Strategic Finance: Applying the CAMELS Framework to Financial Leadership

Randy Wootton (00:05):

Hello, everybody. This is Randy Wootton from Maxio and the host of SaaS Expert Voices, where I engage with finance and SaaS experts about what's happening today and what's happening tomorrow, the victories they've achieved, the lessons they've learned, and what they see on the horizon for our industry. And today, I'm really excited to talk to Mark Gandy, CEO of G3CFO, the founder of the Financial Operating System and the host of the CFO Bookshelf Podcast. Welcome, Mark.

Mark Gandy (00:35):

It's an honor to be here. Hey, since we're on video, does the makeup look okay? Are the broccoli seeds out on my teeth? Just want to make sure that's fine.

Randy Wootton (00:42):

Yeah. No, you look great. And I got the everything bagel seed in my teeth as well, so I'm still working on that one.

Mark Gandy (00:50):

Great to be here.

Randy Wootton (00:52):

Yeah. No, really excited to have you here for a host of reasons. Just your background, which we'll get to in just a second. We both are bibliophiles, so at some point we'll shift over into what books in your book list and the stories you've had and the recommendations. There's never a book that I'm not excited to read when someone recommends it. In fact, I think you recommended a book recently about pricing by a guy initials, JMI. I think he's a BCG consultant and your endorsement was rousing.

Mark Gandy (01:20):

He's amazing.

Randy Wootton (01:21):

Yeah. So, we'll talk more about that and some of the other books that you found to be pivotal in your career. But maybe take a minute to back up and talk about your career, specifically what led to the founding of G3CFO?

Mark Gandy (01:33):

I can give you the Reader's Digest version because it's a story, I guess 40 years in the making. I hope no one holds this against me. I do have an accounting background. Started my career at KPMG. Spent about 10 years in a family-owned operation, very diversified, manufacturing, retail, real estate. And then, we had a little bit of entertainment. Our entertainment was a bowling alley that someone bought out of petty cash. Early in that W2 position, I did something I probably should not have done. I moonlighted on a consulting project. And in 1993, $10,000 was a lot of money. I mean it was a lot of money, but I did that project. Took about 12, 13 weeks and I loved it. I absolutely loved it. And I just thought, "Hopefully, there'll be a day that I can be a full-time teacher, a full-time implementer of stuff that helps other business owners," because the people I worked for, they loved the end result.

(02:46):

So, it stuck with me and about 13 years later, I created this practice. Now, I did become a partner at a large CFO organization in the US. Did that for six years, but I still wanted to own my own brand. I write extensively, so I wanted all of my intellectual property to be mine. So, even though I started consulting in full-time, 2003, 2004, I didn't become G3CFO until I want to say 2014, thereabouts. And so, what I do today is I just show up to CEO conversations, find out what needs to be done and get to work. It's not always what we think is traditional CFO work, which I hate that term by the way, but it's what are the pending or the critical issues that a CEO is trying to deal with, so they can get that next stage of where they're headed?

Randy Wootton (03:48):

Yeah. One of the things we talked about in our pre-brief was you like to focus on in your consulting where a business is stuck. And you cover all three, small, medium, and large businesses. But looking at the business model problems, is it a sales, marketing problem? Is there inefficiencies? Is it cashflow issue? Is it a people issue? Which is kind of classic consulting. The thing that I found was unique was your application of the CAMELS system under the idea of a Financial Operating System. Can you talk a little bit more about the Financial Operating System and CAMELS for people who may not be familiar with it? And maybe we could just talk through the different components and how it applies to different businesses that you've worked with to help get unstuck.

Mark Gandy (04:32):

I love CAMELS. When I worked at KPMG, I did a lot of work in banking. Now, in the banking world, there are various ranking systems. And the credit union ecosystem has its own rating system for a various number of things, like liquidity, management, capital. So, I love CAMELS. It's a great analog, it's a great analogy for what is the chief leadership position in finance all about. So, I use CAMELS as a way to at least kickstart what financial leadership is all about. CAMELS, again, it's a rating system in the credit union world. C stands for capital. And as a financial leader, we can never run out of capital. That's rule number two. Rule number one is never about run out of capital. The A stands for asset. Yeah, I'm serious, Randy. The A stands for assets-

Randy Wootton (05:39):

No, I was going to say what's interesting is the asset quality we'll get to in just a second. I think about capital. People are like, "Well, what's capital?" Capital is the dollars that you invested in the business and the cash that you're operating, right? And so, I think to your point, the number one thing for A CFO, especially as an early stage CEO guy, is I want to turn to my CFO and say, "How much cash we have in the bank?" And that is the immediate thing that we have to be clear on cashflow. And especially, if you're in a SaaS model and you're getting paid upfront, deferred revenue, all the funkiness that goes on in the SaaS model. But at the end of the day, do I have enough cash in the bank? Can I cover the interest payments? Which is becoming even a bigger deal today. I think a lot of us focused on the world of EBITDA, but EBITDA is before interest and now you've got to cover your interest nut and that is a huge issue.

(06:25):

But I think to your point, being able to forecast where we are with the cash, when do we need more cash, i.e. capital, what does that look like in terms of your capital structure? So, there are all these components that fall under that first one around capital, which I think to your point as a CFO or CFO consultant to early stage companies, capital adequacy is are we a viable business? Can we remain solvent? So, then asset quality. What's the second one? How do you think about asset quality and its specific applicability to a small or medium-sized SaaS business?

Mark Gandy (06:58):

It is contextual. Again, this framework was designed for financial organizations. So, asset quality, is this loan, does it have hair on it? Is it performing? Again, this is an analog. You can take that approach, but in your field, there are almost no fixed assets. I mean laptops, gosh, I mean you pay for those out of petty cash these days. But when I think of assets, I think of intellectual property. That's really what we're selling. There's social capital. Well, social capital, you don't have any control over it. It's the people on social media platforms. We do have structural capital, but it's not the main thing. And then, some people are turned off by the term human capital, but that's an economics term. But really, our biggest investment is in human capital. So, when I think of asset quality, I'm looking at those three. And it also helps me to think ahead, especially with intellectual capital, are we going to be relevant 2, 3, 4 years from now? That's a great question. So, that's my lens of looking at asset quality, especially in your neck of the woods.

Randy Wootton (08:21):

And I think that's great. I know having been on both sides of M&A, you start to talk about assets in terms of what do you actually have? And I think to your point, there's clearly... I talk about software being a people business. And so, for example, do you have full-time employees? Are you working with contractors in remote locations? That actually is a meaningful issue that you need to address. Can you have those contract developers flip to employees if you go through a transaction?

(08:46):

If you're looking at trademarks, so when I came into this company, Maxio, where are we with our registered trademarks? I think a lot of companies don't necessarily, in workflow automation, invest in patents. But looking closely at what your patent strategy, and is there stuff that is patentable that become part of your assets? So, I do think it's a little bit different in the software industry, but to your point, it's primarily how have you thought about recruiting, retaining your employees, and demonstrating to a potential buyer that you've got a very strong talent strategy in place with a strong retention. And so, then M in CAMELS is for management, and you have a proprietary tool there. Can you talk a little bit about how you think about alignment and when you go into a business and look to see the alignment between the claim and actually the promise and the pain that a company's trying to address?

Mark Gandy (09:46):

I love talking about the management piece. And yes, the management piece, this is something I share with future clients. I have what's called a value model canvas. And to me, there's only three parts in a business. We find the work, we get the work, we do the work. What did I just describe? Marketing, sales and operations. In marketing, what's the big three that we do in marketing? I mean, we should be able to spit that out quickly. Everyone in the organization should know the big three of what we do with marketing, finding customers or clients. Getting, to me, that's sales. What are the big three? And there's typically a big three. And then, the doing is it's the black box. It's the cool stuff we do backstage, back office, whatever it is to get from raw material to finished goods to the customer. What's the big three?

(10:43):

Now, could it be the big five? The big four? You kind of get the idea. In my organization, we never touch the word KPIs because it's a religion. What we do talk about are VINs, very important numbers. We talk about PINs-

Randy Wootton (10:58):

I've never heard that.

Mark Gandy (10:59):

... priority important numbers. And then, INs, important numbers. When you understand finding, getting, doing, then the VINs are going to fall out. I mean, they're just going to reveal themselves. And then, under those, you start looking at what's a big project or a gap that we have under finding, getting, doing? Now I can hear the FP&A people say, "Hey, where am I?" Or the legal people saying, "Where am I?" Or the HR... Those are support functions. They're not the reason we are in business, but we do use them to help.

(11:31):

But I view management through that finding, getting, doing framework. And I've had so many people take pictures of it when I'm going through or lunch or I've done a mastermind group where we throw this up on a wall, people take pictures of it. So, I think this is kind of sticky, but that's how I approach management. And it helps me as a consultant to figure out real quickly, it kind of just slows down the game. It's a sports concept, slowing down the game. It's like, oh, I see where the potholes are. I could talk about this all day, by the way.

Randy Wootton (12:10):

Well, that's all right. We've got another 30 minutes to keep going. But what would be some of the examples, I mean one or two, of companies that you've seen have gotten sideways in the finding, the getting and the doing, as you pattern match across all the companies you've worked with? Are there consistent themes where people get tripped up?

Mark Gandy (12:28):

First of all, when someone says, "That's a great question," Randy, it means they're stalling. So, I'm stalling when I say, "That is a really provocative question." And again, this is going to fall in the realm of $25 million and under, why are most businesses started or who is the founder? It may be someone who has a skill that's other than in marketing or other than in sales. They are a great widget builder. So, usually, there is success upfront, then there's a plateau. Why is there a plateau? It's because they were successful in spite of lacking marketing skills and abilities and maybe some sales skills and ability.

(13:18):

That's usually why the CEO, the founder is typically the key core person in business development. Usually, the second most important hire they'll ever make is a director of business development. So, I would just say to answer your question, it's not because they're making a mistake. It's just the way biology works. They start out as a great widget builder, a great widget innovator. And then, they come to the realization, "Oh, I need help in marketing." And by the way, we're not talking social media ads. I mean, we're talking something that transcends that. And then, at some point, they realize, "You know what? I need someone other than me to sell." So, I would say that's a broad common denominator, but I feel like I've maybe shortchanged you on your question.

Randy Wootton (14:07):

No, I think, Mark, it's spot on. It's a consistent theme. The way I frame my career at this point in my career, I'm a professional CEO. I'm brought in when companies are struggling, either to get alignment around strategy or go-to-market execution because I've done that. And so, I think I look at companies that are reaching that expansion inflection point. Because a lot of software companies are started by technical people who can write great code, they've identified a problem, are in their early phases of growth, it's an evangelist sales motion where they know the problem so well that they have a lot of conviction around it, and they're able to represent that to prospects who say, "Yeah, I get what you're doing and I'm going to buy your software." But then, when you get around series B, to your point around that $25 million mark, you're bringing on professional investors who are putting in money to juice go to market, I think it's the enlightened startup CEO who recognizes they may not be the scale-up CEO.

(15:05):

And what they might need is either a director of business development sales, or maybe a president to come in behind them, where they can still be the face of the company and write cool code and be out at events. But what they need is someone behind them who can build a go-to-market engine. And so, I think that is one of those lessons learned here a lot about is VCs invest a bunch of money, and early stage companies burned through that capital to try to drive growth, but maybe they don't have product market fit yet, or maybe they haven't sorted out the doing part on your three stages. They can find customers, get them, but they haven't sorted out all the operations. And so, I do think there's these inflection points that very few founding CEOs go all the way to IPO. But if they're able to be self-realized enough that they understand what they do great and how do they compliment and expand their capacity and capability through hiring a great executive team, that's how they're able to keep going through the different phases of growth.

(16:06):

I think it's spot on. I think it's a great insight.

Mark Gandy (16:09):

Great points, Randy.

Randy Wootton (16:10):

Thank you. And so, we're still in the CAMELS construct. You've got a couple more to go through. I think this is really a great way for people to think about their businesses. The next one is earnings. Can you talk a little bit about how you think about earnings and when you're coaching your CEOs and customers, the advice you give them?

Mark Gandy (16:27):

Earnings, it may seem self-evident until it's not. And guys, where do I even begin? And by the way, blanket statements we have to be careful with, right? Blanket statements need to be tested. But I would say it's pretty clear that most CEOs, they are P&L-centric, right? Can we agree to that?

Randy Wootton (16:54):

Yes.

Mark Gandy (16:54):

But every P&L that I design, there's above the fold and below the fold. So, I'm not just looking at earnings. Earnings have to be looked at in the full broader context. By the way, I don't need to say this to you. Most of your listeners, I don't need to say this to. But earnings are not cashflow unless you're a restaurant. And even there, the financial expert's going to say, "Well, on weekends it may take you three days to get your credit card charges," or, "It may take you one day," but it's still pretty much a cash equivalent. So, above the fold, I want to know what are the units that we're selling and what's the average transaction, that gives me some really good insights.

(17:46):

And then below the fold, right under whatever you want to call it, EBT, NOI, net income, which by the way, everyone needs to know what the definition is of the bottom line, but below the fold, I want to see what is OCF, operating cash flow, free cash flow. And if I've got debt payments, I want to know what my operating cashflow coverage is. So, in my firm, we have what's called the 3-2-1 rule of debt service. And ideally, which is impossible in a growth company, ideally, or a mature company, you're going to at least see an operating cashflow-to-debt service of two to one. But in a growth company, pardon my English, it ain't happening. Usually about 1.2 is where I see a lot of my businesses that I work with.

(18:38):

Again, we're not talking EBITDA. We're talking operating cash flow and then free cash flow. And by the way, I have written an article on my website called Buffett is Wrong on Free Cashflow. I think you would agree. We don't have time to unpack that, but I would suggest that. So, when we talk about earnings, we're being holistic. We're not just talking one statement. Because, to me, there's really only one statement. You can unpack a lot just from a couple of balance sheets, and you've got holistic thinking right there in front of you. You just need to add a few more components to make the reporting readable and actionable. Does that help on earnings?

Randy Wootton (19:19):

Totally. Just double-click a minute, Mark. Above the fold, below the fold. What's the fold? What's the line that you're using to define the fold? I hadn't heard that term before.

Mark Gandy (19:30):

I think above the fold, I'm stealing that from marketing people who design websites, so above the fold would be that-

Randy Wootton (19:36):

Right. Well, that's what I was thinking about above the fold, below the fold.

Mark Gandy (19:40):

[inaudible 00:19:40]. So, for me, the above the fold, the first thing I want to see, I never see it, but in my design workup, simple finance reporting, let's take an e-commerce site, a relatively new e-commerce site. Above the fold, how many pay transactions? So, I can look at that. I can look at pay transactions this year, last year. That gives me a lot of context. And then, right below it, how about the average transaction size? So, when I see my revenue going up 8%, is it going up because of transaction, i.e. that's marketing, or because of pricing. It may not be price. It could just be our market basket expanded. So, that provides a ton of context, whereas you have to do a lot of digging. And there's a book by Steven Krug called Don't Make Me Think. So, when I design a stupidly simple financial statements, I've got Steven Krug in the back of my mind, Don't Make Me Think.

(20:42):

And by the way, you'll never see a blog post on this because it's not a big deal. I just get it out there. And usually, people reading these, they don't even bring it up. Just all of a sudden we can start having a conversation about what's going on right? What's going on wrong? But that is above the fold. And then, the below the fold will be some of the numbers I like to throw in, like operating cashflow, free cashflow. What's the multiple to that service?

(21:11):

For businesses who make a lot of money and don't have a strong financial team, I even like to show what is the unfunded tax liability. That needs to be visible at all times. That can come back to kill you come December 31st, January 15th. One of my first clients ever, we had like a half a million dollar tax bill, brand new client. And my client did not know, he was not aware of that. Yet, he had a very well-skilled CPA firm. And I just thought, "This will never happen. We'll have clarity and visibility of our unfunded tax liability starting in March of the current year." And so again, those are examples of below the fold data.

Randy Wootton (22:01):

Got it. And so, in my language, in my framework, I think what you're describing for me above the fold is really around the unit economics.

Mark Gandy (22:08):

Exactly.

Randy Wootton (22:09):

What's driving the growth engine? How much are we selling at what price? One of the things with Maxio, this is the advertisement part, is we get the reporting. Because we're doing the deferred revenue and the MRR roll forward, you get an opportunity to see what's happening at a customer segment region level. And so, at the end of every month, you're seeing, hey, if you had churn, where was that churn? Is there something to explore? So, it feels to me like you're above the fold is this is the business model working? And then below the fold, you're getting into more of the cash and the debt coverage. And some of my experiences in PE firms is they want you to take a lot of debt.

(22:47):

And so, their debt ratio would be debt versus ARR, and they'll encourage you to take one times ARR, up to two times ARR, because they're getting the leverage on the future EBITDA and the cashflow. So, I do think that's a really interesting point. It actually leads into your, I don't know, that's fifth of CAMELS around liquidity planning and the cashflow for weekly buckets. What goes where and how are you going to cover your debt payments, and then future investments. Do you have some other sort of thoughts... In our pre-brief, we talked about jobs to be done under liquidity planning. Help me understand how you think about liquidity planning as part of the CAMELS system.

Mark Gandy (23:27):

It's incredibly boring. It's incredibly technical. I hate to do it. I hate to do it. Once upon a time when I first started my consulting practice, I had heard of other CFOs doing these 13-week cashflow projection reports. So, I'm the idiot who has to study the why behind everything. And by the way, on 13-week cashflow forecast, and we'll tie this into liquidity in about two minutes, do you know the origination of 13-week cashflow forecast? Now, it could be that I'm wrong, but I do know this. Bankruptcy courts require a 13-week cashflow report.

Randy Wootton (24:12):

Oh, interesting.

Mark Gandy (24:16):

So, I think that's why if you read any book by a turnaround expert, you're going to see ugly, terrible examples of 13-week cashflow projection models. And I'm being arrogant because I think the way I do it is better, simpler, but we're not going to get into that. So, liquidity planning to me is what's the job to be done? Can I make payroll next week? Now, that's not a good question. If you can't make it, you should kind of have a rough idea 13 weeks in advance. By the way, there's nothing magical about 13 weeks. One of my favorite clients of all time, we just do four weeks because it's contextual.

(25:01):

By the way, I've had one client, they saw this for the first time, they did it for 52 weeks. And I just thought, "That's stupid. You can't predict in that level of granularity." But he loved it because his job to be done was, "I don't want to worry about making these big delayed vendor payments." So, to me, liquidity is just, do I have enough cash to pay, make payments, make debt service? It's not a replacement of your monthly financial model, which is more of a driver-based model. This is a tool that a high school student should be able to figure out quickly. And don't do it if you've got $3 million on the bank and no debt. And by the way, I have a couple of situations like that. And the best liquidity model is no liquidity model. We do it because, hey, cash could be tight and maybe you're hitting the top of that line of credit, so that's why we do it. So, that's the L in liquidity, at least in this business context.

Randy Wootton (26:15):

I got to tell you, everybody in SaaS who was banking with Silicon Valley Bank and had the scare back in the spring, where they couldn't access the capital that was in the cash in their bank, absolutely faced, and I know I did, faced the prospect of, "Gosh, we're going to have to furlough employees because we don't have enough cash to pay them." And the rules are if you don't have cash to reasonably expect that you can pay your employees, you can't ask them to work. That is at one end of the spectrum, the black swan event of not having enough cash. But I've let go of CFOs because they couldn't give me the cash within about a month of me starting. And I said, "This is absurd." Back to our first comment in terms of capital with the CAMELS model is understanding where you are with your cash.

(27:01):

The 13-week forecast in my companies, and big credit to our CFO and head of Finance who came on board after I started, they do this every week. We look at the cash forecast, 13-week rolling forecast. We present it as what the forecast is. What the actual was on a quarterly basis to the board. It's one of the one things I talk about in every end-of-month report to the board. I talk about what our growth rate was and what our cash is. And I just think that for any company, especially if you're playing with other people's money, you need to be super clear about where you are with your cash. I sit on the board of a company and I'm talking to the CEO last week about cash and what projection is for the operating plan and where he is going to end up at the end of the year.

(27:44):

Because one of the things I think VCs look at in particular is like, "Look, we've deployed this cash. Is this the best use of that cash or should we take it back?" And so, unless you have a very clear sense of what's happening with your cash and then your growth model, growth engine, that's going to show why you're going to generate more cash, EBITDA is a proxy over time, VCs may take their bag and go home and say, "Give me back my cash."

(28:07):

And I think what we're seeing with a lot of companies that are declining or going out of business may be that, is the pressure from the investors are saying, "Look, it's not clear to me that you have product market fit and that this is going to be a company that's going to be viable for the next two or three years." And for them, they're doing a portfolio play. So, they're like, "I'll write this one off and I'm going to double down on the ones that are doing successful." So, I think to your point, liquidity is one of these things that the CEO and the CFO need to be talking about every single week, every single week.

Mark Gandy (28:36):

Yes.

Randy Wootton (28:37):

Which brings us to the final S of CAMELS, sensitivity. And maybe when we were chatting earlier about the Colby systems and how you think about this, I love that idea of being a system thinker mentality, because I think sensitivity to market risk, and I'll let you talk a little bit more about it and how it plays out. Are we still relevant? How does that all work? Can you talk a little bit about how you think about framing sensitivity for your customers and maybe somewhat of what people don't do well here, some of the best practices that you've seen?

Mark Gandy (29:08):

So, I want to preface this and qualify this. On my website, I put the letter little letter M in front of CAMELS, so it stands for modified CAMELS. So, the S in CAMELS came a few years after CAMEL was propagated. S came later. I don't know the exact timeframe. I'm sure some journalist that's listening will email you on LinkedIn to say, "Well, it happened such and such a time..." So, the S came later. The S in my opinion, is hard to apply. So, here's the cool thing about modified CAMELS. I get to make up what it means. So, for me, sensitivity to market risk. It also means when you have a pea-sized brain, like I do, let's simplify this. I like to start out with just a simple question and it's a very provocative question. Are we going to be relevant three years from now?

(30:12):

And again, this is a blanket statement that needs to be tested. It's a theory. But a lot of CEOs, and I bet, Randy, you can deal with this, you're so focused on today's problems. And this goes back to The Effective Executive. Peter Drucker just over and over, "Quit focusing on yesterday's problems. You should be focusing on tomorrow's opportunities." So, to me, the big question on sensitivity to market risk is will we be relevant? And you can't just say yes or no. You need to say yes because... Or you need to say no because... Now, we've got some raw material to work with to be continually thinking ahead. That's the way I approach the S, sensitivity, to market risk. I'm not a quant. I'm sure you could turn this into an extremely complex mathematical equation. That's not what I'm trying to do. I'm trying to generate a good story that we can act on.

Randy Wootton (31:13):

Yeah. No, for me. So, that really gets at the heart of what a CEO's role is around strategy and how do you articulate... I used the book, Used this several times now, it's Playing to Win. And it's a wonderful book that captures [inaudible 00:31:27].

Mark Gandy (31:27):

Roger Martin. Great book.

Randy Wootton (31:29):

Yeah. What's your aspirations? What do you have to believe to be true? What are the management systems you have to put in place? And I do it every year with my team at least once... Well, we do it once a year, and with the board to get aligned on, what do we want to achieve over the next three years? I tell my team that what we get paid for as an executive team is to be making the decisions that are going to impact the company in the next two years. If we're focused on decisions that are happening in the next month, we're over-functioning, we're disempowering our management team.

(31:55):

It's really hard to take on those longer-term projects. It's easier just to solve the thing right in front of you. And so, I do think for you as an advisor for companies and helping them make sure they have the right altitude and are spending the appropriate time focused on the strategic questions. And I think the one you asked was spot on, are we still relevant? Will we still be relevant? If so, why? What do you believe to be true about the market, the way it's unfolding, the competitors, how they're going to play, what your core differentiator is? How are you going to double down on that? Which partnerships do you need to compete? Those are the substantive questions at the core of building a compelling strategy, what Bain talks about in their book, Profit from the Core. What is your core capability and how are you going to profit from the core? What are the appropriate extensions you make in different areas? So, I think it gets right to the heart of the matter of the viability of a specific company.

Mark Gandy (32:51):

I'll just say great points.

Randy Wootton (32:54):

Well, we've got a couple of minutes. I learned an immense amount from our first conversation. I've enjoyed this as well. One of the things you talked about was the first CFO was John DuPont, was John Raskob. And you had described him when we were talking about what a CFO does. And maybe just spend a minute on that and then we'll get to the books. I want to talk about the books, but I thought it was a really interesting framing of what is a CFO, versus director of finance. And what John Raskob said was what a CFO should be doing.

Mark Gandy (33:27):

The book, and by the way, I Will Teach You to Be Rich, I hate the title of that book. I've had him on the CFO Bookshelf Podcast, one of my favorite interviews of the 200 that we've done. That title is not a cheesy book title. It came from a magazine article that John Jakob Raskob wrote. So, who was John Jakob Raskob? He started out as a clerk who was eventually hired by Pierre DuPont. And this is the starting point of the role of the financial leader. Raskob had a natural gift of taking a dollar bill and turning it into $2 or $3. He had another skill, getting a couple of people at the table and getting them into agreement. So, one of the first things that Raskob did was to simplify the ownership structure of DuPont. Very successful in some of DuPont's early business dealings.

(34:40):

Raskob was observing some of the purchases and investments of these railroads and all these municipalities. Raskob could see the bigger picture, knew when to invest, when not to invest, when to divest. So, he does that effectively. Then he gets wind of Billy Durant over at GM, and thinks, "This is a really good potential investment." DuPont actually ended up making a ton of their money in the 1920s, not because of their ammunitions plants. It was their investment in General Motors. Well, it was Raskob who came up with that investment idea. Oh, it was Raskob who thought, "Billy Durant, this ain't going to work. We need a guy that can take over and let's get Sloan in." He did. "Hey, we need better accounting and management accounting." Raskob could have done it, but he hires Donaldson Brown. I hope I didn't get that name mixed up. Donaldson Brown, very famous, one of the most famous management accountants ever.

(35:47):

So, my point, I came up with a definition of the CFO 25 years ago, and I think it's complete. And I hate the term CFO today. I wish CFO was not in my firm name because it's so marginal. Everyone's a CFO, even these little rinky-dink mom-and-pop CPA firms, "Oh, we do CFO services." I don't know what the heck that means. So, my definition 25 years ago of a CFO is the same as it is today. It's a financial expert, deep domain financial expertise, who has a really good grasp on marketing, sales and operations, who could take over being CEO for one entire year. Sales don't go down, cashflow doesn't go down. The value of the business might even go up. Oh, the culture might even improve a little bit.

(36:51):

But after that one year, they're extremely happy to go back to being the CFO because that's what they love doing. That is the definition of a CFO. Now, we haven't talked about the roles of a CFO, but that is my definition 25 years ago. It's my definition today. And I'd tweak it a little bit here and there, but it's essentially the same. And I've got a precedent for it. John Jacob Raskob, the first modern CFO, while I'm repeating myself, the modern business era.

Randy Wootton (37:22):

Well, that's great. Yeah. So, just to hook that in or anchored into the history that was really in the early 1900s that he got started. And was there through the Great Depression and all the investing that he did. And so, I think your point, I would say that's probably consistent with my expectation of CFOs is that I talk about the three people that really run a company are the CEO, the CFO, and the head of HR. And you need all of those. And I do think you find CFOs are often people that fleet up to CEO roles. But I think understanding the business mechanics and how all those pieces come together to make a profitable organization isn't within the domain of the CFO and the modern CFO as a CEO, as someone who didn't come up through those ranks. One of the things I really look to is a CFO's expertise to help run the business.

(38:12):

And I think to your point, if I got hit by a bus, the logical successor is probably either going to be a CFO or if you have a COO in the role. But both of those people need to be thinking about, "Can I be the successor? And if I can't, what do I need to work on?" So, maybe to that point, what do I need to work on as A CFO? I think of turning to mentors, advisors, or great books. What are a couple of the books that you would recommend that you think have made the biggest impact on your understanding of what a CFO does or what a CFO should do?

Mark Gandy (38:44):

See, I just pause, which in post-production, this will get trimmed up a little bit or the pause will be deleted. I remember a couple of years ago, a CEO whom I look up to, admire, I knew this person in advance. And at the end of the interview, she says, "Mark, what are some good books to read? You're a reader." And I froze. It's like Randy, I read 100 plus books a year, and I froze. And what I told her, I had the sensibility to tell her, "Amy, I have the perfect answer for you, *pause* in three days." And she laughed at that. So, I pulled a few... But the way you framed the question, my thought is there's not any book that will teach you how to be a CFO. In fact, I just don't think that's a starting point. I would just say read. Either read or be extremely curious.

(39:51):

Now, at least 25% of the population, and this is an estimate, 25% of the population, they are deep readers. They're going to read. Well, does that mean there's a 25% if they don't read is that a bad thing? No. Hopefully, it just means that they're getting their knowledge and wisdom in another form. So, just because I read a lot doesn't mean that's the only thing I do. I read to stretch the mind. We want the mind to be stretched and put into a new form that doesn't go back to the old form before you read. So, the way I like to answer the question... By the way, the way you framed the question is outstanding. I will just start out here are the first five books I ever read.

(40:39):

And what's really interesting is I was thinking about this this morning, almost every other book... You mentioned, Roger Martin Playing to Win. Did you know a lot of that is standing on the shoulders of Peter Drucker? I mean, Roger's co-author, A.G. Lafley, he used to meet with Drucker, I think once a quarter. I mean, would fly out for a whole day. Can you imagine that? So, everything I've read, I can almost trace back... So, one of my favorite books, it's the first business book I ever read, The Firm does not count as a business book, and I did read it before I read this one, but Barbarians at the Gate.

Randy Wootton (41:20):

Yeah. Oh, right on.

Mark Gandy (41:22):

It has the best M&A story of all time. And I've told that story in a very fun way where I take some Hollywood liberties in telling that story, and I love that book. We talked about capital preservation. What's really interesting is right after KKR acquires RJR Nabisco, the first thing you had to do is start selling off assets. The business was not worth $25 billion. They couldn't pay for it. It was an auction.

Randy Wootton (42:00):

[inaudible 00:42:00].

Mark Gandy (41:59):

[inaudible 00:41:59] the auctions. We have to start selling stuff off, so we can make debt service. But that was the first book, and I've read that three, four times. And I think if you're being very introspective, you're going to gain a lot of insights. It is a great book. There's one professor at Rockhurst in Kansas City, Missouri. He teaches finance. He uses that as his textbook for the course. And I wouldn't be surprised that there are a few others who do that. The other book is, I don't agree with everything in it, it was a book that validated... As a financial leader, I take three words very, very seriously. Truth, trust, and transparency, period. No debating that. No way. Truth, trust, and transparency.

(42:52):

So, I had a CEO hand me the book, The Great Game of Business by Jack Stack. And I read it in a couple of evenings and I'm thinking, "I think he should have read this book." So, if you want to get a feel for operations, start getting a feel for operations along with the next book, The Goal. I love The Goal.

Randy Wootton (43:12):

Oh, sure. The Goal? The allegory.

Mark Gandy (43:16):

The Goal took me to Deming and it took me to Brian Joiner. I think every serious-minded leader needs to read Brian Joiner. And unfortunately, his book... The title escapes me right now. But Brian Joiner was not only a contemporary, but a disciple of Deming. But The Goal led me to other authors and great leaders. [inaudible 00:43:43] has a book that's been translated. So, again, The Goal was just a phenomenal starting point early in my career. And then, the first book that I read by a CEO, my favorite genre, Randy, of books, is books by CEOs. I love them. And the first one I read was by Sandra Kurtzig. And so, for the older audience, for the baby boomers who maybe remember Sandra, she was the first person to create the MRP system.

(44:14):

Now, that is a little bit maybe debated, but she created what's called the ASK system. And then she built, literally... You'd love her story because it is very peripheral to what you do in your industry. But she created this software system, ERP system in her bedroom. And then it became a $400 million business. And I love Sandra's story.

Randy Wootton (44:40):

Oh, wow.

Mark Gandy (44:40):

And then, the other next book, which I read it about every other year, it's The Effective Executive. There are portion in that book-

Randy Wootton (44:49):

That one by Drucker? The one by Drucker?

Mark Gandy (44:51):

Yeah. Yes, it is outstanding. It's dry. Parts of it are boring, parts of it are dated. But I'm thinking, "Holy cow." If you're into financial modeling, if you're into liquidity planning, the chapter on the elements of decision making is outstanding. We talked about will you be relevant? The Vail story, V-A-I-L, the former president and CEO of Bell is outstanding. So, those, to me, were the first five books I read. And it wasn't just reading it linearly. I kept thinking, "How does this apply? Where does this fit in the realm of flawed people making decisions in business?" So, these are pillar books. And a lot of the books that I read today, I could say they all kind of go back to those first five.

Randy Wootton (45:48):

Yeah, I think you're right. So, I always describe it as operating at the edge of my own ignorance. And so, I grew up as an English major. I took a degree and a master's, and I was teaching literature for a while, and I love books and texts.

Mark Gandy (46:02):

Perfect. I'm impressed. I love this, Randy. Good for you.

Randy Wootton (46:08):

Yeah. I am still taking the Shakespeare seminar. I think there's just something to the way you described it in terms of just exposing yourself to ideas. And I think texts are great catalysts for that, conversations could be great catalysts, classes can be great catalysts. But I think to help, as you described, the brain to continue to expand rather than contract, you got to continue to stimulate it. Those are fabulous books. I think to your other point, my biggest challenge is I think a lot of the business books are exactly what you described, recycling of old ideas.

(46:42):

And then, if you go to the source text like a Peter Drucker book and spend time there, you'll see the through-line of thinking around management, manage excellence, managing through operations and discipline. Like even today's OKRs can go back to MBOs and go back to Peter Drucker's idea that then were brought into the modern business world. So, look, Mark, it's been great. I've really enjoyed this conversation. We could probably talk about books forever. I really do appreciate your time.

(47:11):

For people who want more of Mark, clearly they can find you on LinkedIn and look up G3CFO and follow your CFO Bookshelf Podcast, which is on my list. Is there any other ways that you would encourage people to get in touch if they want to learn more or engage in the conversation?

Mark Gandy (47:29):

I wish they could look up MLB St. Louis Cardinals and find me in the starting lineup, but that's not the case, unfortunately.

Randy Wootton (47:36):

Got it. Well, not yet. Maybe you'll one day be part of the management structure with that get rich idea. Well, great. Well, hey, thanks again for your time, Mark. Really appreciate it. And best of luck for you in 2024 and beyond.

Mark Gandy (47:48):

Thank you, Randy.