📬 Mind the gap: Is the leap from SMB to corporate CFO even possible?

Mark Z. from Tampa, FL asked:

How do we balance learning technical accounting knowledge through our careers, with operational and finance knowledge? How do we manage knowledge gaps since the CFO role is so broad?

Hey Mark.

I’m not sure I’d quite categorize the skills you need in that way. As you say, the CFO role is incredibly broad. You need to build many skills to a minimum acceptable standard: controlling, treasury, leadership, FP&A, communication, etc.

I think there are about 20 of them in total (I wrote more about it here).

So you need a minimum competency level in all of them. And then you need 4 or 5 of those that are your specialty; your areas of deepest expertise. Focus on becoming a total boss at those things.

It is the combination of those 4 or 5 things that makes you unique in the finance profession. The art is matching that combination with a suitable CFO role.

For me, I found that my strategic mind, communication skills, speed with numbers, and bias for action lent itself well to turnarounds. But for you, it will be something different.

Of the skills you actually ‘need’, you’ll find only a small number of those are what you might call technical accounting skills. Developing your leadership skills and broader finance and operational skills is much more important.

But the strict answer to your question lies in where you are now, and what sort of CFO you want to become. So spend some time thinking about this. You might find this scorecard useful.

Thanks for the question.

DJ from Austin, TX asked:

In the context of computing valuation, how do you take into consideration maintenance capex vs. growth capex to determine the value of a business? And if the EBITDA multiple you use assumes future growth consistent with historical growth, would it be fair to increase the maintenance capex to include "baseline" growth capex?

I love this question. Let’s get nerdy.

One way to account for these variables is through building a discounted cash flow. Reflecting the total capex requirement, overlaying the associated growth in the future cashflows, and working it back to a valuation.

My problem with that approach is that it means making a bunch of assumptions at a level of detail you probably aren’t informed to make (assuming you are buy-side). You just won’t know the business well enough.

So I tend to prefer working with a smaller number of assumptions that are easier to rationalize at a high level. That is why I generally like using multiples to find a value (I wrote more on this here).

I look at maintenance capex as the level of capex required in the business to maintain EBITDA at the current level, i.e. replacing existing equipment, remaining compliant with legislation, and enough advancements to keep pace with the industry.

That number could be different for two different businesses - even in the same industry, with the same EBITDA. Depending on the shape and quality of their assets.

This is why I like to calculate multiples based on current EBITDA minus maintenance capex, rather than EBITDA, as a sort of simple operational cashflow. I call it Proforma MFCF. I wrote about this a couple of weeks ago.

I’ve seen some smart PE funds using the same metric to benchmark transactions, too. It means working with higher multiples. But as long as you are consistent in methodology, that doesn’t matter, and I do think this is much more robust. For the record, I’d treat any recurring working capital flows the same way.

And what about growth capex? Well, the multiple you apply to that simple cashflow measure versus comparable transactions should reflect your confidence in the likelihood that cashflow measure can grow over time.

So the question becomes to what extent can EBITDA grow, and how much growth capex will be required to make it happen. The relationship between the two should determine how brave you can be with the multiple you apply.

This is a technical area, so there is lots of nuance, but you can deep dive into the pieces I’ve linked. I hope that helps.

Thanks for the question (and for allowing me to nerd out), DJ.

Richard from UK asked:

What are the biggest differences between being a CFO in a large corporation vs. SMB? Is it possible to move from SMB to corporate, or are employers dismissive of CVs including smaller companies/teams?

I’ve focused on SMB to try and gain a wide range of experience but feel it may be difficult to transition from one to the other.

Thanks for the question, Richard.

Your hunch is right, that transition will be difficult. Being an SMB CFO is very different from being a CFO in a large corporation.

Both are great paths that suit different people. But they are different…

In an SMB CFO role, you will likely have broader responsibilities (maybe even beyond finance). You will also need to get more hands-on, with fewer resources at your disposal. And as long as you pick the right business/team, you won’t have the distractions of the complex stakeholder management (and politics that come with it) of a larger business.

But managing that complexity is a huge part of a large company CFO role. Leaders who grew through large organizations have built these sophisticated influencing skills on the way up. These are harder to acquire (and demonstrate) in smaller companies.

I have seen people attempt to step into large corporate leadership roles from smaller businesses in the past. Often they have looked like a fish out of water and struggled to get anything done. Mostly for this reason.

Likewise, I’m seen a few large company finance leaders step into an SMB CFO role and struggle with the breadth.

In a large business, as CFO, your role is predominantly resource allocation and decision-making. Making sure the right people are working on the right things. And the review mechanisms are in place to make sure the work quality is high. There is always a time and place for getting hands-on but knowing when is a delicate art.

Fixing problems through other people (rather than fixing them yourself) is an essential skill for a leadership role in a large corporation. Again, this is a difficult skill to build at the scale you need in a small business. I’m not saying it’s not possible, just that it’s harder, and you’ll need to go looking for it.

A CFO of an SMB would likely have to come into a larger organization at the controller level and start climbing. You would have to be super committed to that transition to make it work.

In the meantime you have built a bunch of skills that are suitable for SMB finance leadership, so why not play to your strengths … Let me present an alternative path to becoming a large company CFO:

Join a rocket ship startup that may be smaller for now, but won’t be for long. Demonstrate you can grow and evolve as CFO within the different stages of the business. And you will level up as the business levels up.

The trick is to get to where you want to go, by exploiting your demonstrated strengths.

Every week I’ll share a book I loved or found useful.

This week is one I used to research the Financial Due Diligence Playbook series. This is an old one, but stands the test of time.

PS - if you missed the third week of the FDD series, you can read it here.

A few of the biggest stories that every CFO is paying close attention to. This is the section you don’t want to see your name in.

Goldman Sachs CEO says that AI can draft 95% of an IPO prospectus in minutes

Ok, maybe it’s worse than we thought for the industry. The DJ/CEO of Goldman Sachs said at an AI conference this week that 95% of an S1 can be completed by AI. The robots are coming…

SEC charges Robinhood with securities violations, brokerage to pay $45 million penalty

There are oversights and mistakes. And then there is whatever the hell is going on at Robinhood. According to the SEC, “Robinhood Securities made at least 11,849 EBS submissions to the Commission that contained inaccurate information or omissions.” New high score.

Perplexity AI makes a bid to merge with TikTok U.S.

Nobody, and I mean nobody, had a more stressful weekend than Perplexity’s CFO. Ok, well maybe whoever is running finance for MrBeast…

How to have the best meetings of your life

This isn’t usually the sort of thing I share, but this - by Evan LaPointe - is the most thoughtful breakdown of running a successful meeting I have ever come across. It is well worth your time.

ICYMI, some of my favorite finance/business social media posts from this week.

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Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need.