A Finance Horror Story: The Currency Conversion Catastrophe with Lauren Pearl

I think we need to recognize that mistakes happen in financial modeling and in organizations, and when they do, there is a best practice of how to deal with that.

And we're going to tell you the story of the currency catastrophe. All right, here we go.

Lauren Pearl is a CFO and startup advisor who helps founders build financially strong businesses. With 13 plus years in startup leadership, she's worked with over 300 companies, bringing clarity to numbers, strategy to growth, and confidence to decision making.

I find that the most confusing is when the currencies are literally called the same. And you have to remember, well, make.

Sure you have your checks for your currency, because we've all done currency mistakes. They happen. How many meetings you have a week should be emails.

The kinds of meetings these days that I wish were emails are.

What's your takeaway from this?

Currencies. They matter. There's two other in my mind that I think really stick out. One is about.

Financial Modelers Corner is the world's premier modeling podcast. It is brought to you by Financial Modeling Institute, the world's leading financial modeling accreditation organization. Hello, everyone. Welcome to this special episode of Financial Modeler's Corner. I am your host, Paul Barnhurst, AKA the FP and a guy. And this week we have a special guest with us where we're going to have a little bit of fun in this episode. So I'm going to take a minute and welcome Lauren Pearl to the show. Lauren, welcome.

Hey, Paul, it is so cool to be here with you. I'm so excited for us to do this episode. We've been chatting about this for a couple of months now.

Yeah, it's been in the works for a while.

Yeah, yeah, yeah, yeah. I like came to you, Paul, with hey, I kind of want to do this crazy idea, but what do you think? And I was elated that you said yes. So I am super excited today.

I'm all for crazy ideas. And you know, before we get started in this fun episode and explain the details, I just want to take a minute and mention our sponsor of the podcast, Financial Modeling Institute. They offer the most respected accreditations in financial modeling. I did the Advanced Financial Modeler last year and this year I just signed up to do the Chartered Financial Modeler. So I'll be busy studying for that. Feel free to join me on some of those courses. You could join Lauren and get your certification on that. Highly sounds great to do it. So there's my plug. Now we'll get back to our regularly scheduled episode. Lauren, before we jump into our episode, how about you tell Our audience, a little bit about yourself since you're going to be my co host today.

Yeah, definitely. So I'm Lauren Pearl. I am a CFO who works with Sarah Startups and I also do a lot of courses and kind of education on startup finance. In particular, the tools you use for it, financial modeling, the way to manage a startup, all that kind of universe of things. So that is sort of my world as a person.

Hey, I don't know that I have a lot of meetings that could be done with an email, but two kind of funny things with that. First, one of my favorite quotes is it takes a very good meeting to beat no meeting at all.

I love that quote and that's a really good thing to live by.

And the second one. So I worked with this lady at a company and she told us previously at a job she had, she had a controller, that he had a rule, okay, if he walked into a meeting and there were more than, I think it was five or six people, he walked out, he refused to attend. He goes, nothing gets done in big meeting. You can just email me the details of what I need to do. And he'd go back to his desk and work.

That's wild. Wow, that's really interesting. It's. I actually had a really interesting story from in, in favor of meetings, actually of big person meetings. We were interviewing Charlie Kers, the CFO of Carta on a podcast that I co host, the growth minded cfo and he said that actually Carta has I think it's one or two full hour all hands meeting for the entire company per week. So that's like a huge time spent in meetings. But I think it's also, it speaks to the value because they work in such lockstep. There's so much Cross functionality at that company and so much need for context for every person that they've gone hard on those meetings and it seems to be working for them.

So I can't see a situation where I would do that. But hey, if it's working for a more power to them, but I'll pass. So that, that reminds me, no part of in my future. All right, back to our.

Let's see what's going on with David.

Let's see what's happening to David.

Cross international markets, Russia, the uk, Brazil, Japan, you name had already been a brutal year. The company had outsourced billing and collections overseas and surprise chaos ensued. Payments, lost invoices.

Have you ever seen that happen? You haven't worked with enough big companies to have outsourced Overseas, Right.

We've. I definitely work with outsourced overseas teams because I used to be a developer, so we've worked with internal scientists previously. To build software. Yeah, to build software. And even at Deloitte, actually, I did a lot of digital transformation where we'd have developer teams out of India or other countries. So. Yeah. And it's. Sometimes stuff gets lost in communication.

You know, I had one where it was so bad. I finally had. We outsourced a billing and it was so bad, I finally had to tell our billing manager that no billing files could be processed till I reviewed them. And we had over thousands of customers. They were all doing it manually. So many bills were wrong and messed up. I mean, it never experienced anything that bad. I was like, hey, I'm head of FP&A. Why am I reviewing every single billing file every month?

That is a horror story.

It was pretty awful. All right, back to our story.

Invoices misapplied, journal entries done in what could only be described as creative interpretations of accounting.

Megan. Ron.

The team was short staffed, and the tension between the CFO and the head of David's department, let's call him Matt, was so thick, you could expense it as a capital asset. But nothing, nothing could prepare David for what happened next.

Dun, dun, dun.

What do you think happened next? What could be so terrible? Like, any ideas of what a currency catastrophe would be?

Okay, so let's summarize what's happened so far. We know that David works in a cubicle Stress. We know he works under fluorescent lights.

Horrible.

We know that he's at a Fortune 500 company. So the stakes are high that they're supporting revenues across a bunch of different countries. So I'm already thinking currency. So there's maybe some conversion issues. We've got some overseas resources. Maybe that's where things are going. There are a lot of things that could go wrong here. I am stressed.

I'm thinking maybe a hedging. Like one of the currencies collapsed and they didn't hedge against it. Like, you know, there's hyperinflation or something. And he had him. Had to try to deal with that. The fallout.

Yeah, that's a really good guess. That's a really good guess. Maybe. Yeah, it could be that one of them just completely. There's like a run on the market and they've got to deal with it and money's moving everywhere and maybe because there's also outsourced resources that's like politically challenging to, like, discuss and like, take action on. I don't know. There's a lot of things that could go wrong here. I feel like I just need to listen. I can't be. I can't be in this space of unknowing for too long.

Let's go ahead and roll it and see what happens. You let me know when deposit next. Here. Here we go.

One gray tutor.

Okay. Okay.

David sat alone in a satellite office in the western U. S. The glow of his screen was the only light in the room when the call came in. Jessica, a junior analyst based in New York. Super nice. Bright, midway through a master's in finance. Hey. Okay, okay, quick question for you. For allocating revenue across global markets, why can't I just add up the amounts in the local currencies column and split things based on that?

Thoughts? Did you hear what was said there? Let's go back and play that one one more time. I'm going to give you the last 10 seconds here.

Let's do it. Let's do it once more.

For allocating revenue across global markets, why can't I just add up the amounts in the local currencies column and split things based on that?

Okay. Okay. So what she's asking is basically the local currency, meaning the currency of the local market. So I'd imagine these are all kinds of different currencies, all different kinds of money. You got, right? Ruples and rands and pounds. And why can't I just add all this up? Well, obviously there's. They're all different currencies of money. They're not equivalent. So it would be a weird currency soup. Oh, okay. I see the problem here.

You mentioned something about allocating, so let's keep listening and kind of hear a little bit more. But it's dawning on you, right? This could be a nightmare. So let's listen a little bit more, see what the real problem is, then we'll stop it.

Like add the rubles, euros, pounds, pesos, and use that total to allocate. Yeah, that's what each customer reported, right? So can't we just use that total? There was a long silence. Was this a prank? Was he being filmed? Was this a trap? Surely someone with a master's in finance should know about currency conversion, right? But no, Jessica was being serious. And so slowly, carefully, like explaining electricity to someone holding a fork, he began.

What would you be your response at this point? Would you be as calm as this person or would you be like, come again? Well, my background is in fpa. I am also passionate about financial modeling. Like many Financial modelers. I was self taught. Then I discovered the Financial Modeling Institute, the organization that offers the advanced Financial Modeler program. I am a proud holder of the afm. Preparing for the AFM exam made me a better modeler. If you want to improve your modeling skills, I recommend the AFM program. Podcast listeners save 15% on the AFM program. Just use code podcast.

So I feel like, especially in the larger company experiences that I've had, there's a lot of sleep deprivation that goes on. And so I feel like when you bump into something boneheaded, you at least I in those situations tend to try to have a little grace because are we all working at full capacity? Maybe? No. Are we all stretched thin? Probably yes. This though, it feels like, you know, I'm remembering the little data we got at the beginning of there's a lot of markets that we're managing. This is a Fortune 500 company. I feel like the mistake itself, I'm not flabbergasted by, I'm sort of like, well, that was boneheaded. But I am quite worried about the implications of this mistake.

Admit I'm a little flabbergasted.

It's okay, go on.

That seems pretty basic, this idea, right? It's like if I'm running a race and someone says, well, how far did you run? Well, I ran 100ft and 200 meters for a total of 300. And they'd be looking at you like, are you an idiot?

You're actually giving.

Like I get sleep deprivation and we all make mistakes and I've done some dumb things. I still remember a couple months after I'd had my daughter looking at some of the work I did and I'm like, wow, this work sucks. They should have fired me because I was so deprived. So we've all done it. So, you know, trying to have some sympathy there. So let's see if this is kind of a one time thing or what it is. But my initial is really like, that seems very basic. All right, let's see what happens next to poor David and Jessica.

Imagine two countries, Russia and the UK. Okay, Russia reports are 100,000. The UK reports 10,000 pounds. If you add those together, you get a hundred and Ten thousand pounds. Units of what? Exactly. It's like saying three feet plus three meters equals six. You can't compare numbers in different units. You have to convert them to a base currency like USD before allocating. There was a long silence on the other end. Then the words that chilled David to the bone, Jessica said in a SMALL voice. Oh, no, I've been doing it this way all year. David's soul briefly left his body.

So it looks like all the different countries were getting allocated on local. So in other words, countries like Japan, Russia.

Yeah.

We're getting a disproportionate amount of the.

Revenue because their currency has. Is a. Oh, my gosh. How would you describe this? Basically, there's more ruples than that it would take to make a single US dollar. And so they're over.

Correct. They've chosen to make it really low value for each of their units. You know, some of that's economy, some of it's the way they've designed it. It can be both. Whereas, you know, others, like the British pound is generally seen as a very strong currency against other markets and they're low, you know, low conversion or high conversion rate versus those markets. So you could have a very low dollar amount. Like, you know, that 10,000 British pounds could be as worth as much or more than the hundred thousand rubles, quite a bit more, potentially.

So Jessica's basically just counted all the units of currency that each country represents and has allocated based on the number of units. Unfortunately, the value of each of those units is vastly different. So it's completely bonkers.

Yeah. So. Right. I mean, let's take an example. You give 30% of the revenue to Russia or Japan, you know, when they should have been three or two.

Yeah, yeah.

And you give 10% to the UK when maybe it should have been 50 or, you know, whatever. So you could see how big this number would be and especially if she's doing that for the whole year. Yeah, a big global 500. Someone came to you, you know, and you're the CFO, and told you, we have a problem. Everything's been misallocated for the entire year. And told you this was the reason and nobody caught it for the year. What would be your response?

You're right. Jessica would be gone and I'd have some explaining to you. The place that my brain goes is how important was that allocation metric to the overall business and to the external shareholders? That's immediately. As a cfo, my brain goes to prioritization and implications for the other part. The, the parties, the different stakeholders. So if this allocation is how I've been deciding my budgets for each of these countries this entire year, that's huge. Folks may have gotten fired on a country that really needed support because they were the main driver of revenue, because they were getting under allocated resources because of this mistake. So that's a huge effect of an error or if I now have to correct it. And external sources are using this allocation to track the performance of my business. When that changes there I'm losing huge amounts of trust with those stakeholders. So that's not good depending, right? It's not clear exactly to me how they're really using this allocation in this company. So that.

Let's keep listening and see what else we can learn here. We got just a little bit longer left.

Okay, Millions of dollars across 30, 40 countries allocated using completely nonsense math David ended the call and sat in stunned silence. He stared at the wall for a second, willing it to become a door to another dimension, then immediately phoned his boss, Matt. We have a problem. He explained what happened. Matt was floored. I knew she was having a rough year, matt said, but I had no idea she didn't know to convert currencies. Thankfully, as formerly mentioned, the entire finance function was already essentially on fire.

Thanks.

The company was already knee deep in a financial systems overhaul, so they were able to quietly roll this correction into the broader remediation efforts. No headlines, no firings, just a deep sigh and a stronger internal review process. David still talks about it to this day because in all his years in finance through recessions, restructurings and restatements, nothing chilled him quite like the curse of the currency conversion.

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Yeah, so it sounds like hilariously, Finance department was so messed up that that just dumpster fire created cloud cover for this egregious mistake. And it wasn't really a big deal at the end of the day. So lesson learned. If you're terrible at finance, go work for a terrible finance department. Will make all of your mistakes just fade into the background of general chaos.

So one one I saw one time is I remember I had a a company where it it came up in an audit.

Okay.

We were, there was this money every month that was being sent to FX currency conversion and said, you're not doing this right. We dug into it and what would been happening is we had Canadian customers so you know, foreign currency. And their, the contracts they had signed didn't mention what currency. The idea was it would be US dollar that later on that was mentioned, but they were paying us in Canadian, so they were writing off the differences in FX currency conversion instead of a discount to the sell. And the reason it was not fixed, like they didn't go out and redo all the contracts is it was in an environment where there had been a lot of competitive pressure and pricing had come down substantially. So you might have actually earned less if you went out and opened up all the contracts for negotiation. Oh, they were just writing out the discount and the auditor said, no, no, no, that's not currency conversion. You're giving your customers a discount.

Yeah, yeah, yeah, yeah, yeah. I mean stuff like this happens all the time. That's even like I find that the most confusing is when the currencies are literally called the same. And you have to remember, especially with Canadian currency, I often will struggle with this one because it's literally called Canadian dollars. Just like US Dollars.

Yep. Australian dollars, Singapore dollars. There's a number of currencies like that.

And often the, the conversion's not too, too far off. It's actually pretty similar, not one to one, but it's more similar than other currencies where the difference is really obvious. So. So that one's on a mistake. It's funny because as I'm listening to this story, I'm realizing I have also kind of made this mistake. Not this bad and not with these kinds of consequences. But early on in my independent consulting career as a frac cfo, I was speaking with a company that was introduced to me through a stern classmate, this amazing AI startup out of South Africa that was doing something in the healthcare space. Really, really cool stuff. And they'd already had a bunch of locations. It was a location based startup that had like a facilities and they already had quite a few of those. And typically when I onboard a client as a frac cfo, you have this advantage of sometimes you get to see the numbers beforehand and so you can help the client know what they can afford. Right. The client tells you they want this, the moon of of of your services, but you can help scope kind of reverse engineering to what you know, the budget that that would make sense would be so that you don't run them out of business and trying to help them. So I did that with this client and I look at the books. I'm like, great. This is, you know, millions of dollars. They're really prominent. I know the CEO is also very prominent. And so I figured, wow, this is great. You know, early in my, in my SPREC CFO journey and already, you know, the big guys are coming to. To work with me. And I go ahead and I put together a proposal and I hear nothing. And then when they do come back, they say, you know, it's, it's a little out of our. We love to work with you, but it's definitely a bit out of our price point. We're not sure we could do it. I'm sitting there thinking, like, I purchased this pretty affordably considering what I know their budget to be like, this is maybe I didn't sell my services enough. And then of course, it hit me. All of those books I'd looked at were in South African rand, not in US dollars. And that's like an 18x difference.

So.

No Fortune 500 companies were hurt in this mistake. But my own client relationship might have been a little damaged. So I have a couple things, like currencies, they matter. I think that's like, number one, right? That's our shining headline is like currencies, they matter.

Currency matters, number one.

There's two other in my mind that I think really stick out. And one is about disclosure, which didn't really come up in here, but it's. It's something that kind of my brain goes to in the CFO seat. And the second would be reviews and checks. So maybe starting on disclosure in this story, it sounded like this person kind of had the. The COVID of an already exploding finance organization that needed a refresh. And so this could kind of go into the pile of a number of mistakes that had been made in, in that org and that were being corrected. That said, let's go back to the implications of a mistake like this, right? There could be impacts on the external stakeholders, impacts on internal folks. People could be watching this number and are going to notice when it suddenly changes. And I think we need to recognize that mistakes happen in financial modeling and in organizations. And when they do, there is a best practice of how to deal with that. And I had a professor at Stern who would talk about the way to react when you make a big mistake that's public in the market is you apologize and you overcorrect. That's the playbook, right? You come out, you Disclose what has happened. You are transparent about that there was a mistake and that it is being corrected. And you apologize, apologize, apologize. And then when you correct, you don't just kind of correct it, oh, we're fixing it. You really go overboard in expressing how much you are taking this problem seriously. And correcting. There's this great.

So you, you don't do what peloton did and blame the parent for the child, the accident with the treadmill.

You do not. That would be a bad case study.

A good case study. And we see what happened to them. Prime example of how not to do it.

The classic example of how to do it would be. There is a case study of. I think it was Tylenol.

It was Tylenol.

Yes, I know the case where somebody had tampered with some of the bottles and had injected like a poison of the Tylenol capsules and it had made some people really, really sick. And obviously this wasn't really Tylenol's fault. It was some bad actor tampering with their medicine. But they still took responsibility. They apologized profusely for it happening and they overcorrected. They created safety caps and things to prevent the tampering and really took responsibility for this terrible incident. And doing so really deepened the trust in their brand. So these can also be opportunities. Build a reputation as a company that accepts that mistakes happen and takes responsibility for them.

You know, the thing I'd add here, especially for the financial modelers, is you're building a model. Make sure you have your checks for your currency. If you have a process in, hey, is there a check? Is it coming? Converted to all standard. Does it all make sense? Because we've all done currency mistakes. They happen. If you're dealing with a lot of currencies. I once forecasted the entire country in a wrong currency. Fortunately, it is our smallest market, so nobody cared but that country. But they weren't happy with me. But nonetheless, you know, I used, I think the euro instead of the Polish Kroner or whatever their currency is. So. So we hope you enjoyed it. If you have a story you think we should feature in the future, let us know. If you think we should do more episodes like this, let us know. But thanks for joining us. And Lauren, thanks for being my co host.

Oh, yeah, thanks for doing this. Hopefully, folks, enjoy. And please, if you have a horror story, send it to us so we can tell your terrible tales.

All righty. And on that exciting note, we'll have some spooky music to take you out. Thank you. Everybody.

Bye, everyone.

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