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What can a CFO do about an economic crisis? "Don't waste it," says finance veteran Ken Goldman.
Tim Reason, CFO.com | US
March 31, 2009
If the economy caught your company overburdened with debt or short of cash, then Ken Goldman's financial advice is probably not going to help you. Good financial leadership, says the CFO of network security provider Fortinet, "starts with what you do when times are good."
In his long finance career, Goldman has seen plenty of good times and bad. Best known in the finance world as CFO of Siebel Systems during the six years leading up to its acquisition by Oracle, he has also been the CFO of Excite@Home, Sybase, Cypress Semiconductor, and VLSI Technology.
Now at privately held Fortinet, Goldman notes that the technology industry — with its rapid growth spurts and regular cycles of self-inflicted downturns — has long required steady financial management. "Hell, I've been in the semiconductor industry, which goes through this every five years," he says. "Other industries have not gone through this and are somewhat unprepared."
When times are flush, says Goldman, companies need to maintain controls, exercise financial discipline, build up cash, and make sure they have a strong balance sheet—"all things that Wall Street didn't do" leading up to the current downturn. Many companies are now "in a very tenuous situation" because they are overloaded with debt, he says.
Goldman is no stranger to the pressure that CFOs feel to shave it close on capital structure. He recalls that when he was at Siebel, he "got a lot of grief from hedge funds that said we had too much cash, and said we should reduce it and buy back stock and even take on debt." Such cries, he says, often echoed by the press, don't do companies or their long-term shareholders any favors.
Today, Goldman operates without many of those headaches. Fortinet is backed by venture funds and private equity, and the CFO has not had to spend time holding the hands of shareholders or banks. The company provides "unified threat management" security systems for corporate computing networks, combining firewalls, antivirus and spyware protection, intrusion prevention, spam protection, and other security measures on a single device. Fortinet grew 30% last year, with $200 million in revenues and an operating profit of $10 million.
Not bad for a company that was losing money when Goldman came aboard in September 2007. "We needed to do a better job of managing expenses," he says. "We grew revenue 35%, but only added 14% headcount. That's how we turned profitable. And we did that during an upturn. We improved our inventory management. We did those things while times were still good."
Goldman says managing expenses means that he personally reviews — and signs the check for — any expense that exceeds $10,000. He also reviews all international cash transfers. "Leadership doesn't [just] mean you're at 30,000 feet; it also means showing your team that you are paying attention to the details," he says. "And then they pay more attention." Goldman says he operated the same way at Siebel, a much larger company than Fortinet. "I think you can scale pretty big and still keep your hands on stuff."
Goldman also focused on improving the forecasting ability of Fortinet's 45-member finance team. "We worked hard to improve our predictability," he says. Because Fortinet's network security products reside on an actual appliance, the company has inventory that has to be carefully managed. "The ability to match up our forecasts with what we order in terms of inventory was very important in terms of predicting our revenue," he says.
The payoff for such predictability and reliability is investor confidence, says Goldman — "more confidence in providing you with credit or further equity rounds." Indeed, he notes, promoting confidence among investors and bankers is "a key role of the CFO."
Forecasting is done quarterly at Fortinet, says Goldman, but "we update our forecast every week." The weekly exercise is done primarily for internal purposes. "We don't do it as much for our equity holders or venture investors," he says. "We do it for ourselves. We do it because it is good business." Goldman admits that forecasting "is a lot tougher in this environment," with much of the information available being "short-term."
As for cost cutting, Goldman is in the enviable position of working for a company that "is still hiring," not firing. Still, he has seen his share of layoffs over the years, both as a CFO and as a board member on several public and private companies. Layoffs, he says, are always a "tough balancing act to manage," an act that varies from company to company depending on capital structure and cash position.
But there's one tactic he considers always to be a mistake. "I've heard [it said], when you cut, do it all at once," says Goldman. But not even the smartest finance professional can reliably predict the bottom of a downturn, he points out, or the possibility of a sudden recovery. Painful as it might be to have repeated layoffs, he says, it is better to "cut the dog's tail off inch-by-inch" than risk being short of resources when a recovery begins.
By far the most important aspect of managing in an economic crisis, says Goldman, is to recognize it as an opportunity to roll out new products and prepare for an eventual recovery. "Don't waste a recession," he says. "You can outflank your competitors during tough times when they are deteriorating. Use this time to invest, expand, take share. Hire great people."
Goldman says he has no more idea than anyone else when this current recession will end, but he maintains that "it's a great time to invest in R&D and great sales folks." Developing new customers and new geographic markets during a downturn are "just good investments," he says. "You may not get a big return in tough times, but you will get a humongous return when the market comes back."
Of course, that all comes back to Goldman's Catch-22: companies can't capitalize on current conditions if they were already in bad shape when the recession started. "If you don't have cash," he says, "all bets are off."