We look at some of Michael Lasch’s Truth Statements, as this entrepreneur reflects on his career to help guide the future of CFOs in South Africa.
My working career spans 30 years, of which two thirds were spent in an ‘employee’ state, and one third was in the space as commonly referred to as ‘owner-managed’. In this article, I am firstly commenting on my perception, experience and view of these two differing states, admittedly where I have a bias toward ‘owner-managed’. I believe each individual’s preference has much to do with his / her psychometric profile, something we are born with. Secondly, I will make some comments on my experience in the role of CFO. And lastly, I wish to comment on the business discipline I am involved in, which is still rather unknown and often misunderstood, and that is of Good Governance.
How it all started
My career started two weeks after my 18th birthday. I went straight from Matric into serving a five year Articles Contract with Alex Aiken & Carter(now KPMG). I was studying towards a BAcc (Bachelor of Accountancy) degree, part-time.
I landed up doing seven years’ Articles, as SAICA penalised me for two years for having broken my studies and articles in the fourth year, to ‘sail the world’ on a 47 ft yacht. It was worth the penalty, and I would do it again!
I completed the BAcc degree at Wits, and wrote the Board Exam to hold the designation CA(SA). I joined a multi-national company as cost accountant, and in the second year, I was appointed the CFO, a role, I held for 10 years. My exposure to operational business was tremendous, where at first we ‘unbundled’ all the different operations, to sell off and close those that were not contributing to the company’s sustainability. Thereafter, it involved implementation of stringent controls and the management of working capital, inclusive of sales and production planning.
Ultimately, I initiated a ‘merger’ transaction with two competitor firms (here in SA) to realise synergies and greater profitability for shareholders.
After 11 years with the same company, I realised that there was a big decision at hand (I was only 36 years old). I could stay on as an executive director, and manage the growth and profitability in return for a reasonable package for more years.
Alternatively, if I needed a bigger challenge (and bigger package), this was the time to put my CV into the market. A third option was to pursue what I believed was my passion and skill, namely, “business turnarounds”. I opted to pursue option three, and effectively went for ‘owner-managed’ employment.
Initially this meant selling my skill and any value I could offer to any organisation that saw merit in the contribution I could make. It comes with two immediate challenges:
- Unsustainable work, providing a regular income stream and
- Immediate confidence in one’s skill and value offering
“A third option was to pursue what I believed was my passion and skill, namely, “business turnarounds”. I opted to pursue option three, and effectively went for ‘owner-managed’ employment. ”
I was fortunate; I immediately got an engagement as an interim CFO of a listed company, employing over 4 000 staff members and commanding a turnover of over a billion Rand.
By virtue of a relationship made in this role, my next bigger assignment was as a financial advisor to SARS on one of their biggest tenders that went to market.
Concurrently to these engagements, I was approached to be part of multiple start-up companies. I currently sell my skill and value to three of these start-up companies that I was involved with as a ‘founder member’.
That is enough to give you context. It is from this that I share some of my experiences as ‘Michael Lasch Truth Statements’.
(My disclaimer: These have held true to me. I imagine I will not be alone in these observations. However, I also recognise that some may have had different experiences. I have also limited these to just 10 for this article)
“The CFO must have an intimate understanding of the product range and production, as the monitoring of costings and margins is critical for bottom line profitability.”
As a CFO ML Truth Statement #1:
The CFO is the executive director that needs to know the most about the company: “Knowledge is Power”.
The big plus of being CFO is that you can make anything and everything in the organisation your business from strategy and feasibility studies, to risk management and applying financial measures to every risk.
By virtue of the target setting / forecasting and budgeting responsibilities, the CFO is intimately familiar with product performance, major customers and suppliers, commodities sourcing, staffing levels and remuneration policies, financiers and related interest rate trends. The CFO must have an intimate understanding of the product range and production, as the monitoring of costings and margins is critical for bottom line profitability.
He / she is also the one that takes responsibility for controls to be in place to prevent pilferage of stock or company consumables, unauthorised usage of company assets, or misappropriation of funds.
ML Truth Statement # 2:
The CFO has the greatest influence by applying the most significant and effective control mechanism, namely “holding the Purse strings”: Approving every invoice for payment CFO Feature136 Here I propose that the CFO apply the Pareto Principle (80/20 Rule), where every invoice must be sighted of those that make up 80% of the monthly spend (it will only be 20% of the pile of invoices). Do random reviews of the balance of invoices, and allow ‘Murphy’s Law’ to kick, in order to hit the invoice with the irregularity. During the listed company assignment, it took me one whole day in the first month, and then only half a day from the second month onward, as I knew what I was looking at by then. The monthly spend was in excess of R50 million, and in excess of a thousand invoices.
ML Truth Statement # 3:
The CFO’s biggest Risk (that I will name ‘inhibitive risk’), is one that comes
from shareholders and boards, namely being relegated to “director of administration and finance”: The only expected deliverable is monthly management accounts.
I have witnessed CEOs becoming insecure about knowing less than the CFO, to the point where they limit the CFO’s responsibilities. The greater unfortunate occurrence is that the CEO does not always recognise the contribution the CFO should be making to the CEO functions (ie the CFO is like a ‘wing man’), and excludes the CFO from discussions where there are risk and financial consequences to the Organisation.
My advice is to clarify roles and functions ahead of accepting an appointment, purely based on ‘designation’, having performed a due diligence of the organisation, to know the extent of the challenges ahead.
ML Truth Statement # 4:
Sustainability only prevails where the owner-manager has a skill to sell. Knowledge alone is usually not enough. As an ‘owner-manager’ one needs to be prepared to do every other discipline required in the business. One must be able to Sell, one must be an expert on the Product, over and above the disciplines of Financial Management, encompassing controls and administration.
I believe the greatest obstacle to the sustainability of start-up owner-managed organisations, is not being able to do the selling part of business growth. Clearly, the product must be of sufficient substance to have a market.
ML Truth Statement # 5:
Avoid investors that only bring ‘cash’ like the ‘pest’. Investor is just another form of financier. They are willing to share in ‘downside risk’, but generally are studious enough not to invest in start-ups that have downside risks.
The returns, sought are similar to those of ‘loan sharks’. Everyone knows that ‘loan shark debt’ would be debilitating, and yet the same warning lights are not there for investors that want even higher rates of returns.
The consequence of getting such investors, is that the effort of the entrepreneur is not met with the fair reward. The cash investment gets a disproportionate equity assignment in relation to the time and effort of the founder member doing all the work.
In my experience ‘optimal’ Investors are those that don’t just bring Cash, but bring synergies or additional market opportunities, which value contribution in itself yields a sufficient return to service the ‘Cash Investment.
ML Truth Statement # 6:
Initial Cash flow constraints are directly correlated with the extent of ultimate reward benefit when achieving profitability and dividends (read in conjunction with ML Truth Statement #5)
Initially, instead of drawing earnings for effort, there is a high likelihood of needing to ‘invest’ in the venture. The cash flow goes in the ‘wrong’ direction, and this can last up to five years, depending on the nature of the venture. ‘Selling time’ (and by this I mean selling one’s skill at an hourly charge) is the closest to an ‘employee’ engagement, and similarly requires the least ‘investment’. However, developing a product to be sold in the future has far greater risk attached to it, and the lead-time for earnings is longer. My advice is to start with a hybrid: if you are developing a product, fund it by selling your skill concurrently on a time and materials basis.
ML Truth Statement # 7:
Most working people must come to terms with the fact that there will be multiple years of NIL earning in their lifetime. The difference from person to person is the timing of when that happens, and how many years it lasts for. The normal end time as ‘employee’ is at the age of 65. In my family, with a genealogy of longevity, this prospect is scary, as 95 years of age is not unlikely. That means that potentially for 360 months, I will have living costs with no income.
My alternative is to have taken a 100-month break from ‘consistent income’ in my forties. My expectation, with a successful venture, is that I will have an income stream for the remainder of my lifetime, certainly as a minimum, 100 months beyond 65, but hopefully closer to 300 months.
ML Truth Statement # 8:
Governance is grossly misunderstood. Most think of Governance as an additional compliance exercise, one that entails abiding by rules and having paperwork in order.
‘Governance’ is rather a term that describes the collective of the aspects that the leadership aspire to and get right. To me, the major aspects are:
- ‘Ethical behaviour’ by all (from board member to every staff member)
- ‘Competence’ by all to fulfil respective functions
- ‘Fairness’ toward and with all stakeholders and encapsulated by the common sense practice of aspiring to have good relationships with customers, staff, suppliers, regulators, unions, shareholders, the media, SARS etc
- ‘Strategy’ and ‘risk management’ done properly (this the biggest indicator of sustainability, ie consistent long-term profitability)
- ‘Internal and financial controls’
- ‘Transparency’ primarily achieved in the quality of communication and reporting
ML Truth Statement # 9:
Good Governance will be a product of seeking to be a responsible corporate citizen with the objective of fairness to all stakeholders being prioritised by its board.
My idealism dictates that all organisations should have as a priority the responsibility to be good corporate citizens. By that I mean that organisations should seek to exist for the benefit of the multitude of stakeholders and not primarily for the shareholders alone. The manner by which this can be achieved: a genuine pursuit by the board and executive directors to make sure that every transaction and relationship that the organisation has is fair and just.
ML Truth Statement # 10:
The realisation of what I set out to do: “business turn-a-rounds” I have come to realise that the most proficient manner for a ‘business turn-around’ is by the application of robust risk management thinking. The biggest risk that makes for business failure is bad stakeholder relationships. It most often materialises in poor staff (the good staff leave early), consequential breakdown of relationships with customers, contractors and service providers. Some bad press from the media, and the writing is on the wall for a business failure.
I look forward to the opportunity for the stakeholder management interventions that we are embarking on, whereby we assist organisations to identify their material stakeholders, the related risks, and then provide the measurement of the quality and strength of the relationship, and the means to improve these.
Ultimately, a company that has good relationships with all its stakeholders is a sustainable organisation.