Your CFO was wrong. Now what?

Perhaps your forecast was far off, the company unexpectedly ran out of cash, or your CFO embarrassed themselves in a board meeting. You feel shaken and disturbed – your CFO was trusted to handle these tasks. Now what? Do they need to be replaced, or was this a one-off mistake?

A short-sighted CEO reacts quickly and fires the CFO in an emotional fit. A wise leader pauses to analyze the mistake and exercise proper judgment, careful to neither keep an underperformer nor throw out a good CFO.

Not all errors are equal, and you cannot measure severity of a mistake by its outcome alone. Good CFOs can execute solid strategies but encounter bad luck, resulting in a bad outcome for the business. Bad CFOs may habitually commit gross negligence with no major consequences to the business for years. 

As the CEO, you need to understand the difference between different types of CFO mistakes to know the correct response.

A technical occurs when a CFO does not have the proper experience or education to perform their duties. Technical errors can manifest themselves as:

Technical errors occur when a CFO has been over-promoted beyond their skill. If your CFO has committed a series of technical errors, they are not fit for the role and should be replaced by someone more experienced.

Negligence is a failure to be proactive – it happens when a CFO does not critically analyze an internal process for weakness. Sometimes this negligence is a form of laziness and sometimes it is due to a lack of resources (common with accounting teams who were recently downsized.) 

Negligence can go on for years without repercussions for the business; but it’s a ticking time-bomb. Without proper controls, financial reporting compliance issues will inevitably arise. Financial negligence also enables other forms of mistakes such as blunders and fraud.

Negligence can be shored up by hiring consultants to improve controls and other processes, especially if the negligence is due to lack of resources. But CFOs who commit negligence out of listlessness should be replaced by a leader with a more proactive approach. 

Although the best CFOs are excellent communicators, in general, finance professionals are not know for their eloquence. As a result, your CFO may suffer from communication afflictions like rambling, message unresponsiveness, or inability to explain the numbers.

If you do not have a formal finance education or you must maintain investor relations, you cannot afford the havoc of miscommunications coming from your CFO. These CFOs should be replaced by someone who is both technically competent and a great communicator.

Small business CFOs are often responsible for forecasting, variance analysis, budgeting, and investment modeling. A formula error in these critical documents may have catastrophic consequences, resulting in millions of wasted dollars. 

Unfortunately, formula errors are statistically impossible to avoid 100% of the time. Even the best CFOs will discover formula errors months after their models have been used for critical decisions.

Formula errors occur because the CFO is not having someone else QA their work, or their model is excessively complex. The simpler the model and the more people verifying the data, the lower the likelihood of a formula error. 

If your CFO committed a formula error, you should seek a third-party opinion about their models complexity and QA process. A Fractional CFO can help you evaluate the severity of such an error and advise on the overall competence of your CFO.

Blunders are material business mistakes caused by gross negligence. Missing payroll due to a failure to forecast cash flow is an example of a blunder. Publishing financial statements without reconciling the bank account is another example of a blunder.

Gross negligence is often the product of both regular negligence and technical errors. If your CFO committed a blunder, they probably need to be replaced.

The CFO is responsible for preventing and detecting fraud. While fraud risk can never be 100% eliminated, it can be quickly detected and stopped to minimize damage to the company. 

If your company experienced fraud over several months without the CFO detecting the activity, they probably are negligent about their controls and should be replaced.

If your company experienced fraud but the CFO identified it quickly, they have performed their job and deserve your gratitude. 

If your CFO themselves committed fraud or deceived you in any manner, you must fire them immediately. Our profession demands flawless integrity, and a deceptive CFO can never be trusted.

Sometimes a CFO deploys a good strategy but encounters bad luck, resulting in a negative outcome. For example, your CFO may choose to hedge foreign currency just before the exchange rates move in a favorable direction, resulting in millions of lost profits. Or, your CFO may form their capital strategy around refinancing debt in 1 year, only to be surprised when geo-political events freeze the capital markets.

Looking back on past decisions with critical judgment is easy, but a wise leader remembers the decisions of the past were made with imperfect information. Bad luck is a normal part of business and should not reflect poorly on the CFO. 

You may still feel uncertain about whether or not your CFO is at fault for the mistake. If so, contemplate these other important considerations:

Remember that trust is critical to a successful working relationship between a CEO and CFO. If you need help evaluating your situation, consider contacting a fractional CFO for a third-party opinion.