Accounting Training for the CFO (#373)
/The Level of Accounting Training that a CFO Needs
What areas of accounting are most important to know to be an effective CFO? Lots of chief financial officers do not come up the promotion path from the accounting department. They could also be promoted in from the treasury side of the business. When this happens, you have lots of expertise in raising money or investing it, but really don’t have any idea what goes on in the accounting department. You may not have taken any accounting classes at all, so this whole area is something of a black box.
The main item to understand is that you don’t need an excessively detailed understanding of accounting to be a CFO – things like how journal entries work, or the details behind the month-end closing process. If you have a reasonably competent accounting team, then they will take care of all that. Instead of going deep, I suggest getting a book on accounting for managers. AccountingTools sells one of these books, and you can find other competing books on Amazon. These books provide you with a basic introduction to accounting concepts, and talk about the financial statements, how to interpret them, the types of accounting reports that are of most use, and how accounting impacts different parts of a business. You can read through one of these books in a couple of weeks in your spare time, and that gives you a high-level understanding of what’s going on.
Is that enough? No. Being a CFO means that you’re responsible for risk management, and there are a fair number of areas within accounting that can go wrong. And you will be the person who’s responsible for those failures. For example, if you become the CFO of a publicly held company, you have to personally certify that the financial statements being released every quarter are accurate. If the financials are not accurate, then you personally could be criminally liable.
The Need for Controls Training
Given that you might end up in jail, I think that controls are a pretty good place to gain a deeper knowledge. Now, does this means that you should go crawling all over the company, digging into every control that’s ever been installed? No. That would be a bad use of your time, especially since larger companies may have hundreds or even thousands of controls in place. What it does mean, though, is that you’ll need to offload this work to the internal audit department, or maybe an outside firm.
Let them dig through the company and report back about any shortcomings in the controls. But this isn’t just about delegating the work. You’ll need a fairly in-depth understanding of what controls do, and what makes for a strong or weak control environment. So, in this one area, I’d suggest taking a course on accounting controls, or buying a book about it.
The Need for Risk Training
In addition to controls, you’ll need to understand any accounting areas in which there’s a significant risk of failure. For example, if your company sells software packages that include an installation component and a training component, that means you have a complex revenue recognition environment. In this case, you’d better get a book or a course on revenue recognition. If that’s not the case, and instead your company only sells lawn supplies for cash, then I wouldn’t worry too much about revenue recognition.
Here's another one. What if you’re the CFO of a high-fashion business, where the clothes you sell can go out of style at any moment? Better read up on the accounting for inventory, then, or else you might be caught with an overvalued inventory. But if your company doesn’t even deal with inventory? Then you can skip the topic entirely.
Training Areas to Skip
There are also some areas in which your knowledge of accounting can be pretty low and stay that way, because they’re basic nuts and bolts accounting topics that are usually fairly well run. That includes billings, accounts payable, and maintaining the general ledger. As long as they have the appropriate controls, of course.
Industry-Specific Training
And then there are very specific accounting topics that you’ll need to know about only in certain industries. For example, if you’re the CFO of an oil & gas firm, you’ll want to know all about the capitalization of drilling expenditures. Or, if you’re the CFO of a shipping company, you’ll really need to understand the capitalization of dry docking expenses. And if you’re running a nonprofit, then you’ll need to understand the finer points of how to classify expenditures as program-related or as management and administration – and if you get wrong, you’ll get pounced on by donors. So, when you’re hired into one of these businesses, sit down with the CEO and the controller, and discuss whether any of these super-important accounting topics exist – and then dig into them in detail.
Training to Manage the Department
That covers understanding accounting from a risk management perspective, but not from a management perspective. If you are the CFO, then you’re responsible for the accounting department, which means having an understanding of how it runs. To do this, your best bet is to get a book on the controller position.
I have one called The New Controller Guidebook, and you can find other ones on the market. The main point is to understand when the accounting department is operating correctly, and when it isn’t. This doesn’t require an in-depth knowledge of accounting, but you will need a set of metrics for the department. For example, you might want a report on the time taken to produce financial statements each month, or the number of early payment discounts that were lost, and certainly something that lists the total compensation expense of the department. You can benchmark that last number against industry standards to see if it’s reasonable. It’s important, because compensation is the biggest expense within the department.
Training for the Financial Statements
Outside of risk management and overall department management, the other area in which to get some training is your employer’s financial statements. As the CFO, you’re the person that investors and lenders are going to talk to about specific items in the statements.
Which means that you need to fully understand every single line item in the financial statements, as well as all of the footnotes. Look at this from the perspective of a CFO who’s running a public company. You might do quarterly earnings calls with investors, and they can badger you about absolutely anything that was included in your quarterly Form 10-Q report. So you’d better be prepared.
This means that you’ll need a detailed knowledge of the structure of financial statements and the ratios that outsiders are likely to apply to them. This isn’t difficult. I sell a book called The Interpretation of Financial Statements, as well as the Business Ratios Guidebook, and again, you can find alternatives on Amazon. Read these books in detail, and keep them on your bookshelf. You might have to refer to them a lot, especially during your first few months on the job.
In addition, you’ll need to sit down with the controller and go over the contents of every single line item in the financials, so that you really understand what goes into them. And, you’ll need to do this after every set of financial statements is released, because you’re the one who’s going to be asked about them.
So, what is the learning curve like for all of this? Steep, for the first few months. And if you change industries, then there’ll probably be a whole new set of accounting rules that you’ll need to learn. But realistically, once you get over the initial hump of book learning, it’s mostly about keeping up-to-date on changes within the accounting department, and on changes in the financial statements.