Absolutely, very few CTOs in my experience understand double entry or know how to read a balance sheet. To their detriment, IMO, but there are all kinds of effective CTOs across all kinds of orgs.
But OP was asking for guidance in learning how to engage on those topics- as opposed to communicating about technical things to that audience. Hence the recommendations.
I agree about the value of NPV, tho I would argue that NPV without some accounting chops is tricky waters. "Value" in that context has an accounting meaning, not the largely useless goofy ROI calculations that tech folks usually create.
People are too quick to recommend accounting and finance books. Or... recommend super complex material because they think the subject is complex. If his/her goal is to learn what it takes to be more effective at the finance piece, they should follow my advice. If they want to go deeper for fun later, they can, but it won’t have as much value as improving the 3 things I mentioned.
I’m a Corp finance guy and agree with your comments more than most on this thread. Very little value in knowing double entry accounting. It’s actually a key difference between most finance and accounting. I don’t even deal with that stuff. I know all about how it works sure, I had to take accounting classes in college but it’s not a routine part of my job and certainly no other executives.
Accrual is important. Mostly because it impacts timing and gives you some levers to adjust to make the financial statements the way you want. Eg depending on your goals, you may want to form a strategy on when to sign a vendor contract.
Financial statements is where it’s at though. And it’s easy to learn from a book. However, what you need to learn, is how this general knowledge fits your company. This is really the difference between good and bad CxOs (and I’ve seen my share of both).
This is a different path. It’s metrics and KPIs. It’s strategy and knowing what’s important for the company. Are you conserving cash, are you growing at all cost, prove you have an ROI on your project, prove you can execute the project as promised, articulate why a project is off the rails (signal risk). A lot of this is financial politics, but if you talk the talk and earn credibility you’ll be seen as has a strong fiduciary over your domain. Also, depending on the size of your company, get a finance guy that reports or has a dotted line to you. If company is too small for that, you can just build a very good relationship with the finance team. I’m my experience, 25%-50% of our job is partnering with other executives; meaning we educate them (comprehension And prep for meetings with other executives/BOD) and we have full scope knowledge of what every other department is doing.
I downplayed the value of the P&L, but your right. If the person ultimately wants to get to a CTO role, I imagine the P&L becomes more important overtime. Knowing when to back a project may come down to knowing whether it impacts the right metric.
The other thing probably worth studying earlier is HC costing. It’s really easy to understand, but often catches directors/vp in non-finance functions off guard.
Basically, timing matters a lot and people make mistakes when asking “can I afford this?”
“can I afford this?” a question I get every day. It's a little naive at times. Because the question is really, what happens if you can't? You should be telling me and any approvers why you need it. Budget is a made up number and we move dollars and rebalance constantly. But the business impacts caused by you not being able to "afford" something, is what real good execs know how to handle. The CTO example is, look I know this wasn't in my budget, but I think we've actually been fairly favorable on travel expenses due to the 'rona, I don't think we can make this deadline without an additional Sr Dev. This usually spurs minimum 2 thought processes; 1) what is the real consequence of missing the deadline ($1M in sales? $10K to adjust marketing push? nothing?) and 2) if we hire a head, do we have work to keep them on after the project or do we plan to reduce the head at that point (basically, is this going to cost us money next year and the years after). Assuming the cash allows for it, these 2 questions will usually steer the decision. But, it's something you want to lead with the CEO/CFO as a CTO. Thinking the whole thing out past the immediate need is generally a sign of a good chief. Also, the CEO and CFO appreciate you lifting the minor burden of them having to think through it. You make your business case and they give some consideration, usually ranking it against every other department's requests for heads, and maybe you get what you need. If not, you've at least signaled the project will be delayed and given an option for getting it back on track.
In your opinion, is a solid understanding of DCF/NPV/IRR/cost of capital somewhat on the more-critical knowledge side for management/executives or somewhat more on the side of less-critical knowledge?
Most execs it's less-critical to almost unnecessary but CTO is probably one I'd say it's a must in some cases. You'll be managing projects, the budget's of those projects, and should also have a perspective on which projects are good for the company to invest in. As such, knowing/understanding the ROI of those projects is a good idea. Also, for allocation of your team's resources/labor you should be able reprioritize confidently if you know how the project is valued. Again, generally this is something a CTO can partner with Finance team on. I don't have a source and I may be minimizing the complexity but I feel like there's probably a few articles/youtube/Khan Academy resources where you could learn what was needed in an evening. You shouldn't be the one building the financial models unless you just find that fun :)
Also fairly specific to CTO, learn the area of accounting around capital expenditures. Whether something is an expense or cap ex is very important for CTOs especially since labor can be capex. Every company will have their own accounting rules / interpretation of GAAP that you will have to get familiar with too.
I'd say your company valuation how it's modeled and pitched to investors, etc. is not as important. Very few people see that info outside of Finance and CEO with the BOD.
Don't necessarily disagree, but the point about what to accrue- I would posit that ground knowledge of both accounting and tech is important. An asset is from a tech perspective is different from an asset from a finance perspective. A given effort towards a specific end may be considered creating an asset from a finance perspective and creating debt from a tech perspective. Conversely, it may be valuable from a finance perspective to classify work as opex that is actually asset building from a tech perspective. The language and semantics don't translate cleanly.
Agree tho they can start in those areas- and of course just talking across domains is infinitely valuable on its own accord. Cheers.
Most of this thread is the financial equivalent of someone saying "How do I do mail merge and excel macros to automate some of my business process" and getting answers like "To get started, Install Linux".
That is a great comparison. I actually got bad advice like this when I started a company 6 or so years ago. I spent way too much time learning stuff that was not important to get results. Now I focus on the basic stuff first, and it works better in all parts of life. That is why I put real advice here, even though, originally it was heavily downvoted
But OP was asking for guidance in learning how to engage on those topics- as opposed to communicating about technical things to that audience. Hence the recommendations.
I agree about the value of NPV, tho I would argue that NPV without some accounting chops is tricky waters. "Value" in that context has an accounting meaning, not the largely useless goofy ROI calculations that tech folks usually create.