Difficult as it may be to come up with strong contenders, the next step -- evaluating the candidates -- is the one at which CEOs most often stumble. Here, too, an outside auditor can help, if only to judge technical competence. The trickier task is to evaluate a candidate's compatibility with your industry, business goals, and corporate culture, as Kirk Cottrell learned.
Cottrell had started Island Water Sports Inc. in 1979. His wife, a former schoolteacher who had worked as a loan officer for one year, joined him in 1981. She handled the books until the business grew to the point that Cottrell decided it needed a professional CFO."We hired a guy who was really qualified," he recalls, "and he almost ruined our company."
At the time, the Deerfield Beach, Fla., company had 16 franchised outlets selling T-shirts, surfboards, and surfing gear. It was a decentralized operation, with each established store having the option to do its own buying, subject to Cottrell's approval. That seemed inefficient to the new CFO, a former Fortune 1,000 company executive with a strong marketing background. He brought in central buying and central billing, hoping for both quantity discounts from suppliers and more control of merchandise in each store.
The vendors didn't like it. Island Water Sports buys from small specialty suppliers, all working near maximum capacity. They didn't want to hear about bulk discounts; they were already selling all they could make. Nor did they want to hear about co-op advertising. What they wanted was to get paid on time.
The franchisees didn't like the changes, either. Now they were being told what to stock and how much to charge. "From our stores' point of view, we were just the middlemen, a 24-hour collection agency, hounding them about receivables," says Cottrell.
Frankly, Cottrell didn't care much for the new system himself -- not with monthly losses and rising expenses. "But I take full blame," he admits. "I don't like operations, so I just handed him the baton. He didn't understand the internal style of a retail business. He ran it like Madison Avenue, spending money in a big-company style. We immediately bought a huge computer system, our own furniture, our own phones. We really got into debt."
Looking back, Cottrell believes that the controversy over centralism masked a deeper conflict over the direction and style of the company. Cottrell wanted to build Island Water Sports, so they could sell more merchandise. His CFO was more interested in building the franchise network, so they could eventually sell the business itself."He didn't have my interests at heart," Cottrell insists. "He had his own interests at heart. I'd be here working, and he would be out on a yacht, wheeling and dealing. But when it came time to making the monthly payments, he just disappeared."
Cottrell fired the CFO and promoted 20-year-old Miguel Reyes, former manager of payables, to a new position as director of accounts. Reyes scrapped the central billing system, cut the central office staff by two-thirds, and put a lid on costs. Last year, sales were $6.1 million, an increase of 5,519% in five years, placing Island Water Sports 25th on the 1985 INC. 500.
Cottrell's experience is not uncommon. "The most important thing is not just finding qualified people, but finding people who can fit your organization," says Louis Radler, CEO of Chessco Industries Inc., a $25-million specialty chemical business in Westport, Conn. He speaks from experience, having fired one CFO, whose autocratic style clashed with his own. "You have to know yourself before you can hire a CFO. Technically, many people might fill the bill, but you need someone who can identify your personality and carry that throughout the company."
This is not to suggest that a CEO is necessarily better off with a CFO from a similar background, as Ted Fluchradt of Automation Intelligence Inc. found out. A former manager with Westinghouse Electric Corp., he had acquired his division through a leveraged buyout in September 1983 and proceeded to hire another big-company man as his CFO. The latter was diligent enough, but he went about his job as if he were still in a big company. The problem was that Automation Intelligence was a rather small one, with $12 million in sales and $1 million in long-term debt. "He was anticipating growth and setting up systems for growth that didn't come right away. He just didn't understand that only three things are important for a small company like ours -- cash, cash, and cash." The problem was resolved when the CFO resigned.
Like Cottrell, Fluchradt recruited a new CFO from within, promoting Becky Yeager from general accounting manager to controller. She quickly turned the company's cash problems around -- slowing payables, speeding up collection of receivables, watching nickels, and pinching dimes.
There is no doubt a moral in all this -- something like "Practice makes perfect," or "If at first you don't succeed . . ." It certainly seems as though, for many founders, hiring a CFO is a developed skill. You go into the process knowing you'll make mistakes, and hoping they won't be fatal, and along the way you learn something about your company, your business, and yourself.
Few, however, learn as much as Alan Kleinmaier, the president and CEO of Specialty Retail Concepts Inc., a $14-million chain of specialty food shops that went public in 1985. But then, he had more practice than most.
SRC was only two years old, in 1978, when Kleinmaier hired his first CFO, who did not find the environment to his liking. "He thought we were going to take the tubes, so he left," says Kleinmaier. The second, a CPA, lasted only five months "because he just didn't have a grasp of day-to-day accounting." Deciding two failures were enough, Kleinmaier went back to school, to the University of North Carolina at Chapel Hill, where he took six months of courses in accounting and finance. When it came to hiring SRC's third CFO, Kleinmaier knew just what he needed and where to find him, luring away the senior member of his outside audit team from Deloitte Haskins & Sells.
It has turned out to be a good choice. "Without him, I doubt we'd be a public company today," Kleinmaier says. "But I still run through the numbers myself every other month or so. I've learned that if you want to be responsible, you have to, or else you have to take everything on trust."
