What Every CEO Needs to Know About CFOs, KPIs, and Financial Systems

I think like when it comes to running a business, think of it like being a—so can you imagine like, where's the last place you flew? Arizona. Okay, Arizona. So imagine getting on the plane and the pilot's like, everybody take your seats. We're going to be taken off here. And he has his co-pilot and he's like, okay, we're going to take off.

And when we get up in the air, run back to aisle 23, lean over the passengers, look out the window, make sure the landing gear’s up. Okay. So the pilot takes off, co-pilot runs to the back, goes to aisle 23, looks out the windows, like the landing gear’s up, he runs back in and he says, okay, halfway through the flight, can you go in the back? Check how much fuel we have.

Can you stick like that rod down in the tank and like figure out how much fuel we have so we don't run out of fuel? He's like, sure thing. I mean, that’d be insane. I mean, you'd probably be like super nervous, right? Getting off the plane.

You're like, I'm getting off the plane. I'm not doing this. And I think so many people run their businesses that way.

They're just flying blind. But pilots, they have this dashboard with all these little gears and widgets and whatnot, which tell them, okay, the plane is—the wings are level, or you have enough fuel, or you have this, or the lights are on, whatever it may be. And for companies, it's like, when I go into businesses and I ask them some basic questions—and no shame, no harm, no foul if this is you, okay, trust me, I was in a worse position when I was running my first company.

But when I asked them, okay, what's your gross profit margin? What's your operating profit margin? What's your throughput? What's your lifetime gross profit to customer acquisition cost ratio? What's your return on invested capital? Your return on labor? Just some core metrics such as these. They're dumbfounded.

Or they'll say this like, yeah, our conversion rate is about 30%. Our retention on our contracts is about 85%. And it's about, or you know exactly what it is.

So oftentimes we're just guessing. The good news is, with this generation that owns a lot of businesses right now, the baby boomers, they started these companies years ago. And just through sheer grit and experience, they were able to build successful firms, right? Like we know a lot of the founders that we work with, and this is the situation they're in.

Now, these founders are like, okay, we need to leave our business one day, exit, and we're going to hand our business over to the next generation. And the next generation is going to come in. They don't have that experience.

They don't have that gut feel. They can't say, yeah, our retention rate's 85% because they don't know. So if you don't have a dashboard in your business, number one, as a founder, you don't know what's going on.

You're just guessing. Number two, it's going to be really hard to like understand what's working and what's not. And if you ever go to exit, how's anybody going to come up behind you and make the same decisions? Because they don't have that experience.

They don't have that context. And so I'd say like the first thing you need to do is you need to have visibility at the key performance indicators. You need to have a KPI dashboard.

You need to have financials, right? And you're reviewing them on a regular basis. You need to have a forecast, not a forecast from January to December, and you redo it every year. I'm talking about a rolling forecast.

So every month, you know what the next 36 months looks like. And these are just the basic tools that so many businesses need, but so many CEOs lack. And CEOs, they know they lack them.

And oftentimes they're frustrated because they don't have them with the CFO or even without a CFO.

And so how come KPIs are one of the first stepping stones into building a well-oiled business?

Yeah. I think it's because if you have a really good KPI dashboard—like we have our own platform here at Coltivar, and I think I'm a little biased, but I think our KPI dashboard is great because it just gives you a quick snapshot. But I think that's what it is. If I gave you the financial statements, and you don't have the financial background—you hear me talk about it all the time, Mel, and you've been to some of the workshops that I've put on, right? But if I gave you the financial statements and I'm like, here you go, Maya. Here's the income statement, the statement of cash flows. Come back to me in an hour and let me know, like, where's the business off track? You'd be like, uh, you'd go line by line, maybe like gross profit. This seems kind of low. I think he's talked about this before and you'd be lost, right?

You're a smart girl and you could read through the financials and understand, okay, I think cash flows should be higher than this generally. And that's how a lot of business owners are. But the KPI dashboard helps you to focus on what matters most. And the KPI should be measuring the strategy and the effectiveness of the strategy. But it's not about just having a bunch of random KPIs where you're just tracking all this stuff.

It's being able to pinpoint, we have a problem with customer acquisition, or we have a problem with our liquidity. And the KPIs, they give you just a very quick snapshot. So then you can act with precision. The financials are good, but oftentimes you have to understand the story behind the numbers and the KPIs help you to understand that story.

I think that's great. And you talked about the KPIs being very targeted. What other traits does a good KPI consist of?

Yeah. I think like having KPIs that tell you how your business is doing is good, but then being able to set those targets as you alluded to, and having benchmarks to know what you're aiming towards is really important. So it's like, okay, your gross margin is 28%. Good to measure. What should it be? And that's where you should have the side-by-side and say, okay, we're 28%, we should be 35. And then your team understands, okay, what are we working towards?

It's Peter Drucker. He said once, what gets measured gets managed. And just by measuring stuff, you'll drive better performance. But I think so many teams are out there, they're working hard. They just don't even know what they're doing. What game are they playing?

I mean, it's like, imagine playing football or like, what's your favorite sport? Soccer. Okay. Soccer. So you go to a soccer game and you're sitting there for an hour, right? And somebody asks you, what's the score? And you're like, oh, they're not keeping score. That would be probably a boring, what the heck am I doing here? Give me a refund.

So I think it's like, if you don't know what the score is or what are the rules of the game or what's the target, then yeah, it's very difficult to understand what's going on in the business and to drive better performance.

So going back to the beginning, I'm a CEO looking to hire a CFO, but I'm not a very financial person. And if he came and told me all of this, I'd be like, I don't even know my data. I don't know my numbers. How would I even begin tracking them and translating them into goals and KPIs?

Yeah. And I think that's where you don't necessarily need a CFO. Like we work with companies that don't have CFOs because we bring the system. So that's where I was saying like, start with the system first, because some people are like, we don't have a system. So we're going to hire a CFO, but then CFOs come in and they don't have a good system. And owners get frustrated.

I was talking to a founder the other day in California. He's like, yeah, we just hired a CFO. And like, I'm getting frustrated because I'm asking for basic things. Like I need a forecast. I need KPIs. I need to know what a break-even is. And the CFO is just struggling to bring it all together. It's not that CFOs are bad. It's just there's one skillset, which is being an architect, like designing the system. And then there's another capability or skillset of like running the system. But it's very rare to find a CFO who can build a system, design a system and run a system. And that's where, you know, CEOs have to be careful.

So I think like it first begins with bringing in somebody who has a system, the KPIs, the forecast, all the tools, and then you can embed a CFO. So it's similar to companies that go in and they hire salespeople, for example, like, okay, I'm going to hire in some salespeople, business development reps, and I'm going to have them come in and build the system as they're doing sales marketing. Terrible idea. Okay. I've seen this fail over and over again.

Instead, I think it's best to invest in a system. Be like, okay, here's our funnel. Here's our offer. Here are the scripts. Here's how we do sales calls and like have a system in place. Then bring people in and say, this is the system. I need you to like, do this, follow the script, close like this, et cetera. Instead of expecting somebody to come in and build the system. It's just hard to find somebody with those skillsets, a doer and a designer.

Okay, Steve. Great. Now I have a system and I'm ready to hire a CFO. How do I know if they're a good fit and right for my company and also good at their job?

Yeah. It's, oh my gosh. Oh, I'm working with a founder right now and he's just cleaning up the mess of, it wasn't a CFO. It was a financial manager, like an accounting manager that he hired. And he's like, Steve, I think we're about $200,000 in the hole because of this person. Because they're making mistakes with compliance, with tax filings, with all sorts of things.

And this is just because of one person.

Yeah. Just because of one person. And what's crazy, and this is why it's hard, right? I'm saying it's hard to find the right person. I was part of the interview process and, you know, so I was sitting in the interview and I'd ask tough questions. This is how I can vet people out oftentimes from a financial perspective. So I'll come in and be like, okay, where do you find CapEx, capital expenditures on financials? And if they're not saying on the statement of cash flows, under investing activities, I'm like, okay, you don't really understand the statement of cash flows.

Or I'll say, okay, if we have a problem with gross margin, what are the three levers you can pull? And sometimes they're like, I would look at my labor, reduce my advertising. They say a bunch of random stuff. I'm like, no, it's three things. You change your price, you increase your volume, or you reduce your cost of delivery fulfillment, like reduce your cost to get sold. So I can ask targeted questions to like check their financial acumen.

But then like, it comes down to a person understanding the entire system of how it works. So sure, they may be technically proficient and they may be able to do certain tasks, but you have to connect everything together. So when you are entering in these receipts into the system over here, or you're creating a chart of accounts over here, how does that impact the financial statements? And then how does that flow through to the forecast? And how does that feed into the KPIs?

That's the challenging part because it's an entire system, right? Accounting is this entire operation of the business. Then it has all these interconnected parts. It's tough finding a good CFO.

And then the trust piece is big. Like we run background checks on all of our employees, especially in financial roles. Like we always recommend that our clients run background checks. And one of our clients recently ran a background check on a new hire and they had this criminal history of like theft and everything else. I’m like, thank goodness you ran this background check because they were going to have financial responsibility in your business.

So I just say like, it’s tough to hire the right person. It begins with trust, and you’re going to be spending a lot of time with this person. So make sure that they can pass like the ski trip test. We’ve talked about that for us. Like we live an hour and a half from the mountains in Colorado. It’s like, if you’re going to go snowboarding for the day or skiing for the day with somebody and they’re stuck in the car with you, if you want to jump out the window before you got there, they’re probably not a good fit.

So I just think it’s like, spend a lot of time with them and make sure they’re technically proficient and then ask them questions which will help you to understand their way of thinking and solving problems and looking at data. And the more specificity you get from them, the better. So if you ask them, okay, we are struggling with sales and marketing, what are like two or three things you’d pay attention to? And if they’re not coming in with specific metrics like, “Oh, I’d look at our LTGP to CAC or lifetime gross profit to customer acquisition cost, and our ROAS—return on ad spend,” if they don’t give you specific KPIs, then you know they may not truly understand the role.

Yeah, I think that’s great because you not only are trusting them with your business, but also your life—especially at the C-suite level. It’s more than just a job. It’s part of your identity and it trickles down into your personal life.

Yeah. So I think that’s really important as well. And it can be threatening. Like, we go into businesses and we talk to owners all the time and they’re like, “I already have a CFO. We don’t need your system.” Because our system—we come in, we have the technology, we have the KPIs, we have everything to manage your strategy. And they’re like, “We already have a CFO.” And I’m like, “Good news, because we’re not CFOs.” And they’re like, “Well, I have a CFO. I just don’t want to offend them.”

And it’s like, you have to break out of that mindset because if your CFO is going to get offended, then that’s a red flag. Right? Because like I said, it goes back to just because they’re the CFO doesn’t mean they’re a good architect of the system. And hey, that’s okay. You don’t expect them to be all things.

But I think having the right tools in place is really critical. And oftentimes CFOs, they come up through the ranks, they go to school, they get their degrees in accounting and finance. They go into public accounting, or they take on an accounting role. Then they work their way up through the ranks and they become CFO. Yeah, that’s great exposure. But when it comes to being a strategic CFO, oftentimes you don’t get that training in school and it’s just an entirely different skillset.

And that’s why relying on outsiders who have built a system and who have designed the tools can be a nice connection point.

So it sounds like system, system, system. That’s so important. And it sounds like it’s also an ecosystem in a way—that every department and every role is trickling down and affecting other roles or people they haven’t even heard of in the organization. What happens if one part of that or one branch breaks?

Yeah. I mean, and that’s a good point because when I was the CFO of this billion-dollar company, I was working very closely with people. Our people department reported up to me, our technology department reported up to me. And so here I was running those parts of the business. And then the CEO is taking on more of the strategy and growth side of the business. And then our COO was handling operations. And so there were a lot of functions that I was managing and leading because there is that interconnection.

And I think the CFO is oftentimes the orchestrator of these functional departments in a business. And that’s why they have to be so close with the CEO. But when things start to break down, that’s where you have to get in there very quickly and identify what is the problem and fix it. Because if not, things will deteriorate very quickly, or they’ll become disjointed. You’ll have the people department adopting this new technology or signing up for this, you have a different system or process going on over here with tech, and it just becomes like this jumbled mess, which can get out of control very quickly.

So Steve, I’m a CEO, already got my system down. I know what’s working great. Do I even need to hire a CFO now?

I mean, it’s a good question. I mean, there’s this trend happening in business too, where the COO, the Chief Operating Officer, is playing this dual role of ops and finance. And I think that can work for some companies, and sometimes you don’t need a CFO. But like I said, I mean, there’s some firms out there that are doing $50 million a year and they don’t have a CFO because they have really good systems.

I’m not against the CFO. I’ve been a CFO for a lot of companies. I just think if you have a really good system and you’re getting the data insights that you need—if you have a really good strategy and you know what’s driving value—then hey, maybe you don’t need to take on that additional expense. Because a CFO full-time is very expensive. It’s a lot more expensive than a system.

What can you draw from your personal experience as a CFO for many million and billion dollar companies? How has that translated into Coltivar and your new perspective on a system?

Yeah. Well, I think working with a CEO and a CFO—that relationship has to be in lockstep. That’s like the biggest thing that I’ve learned, that you have to be partners with the CEO. I think that’s taught me a lot because I worked with a CEO very closely back in the day and he didn’t have those financial skills. Like he hadn’t come from a financial background.

So he’s a very smart person, he’s very, very brilliant when it came to operations of the business and growing the company. But giving him financials—he just didn’t understand. So we built this relationship, we checked in a lot, we talked a lot with each other, but I also said, “Okay, you need to know just the basics.” I’m not talking about you being a nerd, doing like debits and credits and wearing a green shade in the back office, but you need to know the basics.

And so that was a big lesson learned. Because if the CEO doesn’t understand the numbers, it doesn’t matter how good of a system you have because they may not prioritize it or pay attention to it. And therefore that trickles down to all other parts of the business.

And then the CFO could feel very lonely because they’re working in isolation. They have these benchmarks, they have these KPIs, they have these forecasting tools, but nobody cares because the tone at the top says, “Hey, financials aren’t important.”

How common is it for CEOs to not know their numbers that well?

Well, I mean, it’s crazy. Because when we start diving into a business and looking underneath the hood, you would think these professionals—and sometimes they’re CPAs—you’d think that they would understand certain things. I mean, we were talking about the other day about the chart of accounts. It’s like, basic things.

Okay, your chart of accounts should be numbered like this. Best practices: assets should start with a thousand, or ten-thousand account numbers. And liabilities should start with a two, and equity should start with a three, and revenue with a four, etc. Just a chart of account setup—just basic things. And you go into some of these companies, managed by CPAs or CFOs or bookkeepers or whatever it is—these professionals—and it’s a mess. And you’re like, “What the heck?”

I just think that there is a massive gap with accounting and finance. It’s a skills gap. It’s a capabilities gap. I mean, a lot of people—they’re like, “I just don’t want to learn that stuff. That’s for the nerds and the birds.”

And my brother-in-law, he’s actually a partner in an accounting firm here in Colorado Springs, in fact, and he’s telling me, “Yeah, we have to turn down work. We have all this work out there for us and we have to say no to it because we don’t have the staff, because people aren’t coming through these programs at school and they’re not graduating with accounting and finance degrees.”

So I think the gap is going to get bigger and bigger. That is troublesome to me. But to answer your question: sure, it’s very common. It’s very common that you could have a CFO or a professional on your team—or use an outside company—and things are incorrect and it’s costing you a lot of money and you don’t even know.

So you referenced how the financial roles now and in the future aren’t going to be filled as fast, or there’ll just be less people in general taking those roles. What does that mean for the future of business and the economy and people being hired?

I think a lot of business owners have hope and optimism in the power of AI, which I think AI can support financial and accounting professionals and free up their time to do more stuff and do more capacity. So that fills some of the skills gap.

My concern is that AI is intelligent, but it doesn’t provide wisdom. So you can put all your numbers into AI, and it’ll spit out: “Your gross profit’s this, it should be that, do this,” and could give recommendations. Like we have AI built into our platform, right?

But the limitations include the wisdom that’s lacking—because it’s so nuanced. Think about it. Your business has a million bucks in profit. And you’re like, “Okay, is this good?” And AI says, “This is great.” And you’re like, “Okay, it’s great, but it took a hundred million dollars of invested capital to earn the million.” That’s not great, right?

But AI doesn’t understand all the nuances and the systems and the flow in a comprehensive manner. Or it’s like, “Yeah, that’s great, but you have all these health problems at home and these medical expenses, and Johnny needs this, and you have this other pending lawsuit,” and all these other weird nuances of the business, and it’s like the million is terrible—you need five.

So I think AI lacks that wisdom and that nuanced response that so many business owners are craving right now.

So Steve, you talked a lot about financial literacy. Do CEOs even need to know their numbers or can they just hire someone and that’s off their plate?

Yeah. I was working with a CEO once and he said, “Steve, imagine this. You don’t know a lot about construction.” I’m like, “Actually, I know a decent amount. I’m not some expert,” but he’s like, “Okay, well, imagine this. You get a soils report and I give you the soils report and you look at it, and you have to make a decision whether or not it’s a good site to build a building on.”

He’s like, “That’s what’s happening with the financials.” And he’s like, “So I don’t expect you to learn how to read a soils report. That’s my job. And you shouldn’t expect me to have to learn how to read financials.”

And I was like, “Okay, hold on. That’s flawed thinking.” If we were making decisions about whether we should build a building here—that’s a big decision for the company—I will go and get the knowledge necessary to understand how to read a soils report. Now, I’m not going to become a geologist and learn all the different types of soils and expansion, but I’m going to learn enough to be educated to make a decision, right?

And then I’m going to bring an expert so I know what the heck they’re talking about.

So the short answer is: CEOs, they don’t have to be these green-shade-wearing nerds. They don’t have to know all the details of accounting and finance. You can hire people, and there’s other people with expertise. But you should know the story behind the numbers. That’s the key.

If you can’t look at a financial statement and say, “Here’s what’s happening, this is why it’s happening, and these are the things I’m going to do about it,” then I think you’re missing the point.

So I think there’s a fiduciary responsibility for CEOs, because they’re watching over the assets of the business for the CFO. So they should know just the foundational stuff to drive value in their company.

And I think that’s lacking. And I think it’s something that CEOs should really invest their time in.