How CFOs can make crypto less cryptic

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

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

Eric Segal

Bloomberg News Matt Levine, who covered the FTX debacle, hits crypto and fintech firms hard when he wonders: Do they have hard-earned expertise, accumulated over many years, in accounting controls and the business processes for running a giant organization? Are they happy to make sure all the documents are correct?

Many boards and management teams hire CFOs or hire consultants to provide this expertise. We are often given the explicit mandate to build strong accounting and finance teams as well as internal controls, policies, procedures and forecasting models.

For the next batch of successful fintech and crypto companies, here are some things to help you not find yourself overwhelmed and strapped for cash:

Create a forecasting model aligned with the strategic plan

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

With a template, you can start to detail the strategy down to specific elements that can be incorporated into financial statements. The 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 will you need and how quickly will you hire them?

Develop a solid accounting and reporting infrastructure

A financial accounting platform is another must-have. You will need to choose the right accounting system to fit the business plan which will evolve with the business growth plan. Start-ups can get a lot of value from QuickBooks or a similar simple platform. For businesses with higher volumes and increased complexity, Oracles 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.

Follow the 3 flows: cash, information and accounting

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

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

Cash is the cornerstone of any business. For fintech and crypto companies, it’s also important to separate customer cash from company cash. The best internal control for this type of flow is to reconcile cash transactions with bank statements on a daily, weekly or monthly basis depending on the volumes and nature of your business. If you don’t stay above this control, your cash flow situation will become very confusing very quickly.

The information flow provides data for accounting entries and management reports. On fintech and crypto platforms, transactions can happen every second 24/7/365 while your business generates revenue, incurs expenses, and manages cash from each transaction. This information must be reserved appropriately and accurately. The transaction system must communicate with the accounting system, the books must correctly reflect transactions, and customer funds in the user’s wallet/account must be updated. You will be dealing with a lot of crypto and cash and you need to have these systems in place to know how much and who owns it.

Accounting flows are 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 data from operating systems is correctly reflected in the general ledgers, and comparing financial results to budget or forecast.

Turn data into insights for C-Suite and investors

It is extremely important to collect the data, to validate it and to account for it correctly, but it is not the last step. How you communicate something is often more important than what you say. Remember that there can be two sides to the coin. For example, employee turnover is disruptive, but it also presents opportunities for upgrading talent and re-engineering 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 be linked to these documents, comparing the results to 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 ahead of schedule and received a discount that will reduce expenses by 20% over the life of the contract. It’s part of the story you can create with numbers.

You will 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 does your team need to present the information?

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

Oracle NetSuite is a CFO sponsor. Oracle NetSuite has no influence on this contributed article.

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