference between struggling and thriving. The upshot: a business-savvy finance team that can see beyond the numbers and outside the cubicle is a fast-moving company’s BFF.

Some of the scenarios we get inside include:

A life sciences company with a promising drug nearing payoff (they think) is contending with a business IT system that makes day-to-day operations a frustrating slogfest. What’s the next move?

A hot social media start-up is taking off, but their young staff lacks the chops to keep pace—and they’ve sprung a cash leak. Can they plug it? Could they have prevented it?

A tech company with game-changing technology needs to scale fast to meet demand, but the capital well is drying up and a decent revenue stream is only a gleam in the CEO’s eye. How to stay afloat without missing the market?

Can you relate? Check out our report to see what happened. And you’ll learn about other strategic finance solutions in capital efficiency, business information systems, process optimization, and people and culture. We hope you enjoy it.

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Ethics: it’s a matter of trust

Recently we have read press coverage about the CEO of Yahoo losing his job for including on his resume a degree he didn’t have. And last fall, the CEO of Hewlett Packard lost his job over false expense reports.

In both cases, the ethical line was crossed. When that happened, they had to go—that line must never be crossed.

Why is this so important? The answer is that when someone crosses the ethical line, you can no longer trust that person. What happens when you face a situation where you have to rely on that person’s honesty, such as in a management representation letter, if you can’t trust them? The answer is that you cannot rely on them, so the situation cannot be allowed to occur.

Here’s just one example that affected me personally and that I hope will put this in perspective.

I was the CFO of a company when the CEO wanted to hire a new VP of sales whom he and others had worked with before. As a company we had all the personal references we wanted, and the candidate had a great selling history. Perfect guy, or so we thought. We got to the point of wanting to hire him quickly, asked him to complete an application form and started the background check.

Unfortunately, we quickly came up with two issues. He did not have the exact degree he claimed on his application form, and he had answered “no” to a question that the background check showed that he should have answered as “yes.” We asked him about these issues, and after some time he admitted the application form he had completed was inaccurate, that he had overstated the degree and answered the question falsely. He was very apologetic.

So were we, because we couldn’t employ him as a result of the false statements. How could I, as CFO—or the auditors, or the board—ever rely on any statement he may be asked to make when he lied on an application? Or how could we be sure that he was being truthful with our customers when he was negotiating on our behalf? We couldn’t, so we had to pass on him.

The sad fact is that we would have hired him if he had answered the questions correctly. We didn’t care what his degree was in, or about his other answer, but because he didn’t answer those two questions honestly we knew we couldn’t trust him to be honest with us when it really mattered. That’s the bottom line, and that’s why ethics matter.

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