Poor CFO…
These videos are becoming more and more entertaining – after the stunning Visa Commercial Add I have now found a video from Oracle that literally draws a very different picture of CFOs and their daily challenges.
Digital Capital – new accounting approach needed.
Here a true eCFO topic – accounting! Before you stop reading – this is really important – so stay with me. I first picked up on the topic when I started working with our Facebook agency on their generic group concept. By now we have over 1 million fans in general Facebook groups that we “rent” out to clients in order to advertise to a specific target segment. I argued back and forth with our accountant that the capital we invested is in fact not a period expense in our P&L but that we are actually building a long-term asset that should show up on our balance sheet. I lost the argument but still know that I am right – just our accountings standards have not yet caught up with the “digital revolution”. Now McKinsey seems to agree – the consultancy published a new story that focuses on “digital capital” (LINK)
In their conclusion they highlight that even though accounting has not caught up – companies need to act now and explain to investors that they are building assets even if their balance sheet does not reflect it (yet). Capital allocation needs to be quickly adjusted in almost all industries to catch up with changes brought by the rapidly developing digitalization:
“The need for growth and competitiveness will force companies to build strong digital capabilities. Viewing them as assets rather than additional areas of spending requires a new set of management and financial lenses. Embracing them is a major shift—but one worth making for companies striving to master a still-evolving landscape.”
They continue to highlight that companies really need to focus on collecting and analyzing data from their activities. The digital development combined with big-data analysis capabilities offers new business opportunities but also threatens established players that are to slow to react.
“Since identifying intangible assets is difficult, companies may be missing growth opportunities. Many have realized only recently that they can use social-media interactions with their best customers to leverage innovation efforts or that they may have unused data they could restructure into valuable big-data assets to sharpen business strategy. Similarly, companies should take stock of how digital capital they don’t own may be relevant to the business. A retailer that doesn’t have access to digital behavioral data on consumers, for example, may be at a disadvantage. So could a bank whose customers access products through a third-party platform that limits the bank’s ability to capture information.”
So what now? We need better accounting methods that reflect the real value of digital capital allocation but this is not going to happen quickly. eCFOs will need to do a much better job explaining to markets, shareholders and capital providers how they are planning to make money due to their digital capital investment. Financial statements will again become more irrelevant for company valuations and future earnings expectations.
eCFO Tips continued….
September & October 2012
eCFO Tips: Always do a beauty contest when it comes to selecting advisors/service providers. No matter how small you are, always have at least 3 potential advisors compete for business. You will learn a lot through these interviews and it will be time well spent. Make sure you also invite people from various background e.g. individuals, small, medium and large firms.
eCFO Tips: Remember your consultants/advisors will only be as good as the information you share with them. You should regularly update your advisors and MOST IMPORTANTLY the people who do the actual work on a daily basis (junior staff) at least once every quarter. Invite them over to your company and give them a general update on how things are going. This will ensure that they will provide you with sufficient advice. It will also save you money since advice will generally be better and you will not need as long to bring them up to speed if an urgent matter arises. Throw in some nice food and drinks and I am sure your work will always end up on the top of the pile 😉
eCFO Tips: Pricing – often it is going to sound like the hourly rates of your advisors are set in stone. This is not true – make sure that you negotiate not only the hourly rates but also yearly accumulated fees e.g. if you go above EUR50k you get an overall discount on all accumulates fees for next year. In addition, ALWAYS ask your advisors if they are willing to take some risks and enter into a performance agreement. Even if they do not end up doing it, you will find out how convinced they are with regards to actually being successful.
eCFO Tips continued …
August 2012
eCFO Tips: Communication, communication, communication… when it comes to strategic decisions never assume that you know what each stakeholder wants. You will most likely approach a decision from a financial analysis perspective – most other (normal) people will not think that way – so make sure you talk to everyone and do not assume anything. Often you will be surprised – sometimes pleasantly and sometimes not so :).
eCFO Tips: Do not be afraid to think about new things. If you are working in an innovative start-up there might be lots of balance sheet optimization questions that nobody has really thought about. Are facebook fans in generic groups that are rented out for advertising assets? Should the initial investment into these groups be on your balance sheet and depreciated over time? How do you value your investments in other start-ups? What happens with your old, cancelled projects? Make sure you have good advisors and get lots of support when tackling these questions.
July 2012
eCFO Tips: Especially in a start-up environment do not get bogged down in the details. If you are looking to establish financial goals do not say EUR9,287 because your business plan spits out that number – instead just define easy to remember goals e.g. we need EUR10,000 revenue per month with at least 30% EBIT. Do that for 3 months in a row and this business starts to be viable. This is an easy rule for not only you to remember, but it also sets a financial target the management team can work towards.
eCFO Tips: Make sure that management teams can differentiate between expenses and investments. In our company everybody gets a VOIP phone installed on their computer and uses a headset for calls. We do not have actual phones anymore. Nevertheless, the FolienKnecht team requested to spend EUR40 for an actual phone – it took a long discussion for them to convince me that this was a necessary expense and approval took a while. At the same time I suggested that they should get together with the city of Hamburg and sponsor a networking event. Sponsoring fees here were a small 4 digit amount and they asked why I did not have a problem with such a comparatively large amount, versus all the hassle for the EUR40 phone. The answer is easy – for a start-up it is essential to spend money on the RIGHT things not on those that are nice to have. As an eCFO it is your responsibility to ensure that this principal is actually enforced and that every expenditure is measured.
eCFO news for start-ups! 