First -- further details on the economy and its near future:


A few weeks ago, I wrote about the dangers the weak employment figures posed for long-term, healthy improvement to our restaurant industry.  That still remains a primary concern of mine, and of a lot of people smarter and more focused on the economy than me.  As if that weren’t enough of a downward pressure on our industry, and all others dependent on consumers, the Washington Post recently carried a column by Harold Meyerson (link is which, among other things, notes a study by Michael Cembalest, Chief Investment Officer of J.P. Morgan Chase.  Cembalest concludes something that’s been widely speculated on, and discussed, regarding the failure of wages to keep up with overall GDP and living costs; in his words, “US labor compensation is now at a 50-year low relative to both company sales and US GDP.”


The column goes on to discuss whether, and how much, this is related to the decline in the bargaining power of unions, among many other topics, but I want to focus on a question raised by Cembalest’s conclusion: if labor compensation is at a 50-year low related to US GDP, it’s at the lowest point EVER in the life of the restaurant industry, which didn’t really exist in anything like its present form 50 years ago.  If we combine the large bloc of unemployed, including the growing number that economists believe may be structurally unemployed for years due to a lack of retraining and re-employment options, with those whose relative purchasing power has declined -- particularly in the past decade -- we reach the conclusion that pricing flexibility will be more difficult for any consumer-facing business, and that low absolute costs and perceived value offerings will be essential to the success of most restaurants for the foreseeable future.  Let’s add to that the apparent truth that Federal support for State programs will be scarcer in the coming years, as a byproduct of the budget deal now taking shape, and that States are therefore likely to require further cutbacks in services, leading to fewer employed State and Municipal workers.  (Witness California, Wisconsin, and several others already facing this issue in different ways.)  Are you ready?


Second -- a kind-of, sort-of defense of the CFO (this is risky territory, and will likely turn into a longer discussion about the relative roles of company officers):

In my years as a lender, I noted that the CFO often received a substantial amount of credit when a company was performing well, and a significant amount of blame when performance was off.  During the 90s, and again early in this century, there was a bit of a “cult of the CFO” in the financial markets.

Let’s grant that, in any sufficiently large company, the CFO’s role is likely focused on two or three things which can have a dramatic influence on the bottom line: (1) making the best use of the capital markets, insuring that the company has the fewest demands possible on its cash flow; (2) evaluating, and perhaps leading the charge, on merger and other investment opportunities to build value; and (3) constantly focusing on costs to keep the most flexible operating structure.

As company size shrinks, a few things happen to this list: (1) smaller companies are generally price-takers in the capital markets -- a good CFO may save a few dollars in interest or lease cost (and fees) by careful shopping, but smaller companies generally lack the clout to create unique debt or equity securities which give them a particular advantage; (2) could still be the same in a few cases, but any transaction will more likely be overseen, and led, by an outside private equity investor or other capital partner; and (3) becomes, if anything, more important, although once again the relative size of the company and its suppliers means that the company may have limited leeway on costs.


This isn’t to say the CFO of a small or midsized business isn’t important -- he or she is vital -- merely that they sometimes get credit or blame for the wrong things.  CFOs are seldom (don’t say never) the primary party at fault when sales decline precipitously, for instance, although they’re often blamed for the resulting lack of cash and debt defaults.


I’d be interested in your thoughts on this, and will plan to develop it further -- and look at other roles -- during the coming weeks.

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Tags: CFO, economy, growth, value


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Comment by Rod Guinn on August 10, 2011 at 12:08pm

Thanks to both John and Sam for expanding on the topic.  I think your two comments are really in line, and I don't disagree with either.The capable CFO is best used when he or she is both a strategic thinker and in control of reporting and costs.

Unfortunately, two realities emerge.  First,as Sam notes, the CFO is often forced to sacrifice the strategic role due to limited staffing (the cost-management side).  Second, the point I was suggesting is that the debt and capital markets sometimes attribute too much of the blame (or credit) to the CFO for changes in financial position due to familiarity -- they're more often in communication with the CFO, and it's easiest to shoot the messenger.

Comment by John A. Gordon on August 9, 2011 at 8:53pm

Rod: Being a CFO in the past, the memory emerges: the CFO generally struggles between being a  policeman/technician and strategic advisor/planner. Their actual workaday roles fall along that scale.

I feel the CFO is self actualized when they can build above the policeman/technician role (accounting, reporting, audit, regulatory) and interface with the other business disciplines, including and especially marketing and field operations, adding a new deeper dimension of analytical perspective.  The CFO isnt merely a cost person, they should also be a revenue person and both tactical and strategic direction advisory role.  

Comment by Samuel Nicholas Borgese on August 9, 2011 at 9:22am

Rod - Your post assumes that CFO's are always focused on strategic activities.  My experience recently is that CFO's are being mired in accounting either from a lack of qualified accounting support people or an absence of human resources as a result of a RIF in the F&A group.  Too many CFO's are working 14 hour days and give their strategic role a back seat to accounting and publishing financial reports.

More to the point of your post the creative tension between a CEO with strong leadership and clarity of concept vision and a CFO focused 80% on the strategic and cost control side of F&A is invaluable to the success of any company with the top line volume to support those roles.  Sam




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