How CFOs can make crypto less cryptic

The recent bankruptcy of FTX, one of the world’s largest cryptocurrency exchanges, underscores the need for companies in the fintech/crypto industry to develop and install robust internal controls and financial processes.

FTX, led by 30-year-old Sam Bankman-Fried, who has since resigned and been arrested, was once valued at $32 billion, before its financial collapse and bankruptcy filing. It does not appear that the company had a chief financial officer (CFO) in the management team.

Eric Segal

Bloomberg News’ Matt Levine, who has been covering the FTX debacle, comes down hard on crypto and fintech companies when he wonders, “Do they have hard-won expertise, built up over many years, in accounting controls and business processes for operating a giant organization “Are they happy to make sure all the paperwork is correct?”

Many boards and executive teams hire CFOs or engage consultants to provide that expertise. We are often given the explicit mandate to build solid accounting and finance teams together with internal controls, guidelines, procedures and forecasting models.

For the next batch of successful fintech and crypto companies, here are a few items to ensure you don’t get overextended and short on cash:

Create a forecast model adapted to the strategic plan

Crypto and fintech companies should develop a financial model based on assumptions that are reasonable, well-articulated and stress-tested so that investors, bankers and other partners will feel comfortable that it represents a fair forecast.

With a model, you can begin to granulate the strategy down to specific elements that can be rolled up to accounting. Key questions to be answered in the model are:

• What are the revenues and costs associated with each element of the plan?

• What infrastructure is needed to support operations?

• How many employees do you need and how quickly do you want to hire them?

Develop a solid accounting and reporting infrastructure

A financial accounting platform is another must-have. You need to choose the right accounting system to fit the business plan that will scale with the company’s growth plan. Earlier stage businesses can get a lot of value from QuickBooks or a similar “simple” platform. For companies with higher volume and increased complexity, Oracle’s NetSuite or Microsoft Dynamics 365 may be the answer. The usefulness of spreadsheet-based accounting and reporting platforms is short-lived because they are error-prone and difficult to audit.

Go with the 3 streams: cash, information and accounting

When we helped a crypto derivatives exchange gain regulatory approval from the US Commodity Futures Trading Commission (CFTC), our mandate was to produce auditable financial statements. But before we could prepare the statements, we had to develop the key accounting and risk management policies and processes that articulate the governance and control of the information in the accounts. Crypto and fintech companies may soon face more regulation, and a focus on the three “streams” will help you keep your financial house in order.

Your accounting system and processes should focus on these critical flows.

• Cash flow is the lifeblood of any company. For fintech and crypto companies, it is also important to keep client cash separate from company cash. The best internal control for this type of flow is to reconcile cash transactions to the bank statements on a daily, weekly or monthly basis depending on volumes and the nature of the business. If you don’t stay on top of that control, your cash position will get very confusing very quickly.

• Information flow provides data for accounting and management reporting. On fintech and crypto platforms, transactions can take place every other 24/7/365, all while your business earns revenue, incurs expenses and manages cash from each transaction. This information must be ordered correctly and accurately. The transaction system must communicate with the accounting system, the books must reflect the transactions correctly, and the customer’s funds in the user’s wallet/account must be updated. You will be handling a lot of crypto and cash and you need to have these systems in place to know how much and who it belongs to.

• Accounting flows is the series of processes and controls that the accounting department performs to correctly represent information from business operations. These include the bank account reconciliations mentioned above, reviews to ensure that the data from the operating systems is accurately reflected in the ledger, and comparing financial results to the budget or forecast.

Turn data into insight for the C-Suite and investors

Collecting the data, validating it and accounting for it is extremely important, but it is not the last piece. How you communicate something is often more important than what you say. Remember that there can be two sides to the coin. For example, staff turnover is disruptive, but it also provides opportunities to upgrade talent and restructure processes.

When communicating with the C-suite and the board, use the strategic plan and budget as the center of your universe. Each material element must relate back to these documents, comparing the results with the expectations. In November, you expected to spend $10 million on technology, but you spent $12.5 million. Why? Well, maybe you signed a contract with a cloud computing platform sooner than planned and you received a discount that will reduce your expenses by 20% over the life of the contract. This is part of the story you can create with the numbers.

You also need a communications strategy to manage investor relations. Investors always seem to want more information. What level of detail strikes the right balance? Who will speak to them on behalf of the company, and what briefings will your team need to present the information?

Eric Segal, who is a partner at CFO Consulting Partners, leads the firm’s banking and financial institutions practice. He is former CFO and current CFO. He has been advising crypto and fintech companies since 2014.

Oracle NetSuite is a sponsor of CFO. Oracle NetSuite has no influence over this article.