YOU WOULD THINK THAT ROBERT L. Luddy would have known better than to hire a fly-by-night chief financial officer. After all, he himself had been a corporate controller for a year before founding Captive-Aire Systems Inc. in 1979, and -- in the beginning, at least -- he had been perfectly comfortable handling the company's books and bankers on his own. But by 1981, he realized that he could no longer do it alone. So he decided to hire a full-time CFO. And that's when his troubles began.

It is a task every founder must tackle sooner or later, and Luddy was better qualified for it than most. On the surface, moreover, the position did not look particularly difficult to fill. Sales at Captive-Aire, a manufacturer of kitchen-ventilation equipment based in Raleigh, N.C., were a modest $148,000 at the time. On the other hand, Luddy was convinced that the company was poised to take off, and he knew that growth would demand accurate and timely numbers for planning, not to mention lots of cash, most of which he hoped to raise through a line of credit on his accounts receivable. That, in turn, would require more numbers for lenders. He himself was preoccupied with engineering and marketing problems. As a result, Captive-Aire was slipping behind in its payables, and its books were a mess. Although it had an outside accounting firm for annual statements and had installed a computerized system to monitor inventory and receivables, the company had no general ledger with which to generate monthly income statements and balance sheets. So Luddy set out to find someone who could take charge of the situation, create order out of chaos, and provide the systems and the numbers that the company needed to grow.

The person he chose, the former chief budget officer of a large Canadian corporation, clearly had all the necessary tools. A man in his fifties, he was relatively seasoned as well. Luddy, who was then just 35, was eager to add a mature voice to a young management team, and he liked the man's style. "He seemed so assured and self-confident that you just had to trust him." Indeed, he inspired so much trust that Luddy hired him without even checking his references.

Nor did Luddy stop trusting his new CFO when employees expressed skepticism over the man's ability to pull numbers from a computer program that no one else could work. Luddy thought the numbers looked all right; at least they showed a profit. And they must have looked all right to the bankers, too, for the Canadian convinced them to lend Captive-Aire $300,000, more than 10 times as much as the company had ever borrowed before.

Luddy was delighted, and didn't give it a second thought when the CFO asked to set up a discretionary account at the new bank that was making the loan -- just a few thousand dollars he could tap as needed. In fact, Luddy didn't get worried until the Friday afternoon when he discovered that the entire loan was to be deposited in the CFO's discretionary account.

"It could have been a coincidence, but it hit my panic button," Luddy recalls. "I know I should have caught things earlier, but I was worried about a whole lot of things, and the loan was not the top thing on my mind."

The last time Luddy saw his CFO was the next Wednesday morning, when his outside accountant came in. "Your auditor is here, Bob," the paging system squawked throughout the offices of Captive-Aire, and the Canadian took a powder. "Perhaps he's gone to lunch," someone suggested. When the CFO didn't show up that afternoon, Luddy tried calling him at home, but there was no answer until the next morning.

"I stepped on a nail," the man explained. "I had to go to the hospital." But he wouldn't say which hospital, and when Luddy called around, there was no record of the Canadian being treated anywhere in the area.

That same morning, Luddy fired his CFO. Although the ensuing investigation produced no evidence of fraud, the episode "scared the living daylights out of me," Luddy says. Rather than risk getting burned a second time, he decided to take the financial reins himself, but the bank wouldn't let him keep the loan unless he hired a new CFO. This time he checked the applicants' references carefully and ran the finalist through two sessions with his auditor before settling on William Francis, formerly with the Big Eight accounting firm of Peat, Marwick, Mitchell & Co.

Francis turned out to be just what the banker ordered. He straightened out the books, streamlined the computer system, developed new credit policies and invoicing guidelines, and established manufacturing controls, all the while keeping the bank well informed and reassured. This took time, of course -- five years, to be exact -- but Luddy got what he wanted: the freedom to concentrate on sales. The result was a five-year revenue growth of 2,682%, compounded, allowing Captive-Aire to place 65th on INC.'s 1985 listing of the 500 fastest-growing private companies in America.

It is a sobering thought, that one of America's most successful young companies might have suffered an early demise from a corporate case of sudden infant death syndrome but for the fortuitous discovery of a bad hire. Yet the story illustrates just how important that particular hire can be. No matter what his, or her, formal title, the CFO performs the second most global role in an emerging company, and can make or break the business. Considering how ill-prepared most founders are to fill the slot, the wonder is that more companies don't go down the tubes because they have the wrong CFO.

For most companies, of course, there is probably less danger of hiring a thief than of hiring an incompetent. That danger is all the more acute because the job is so tricky to define. Granted, the textbooks make it sound easy. A CFO's role, they say, is to guard a company's assets and to prepare statements of its financial position. Trouble is, those tasks can be defined as narrowly as basic accounting or as broadly as setting company policy.

Take the income statement, for example. Do you just need someone with a calculator to tote up your revenues and expenses, or should your CFO be figuring out which accounting policies are best for your business? When should you recognize revenue -- when the order comes in, or when it's shipped, or when it's paid for? How should you allow for bad debt? What about the terms of warranties? Each issue leads to another, from revenues to pricing to purchase orders to banking policy. How do you want to figure inventory value -- FIFO (first in, first out) or LIFO (last in, first out)? If you need to show a profit, you may decide to take inventory at its lowest cost, but that will increase your tax liability. Then there's overhead. Should you allocate it by dividing it among your revenue centers, or should you set up a direct charge system and let the revenue centers purchase the services they need?

At the very least, a CFO should be able to tell you how each accounting option will affect your ability to achieve your specific business objectives. But that means you have to define those objectives before you can figure out your needs. You also have to weigh your own strengths and weaknesses, as well as those of your team. Would you be better off hiring a first-class accountant, with largely internal duties, or should you look for someone who can serve as a controller, also dealing with outside capital sources? To some extent, your answer will depend on your company's stage of development. True, you will need someone who can do forecasting and planning no matter where you are on the growth curve. If you are just starting up, however, you may need a CFO who can play other administrative roles as well. You may also need one who can set up basic reporting and control systems. As sales rise, the CFO may have to hire, train, and manage a staff, or decide where, and how, to deposit (or invest) company funds. If you decide to go public, you may need someone with a much broader range of experience to work with the lawyers and underwriters.

Considering the range of possibilities, there is remarkable consensus on the characteristics of the ideal CFO for a growing company. The experts agree that he, or she, should be comfortable with both inside and outside work. He should have worked inside a large company and been trained in using financial tactics as a means of executing strategic policy decisions. But he should also have spent part of his career in a small company, learning how to deal personally with such issues as payroll or receivables -- matters often left to staff in larger corporations.

Now try to find him.

That's no easy chore, as Tad Witkowicz discovered when he set out to hire such a paragon for Artel Communications Corp., the Worcester, Mass.-based fiber-optics communications company he founded in 1981. By 1985, the company had grown to 85 employees and $6 million in sales -- time to bring on a CFO. For eight months, Witkowicz searched high and low, rejecting candidate after candidate. Everyone seemed either "too weak or too strong, or good in one area and not the other," he says. "You want somebody with a lot of experience in a well-managed company, either as a controller or a CFO. But a controller has too narrow a focus, and doesn't know how to talk to investors or do financial and strategic planning or manage funds. And if somebody has been a CFO in a large company, it's not likely he'll want to come to as small a company as ours."

What made the search even more difficult was Witkowicz's desire to find someone who would be more than a CFO, or so says Carl Heeder, the man eventually hired as Artel's vice-president of finance. According to Heeder, Witkowicz was really looking for a number-two man -- a generalist with whom he could discuss such strategic questions as market positioning, staffing, or organizational development.

"I got the impression that Tad was lonely, in a professional sense," Heeder says. "And a financial guy can be a very good alter ego. He deals in unemotional issues, the numbers. He's a scorekeeper, too, so he's an interesting foil with whom to discuss the broader issues." In Heeder's mind, an effective number to also does "what the number one doesn't want to do." That meant assuming responsibility for administration and personnel as soon as he started, and later taking charge of capital expenditures and manufacturing -- leaving marketing, sales, and research and development to his boss.

Versatility is, indeed, an important quality in a CFO, since it allows the person to grow with the company. Witkowicz was lucky to find someone who had it. More often, chief executive officers discover that hiring the right CFO is like trying to hit a moving target.

The most common strategy, widely recommended by headhunters, involves a simple, four-step process. First, figure out the exact tasks you hope to see the CFO accomplish over the next year. Next, draw up a list of ideal characteristics, including past work experience, specific job skills, personality traits, and compensation range. Then divide that list into "must have" and "should have" categories. And, finally, start searching. It certainly sounds easy enough. Without a good deal of luck, however, you could have an experience much like that of Michael Wayne, founder, chairman, and CEO of Durakon Industries Inc., in Lapeer, Mich.

Durakon, a manufacturer of truck-bed liners, was only two years old when Wayne hired his first CFO in 1982. "I needed someone who could take us from manual to computer systems, so I picked a computer-oriented guy," Wayne says. "But we were growing at 100% a year, and we outgrew him in a year. He was a good fella, but it got to the point where his monthly financial statements just didn't make sense. Our sales had totally outgrown his system, and he had no idea what to do with staff." The experience, he says, taught him a lesson: "not just to hire for today's job, but for the work as far out as you can see."

"It was a pretty typical situation," explains John Bambery, who replaced the first CFO. "They hired my predecessor when the company was at $7 million in sales and couldn't afford to hire more experience. My predecessor didn't explain his needs, so upper management didn't understand them. But management doesn't understand what accountants do; they just want it done."

Even if you know exactly what you're looking for, it's not always easy to come up with stong candidates. Wayne, for one, tried putting want ads in newspapers. Over 150 resumes flooded his office, most from the obviously incompetent, like "one guy who was currently employed as a statistician at a General Motors plant."

"When you put an ad in the paper, everyone who wants to do the job replies, and usually they're people who have never done the work before," says headhunter Elaine Levin of New Horizons, in Santa Cruz, Calif. "Besides, the person the CEO really wants to hire is probably very happily employed, and usually too busy to be looking through the want ads."

One obvious alternative is to turn the search over to a search firm. You can expect the process to take as long as a year, at a cost of between $35,000 and $40,000. The question is: what kind of search firm should you use? Charles Ollinger of Ollinger Partners, an executive search firm in Duxbury, Mass., recommends using a firm "that knows the discipline," that has done CFO searches before and can evaluate candidates based on their professional history. Fred Wackerle, of McFeely Wackerle Associates, in Chicago, disagrees. "Finding a firm that has experience working on assignments with clients similar to you is more important," he says, because they are more likely to understand your size and style.

No doubt the best way to judge a search firm is to call some of its previous clients, but -- even if it gets rave reviews -- you probably shouldn't count on the firm to solve your problem. Artel's Tad-Witkowicz, for one, had no luck with any of the headhunters he tried. "They'd call and say, 'I've got this hot one.' They wouldn't send a resume, but they wanted me to see the candidate anyway, and usually there was no fit." Fortunately, most companies have other places to turn to for help in locating candidates. An outside audit firm is one, particularly if it is large enough to have an alumni association. An outside board is another. Even consultants may have some suggestions.

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."