Category: Accounting, Finance, Treasury, Leadership
Board of Directors and CEOs rely on Chief Financial Officers. They rely on them to explain the past, see the future and provide insight into corporate planning and decision making. Of course, the operational tasks of liquidity management, margin analysis and asset utilization are also first tier responsibilities of the CFO.
While being a Board member or the CEO doesn’t require a degree in finance, good financial management is the result of having confidence all your CFO pillars are being responsibly managed. These pillars are made up of four specific activities. In this article we’ll walk through each one and share some tools to help you improve these four pillars.
1. Timely and Accurate Recording and Reporting Systems
This covers the Accounting portion of the CFO core responsibility areas: Accounting, Finance and Treasury (“AFT”). (Use our AFT Assessment Tool to analyze your accounting, finance and treasury departments)
Process Management Skills – Application of knowledge, skills, tools and systems to define, visualize, measure, control, report and improve processes to meet a specific goal. For example, a retail business would have a process of: Sales Order, Delivery of Product, Issuing the Invoice and Collection of Cash. A tight process can help to eliminate accounting errors.
Financial Statement Expertise – Refers to knowledge of the income statement, balance sheet and cash-flow statement. Understanding your gross margins, overhead costs, assets, liabilities, and how money moves through your business are keys to its success. It’s important to have a good grasp of each element and how they connect; for example, how profit builds equity on a balance sheet and improves your overall financial position. These statements help to explain how investments are converted to cash and how quickly.
Key Performance Indicators/Dashboard –KPIs are quantifiable measures to gauge or compare performance in terms of meeting strategic and operational goals, and the Dashboard is used to summarize the key areas of your business. A prime example of a KPI is gross margin percentage (gross margin divided by revenue). On the Dashboard side, Day Sales Outstanding is one metric that would indicate if you were meeting time to collection objectives. Understand what the main drivers of your business are and create metrics around them.
2. Treasury Management Capabilities
(Falls under Treasury in the AFT model.)
Cash Flow Management – Being able to forecast cash flow and ensuring you have enough for day-to-day operations is important for any business. You need to understand where the money will come from— profits, customers, vendors, banks or equity investors. This is particularly important for early stage businesses.
Debt and Equity Financing Expertise – Being able to raise money through debt and equity markets. For example, if you are growing your business the company will require increased working capital—more cash—for operations. Banks are normally a good source of credit for a portion of your working capital but they will require some of your working capital needs to be supported by equity. Knowing which banks to approach and how to negotiate terms is important to prevent using too much valuable equity to support low-return working capital assets like inventory and receivables.
3. Business Planning and Business Growth
(Falls under Accounting and Finance in the AFT model.)
Strategic Planning –Every business plan needs to be converted to a financial plan. This will help you understand how your growth and other strategic initiatives are impacting your business financially. Whether your key initiatives include growing your human resources, investing in technology, building a new plant or expanding into certain geographic areas; once you’ve established a strategy, your financial model will help measure your success in implementing it and assist you in making course corrections along the way.
Financial Forecasting – Analytics, market research and use of financial statements all help to project your future finances. This data is key to strategic planning.
Investment Analysis – Assessing the potential profitability of a long-term investment. What will your return on investment (ROI) be? Let’s say you wanted to build a new plant. You will need to determine the cost to build, revenues from the building project, and costs related to those revenues. It is also important to be prepared for potential unexpected costs, such as issues with construction or other unforeseen challenges.
4. Governance and Controls
(These areas are covered by both Treasury and Accounting in the AFT model.)
Compliance – Includes Controls, Governance and making sure regulatory filings are complete. Awareness and application of laws, regulations and policies in terms of accounting and auditing as well as rights and responsibilities of stakeholders, rules and procedures that govern corporate decision making are the foundation of effective financial management.
Risk Management – Includes risks in areas such as banking and financing, as well as insurance needs. This is a very important area for boards and corporations; some may even have a Risk Management committee or department. There may be nothing you can do to mitigate certain risks, but many risks can be managed..
With a solid understanding of these concepts, your CEO will be in a position to make informed decisions, paving a clear path toward financial success. If you’re looking for a detailed snapshot of your corporate financial health, utilizing an AFT Assessment Tool can be helpful in identifying areas that may need improvement. Having a financially savvy CEO will help your business grow profitably and avoid the financial pitfalls that many businesses encounter.
