The New CFO Financial Leadership Manual E-Book

Steven M. Bragg

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 995

Veröffentlichungsjahr: 2011

Beschreibung

Filled with pragmatic insights, proactive strategies, and best practices, The New CFO Financial Leadership Manual, Second Edition is destined to become your essential desktop companion. This thorough guidebook is essential reading for the CFO requiring an overview of strategies, measurement and control systems, financial analysis tools, funding sources, and management improvement tips.

Leseprobe

Table of Contents

Title Page

Copyright Page

PREFACE

Acknowledgments

ABOUT THE AUTHOR

PART 1 - OVERVIEW

CHAPTER 1 - CFO’S PLACE IN THE CORPORATION

FIRST DAYS IN THE POSITION

SPECIFIC CFO RESPONSIBILITIES

OVERVIEW OF THE CHANGE MANAGEMENT PROCESS

DIFFERENCES BETWEEN THE CONTROLLER AND CFO POSITIONS

RELATIONSHIP OF THE CONTROLLER TO THE CFO

SUMMARY

CHAPTER 2 - FINANCIAL STRATEGY

CASH

INVESTMENTS

WORKING CAPITAL

INVENTORY: INVENTORY REDUCTION DECISION

FIXED ASSETS: LEASE VERSUS BUY DECISION

PAYABLES

DEBT

EQUITY

FIXED EXPENSES: STEP COSTING DECISION

PAYROLL EXPENSES: TEMPORARY LABOR VERSUS PERMANENT STAFFING DECISION

ENTITIES: DIVESTITURE DECISION

HIGH-VOLUME, LOW-PRICE SALE DECISION USING THROUGHPUT COSTING

CAPITAL BUDGETING DECISION USING THROUGHPUT COSTING

MAKE VERSUS BUY DECISION USING THROUGHPUT COSTING

SUMMARY

CHAPTER 3 - TAX STRATEGY

ACCUMULATED EARNINGS TAX

CASH METHOD OF ACCOUNTING

INVENTORY VALUATION

MERGERS AND ACQUISITIONS

NET OPERATING LOSS CARRYFORWARDS

NEXUS

PROJECT COSTING

S CORPORATION

SALES AND USE TAXES

TRANSFER PRICING

UNEMPLOYMENT TAXES

SUMMARY

CHAPTER 4 - INFORMATION TECHNOLOGY STRATEGY

REASONS FOR DEVISING AN INFORMATION TECHNOLOGY STRATEGY

DEVELOPING THE INFORMATION TECHNOLOGY STRATEGY

TECHNICAL STRATEGIES

SPECIFIC APPLICATIONS

SUMMARY

PART 2 - ACCOUNTING

CHAPTER 5 - PERFORMANCE MEASUREMENT SYSTEMS

CREATING A PERFORMANCE MEASUREMENT SYSTEM

ASSET UTILIZATION MEASUREMENTS

OPERATING PERFORMANCE MEASUREMENTS

CASH-FLOW MEASUREMENTS

LIQUIDITY MEASUREMENTS

SOLVENCY MEASUREMENTS

RETURN ON INVESTMENT MEASUREMENTS

MARKET PERFORMANCE MEASUREMENTS

QUALITY OF EARNINGS RATIO

SUMMARY

CHAPTER 6 - CONTROL SYSTEMS

NEED FOR CONTROL SYSTEMS

TYPES OF FRAUD

KEY CONTROLS

WHEN TO ELIMINATE CONTROLS

SUMMARY

CHAPTER 7 - AUDIT FUNCTION

COMPOSITION OF THE AUDIT COMMITTEE

ROLE OF THE AUDIT COMMITTEE

PURPOSE OF THE EXTERNAL AUDITORS

DEALING WITH EXTERNAL AUDITORS

IMPACT OF THE SARBANES-OXLEY ACT ON THE AUDIT FUNCTION

ROLE OF THE INTERNAL AUDIT FUNCTION

MANAGING THE INTERNAL AUDIT FUNCTION

PLANNING CONTROLS

PERFORMANCE CONTROLS

FOLLOW-UP CONTROLS

SUMMARY

CHAPTER 8 - REPORTS TO THE SECURITIES AND EXCHANGE COMMISSION

OVERVIEW

SECURITIES ACT OF 1933

SECURITIES EXCHANGE ACT OF 1934

REGULATION S-X

REGULATION S-K

REGULATION S-B

REGULATION FD

SEC FORMS

EDGAR FILING SYSTEM

SUMMARY

PART 3 - FINANCIAL ANALYSIS

CHAPTER 9 - COST OF CAPITAL

COMPONENTS

CALCULATING THE COST OF DEBT

CALCULATING THE COST OF EQUITY

CALCULATING THE WEIGHTED COST OF CAPITAL

INCREMENTAL COST OF CAPITAL

USING THE COST OF CAPITAL IN SPECIAL SITUATIONS

MODIFYING THE COST OF CAPITAL TO ENHANCE SHAREHOLDER VALUE

STRATEGIZE COST OF CAPITAL REDUCTIONS

SUMMARY

CHAPTER 10 - CAPITAL BUDGETING

HURDLE RATE

PAYBACK PERIOD

NET PRESENT VALUE

INTERNAL RATE OF RETURN

PROBLEMS WITH THE CAPITAL BUDGET APPROVAL PROCESS

CASH FLOW MODELING ISSUES

FUNDING DECISIONS FOR RESEARCH AND DEVELOPMENT PROJECTS

CAPITAL INVESTMENT PROPOSAL FORM

POST-COMPLETION PROJECT ANALYSIS

SUMMARY

CHAPTER 11 - OTHER FINANCIAL ANALYSIS TOPICS

RISK ANALYSIS

CAPACITY UTILIZATION

BREAKEVEN ANALYSIS

BUSINESS CYCLE FORECASTING

SUMMARY

PART 4 - FUNDING

CHAPTER 12 - CASH MANAGEMENT

CASH FORECASTING MODEL

MEASURING CASH FORECAST ACCURACY

CASH FORECASTING AUTOMATION

CASH MANAGEMENT CONTROLS

CASH MANAGEMENT SYSTEMS

FOREIGN EXCHANGE WITH THE CONTINUOUS LINK SETTLEMENT SYSTEM

NATURAL HEDGING TECHNIQUES

SUMMARY

CHAPTER 13 - INVESTING EXCESS FUNDS

INVESTMENT CRITERIA

INVESTMENT RESTRICTIONS

INVESTMENT OPTIONS

SUMMARY

CHAPTER 14 - OBTAINING DEBT FINANCING

MANAGEMENT OF FINANCING ISSUES

BANK RELATIONS

CREDIT RATING AGENCIES

ACCOUNTS PAYABLE PAYMENT DELAY

ACCOUNTS RECEIVABLE COLLECTION ACCELERATION

CREDIT CARDS

DIRECT ACCESS NOTES

EMPLOYEE TRADE-OFFS

FACTORING

FIELD WAREHOUSE FINANCING

FLOOR PLANNING

INVENTORY REDUCTION

LEASE

LINE OF CREDIT

LOANS

PREFERRED STOCK

SALE AND LEASEBACK

SUMMARY

CHAPTER 15 - OBTAINING EQUITY FINANCING

TYPES OF STOCK

PRIVATE PLACEMENT OF STOCK

LAYOUT OF THE OFFERING MEMORANDUM

ESTABLISHING A VALUATION FOR THE OFFERING MEMORANDUM

SWAPPING STOCK FOR EXPENSES

SWAPPING STOCK FOR CASH

STOCK WARRANTS

STOCK SUBSCRIPTIONS

PRIVATE INVESTMENT IN PUBLIC EQUITY

COMMITTED LONG-TERM CAPITAL SOLUTIONS

BUYING BACK SHARES

SUMMARY

CHAPTER 16 - INITIAL PUBLIC OFFERING

REASONS TO GO PUBLIC

REASONS NOT TO GO PUBLIC

COST OF AN IPO

PREPARING FOR THE IPO

FINDING AN UNDERWRITER

REGISTERING FOR AND COMPLETING THE IPO

ALTERNATIVES FOR SELLING SECURITIES

SCOR

TRADING ON AN EXCHANGE

OVER-THE-COUNTER STOCKS

RESTRICTIONS ON STOCK IN A PUBLICLY TRADED COMPANY

SUMMARY

CHAPTER 17 - TAKING A COMPANY PRIVATE

GOING PRIVATE TRANSACTION

RULE 13E-3

FILLING OUT SCHEDULE 13E-3

INTENTIONAL DELISTING

SUMMARY

PART 5 - MANAGEMENT

CHAPTER 18 - RISK MANAGEMENT

RISK MANAGEMENT POLICIES

RISK MANAGEMENT PLANNING

MANAGER OF RISK MANAGEMENT

RISK MANAGEMENT PROCEDURES

TYPES OF INSURANCE COMPANIES

EVALUATING THE HEALTH OF AN INSURANCE CARRIER

CATASTROPHE BONDS

CLAIMS ADMINISTRATION

INSURANCE FILES

ANNUAL RISK MANAGEMENT REPORT

KEY-MAN LIFE INSURANCE FOR THE CFO

SUMMARY

CHAPTER 19 - OUTSOURCING THE ACCOUNTING AND FINANCE FUNCTIONS

ADVANTAGES AND DISADVANTAGES OF OUTSOURCING

CONTRACTUAL ISSUES

TRANSITION ISSUES

CONTROLLING SUPPLIER PERFORMANCE

MEASURING OUTSOURCED ACTIVITIES

MANAGING SUPPLIERS

DROPPING SUPPLIERS

SUMMARY

CHAPTER 20 - OPERATIONAL BEST PRACTICES

BEST PRACTICES

SUMMARY

CHAPTER 21 - MERGERS AND ACQUISITIONS

EVALUATING ACQUISITION TARGETS

COMPLEXITY ANALYSIS

EVALUATE ACQUISITION TARGETS WITH ALLIANCES

VALUING THE ACQUIREE

DETERMINING THE VALUE OF SYNERGIES

FORM OF PAYMENT FOR THE ACQUISITION

TERMS OF THE ACQUISITION AGREEMENT

WHEN TO USE AN INVESTMENT BANKER

ACCOUNTING FOR THE ACQUISITION

PURCHASE METHOD

COST METHOD

EQUITY METHOD

CONSOLIDATION METHOD

INTERCOMPANY TRANSACTIONS

CONTINGENT PAYMENTS

PUSH-DOWN ACCOUNTING

LEVERAGED BUYOUTS

SPIN-OFF TRANSACTIONS

SUMMARY

CHAPTER 22 - ELECTRONIC COMMERCE

ADVANTAGES OF ELECTRONIC COMMERCE

E-COMMERCE BUSINESS MODEL

RESTRUCTURING THE ORGANIZATION FOR E-COMMERCE

E-COMMERCE ARCHITECTURE

E-COMMERCE SECURITY

E-COMMERCE INSURANCE

E-COMMERCE LEGAL ISSUES

SUMMARY

PART 6 - OTHER TOPICS

CHAPTER 23 - EMPLOYEE COMPENSATION

DEFERRED COMPENSATION

LIFE INSURANCE

STOCK APPRECIATION RIGHTS

STOCK OPTIONS

BONUS SLIDING SCALE

CUT BENEFIT COSTS WITH A CAPTIVE INSURANCE COMPANY

SUMMARY

CHAPTER 24 - BANKRUPTCY

APPLICABLE BANKRUPTCY LAWS

PLAYERS IN THE BANKRUPTCY DRAMA

CREDITOR AND SHAREHOLDER PAYMENT PRIORITIES

BANKRUPTCY SEQUENCE OF EVENTS

TAX LIABILITIES IN A BANKRUPTCY

SPECIAL BANKRUPTCY RULES

THE BANKRUPTCY ACT OF 2005

ALTERNATIVES TO BANKRUPTCY

SUMMARY

PART 7 - APPENDICES

Index

This book is printed on acid-free paper.

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Bragg, Steven M.

p. cm.

Includes index.

ISBN-13: 978-0-470-08200-3 (cloth) ISBN-10: 0-470-08200-3 (cloth)

1. Chief financial officers-Handbooks, manuals, etc. 2. Corporations—Finance—Management—Handbooks, manuals, etc. I. Title. II. Title: CFO financial leadership manual.

HG4027.35.B73 2007

658.15—dc22

2006042123

Electrician, locksmith, and woodworker, the first in the family to finish college, an indisputable genius, and our provider—I would not be where I am without you, Dad. But couldn’t you let me win at Scrabble just once?

PREFACE

The second edition of the New CFO Financial Leadership Manual is designed to give the Chief Financial Officer (CFO) a complete overview of his or her place in the corporation, and to provide strategies for how to handle strategic decisions related to a variety of financial, tax, and information technology issues. Some of the questions that Chapters 1 through 4 answer include:

• What should I do during my first days on the job?

• What are my specific responsibilities?

• How do I reduce my foreign currency exposure?

• How do I increase the company’s return on assets?

• When should I issue convertible securities?

• What factors should I consider in regard to a step costing decision?

• When can I use net operating loss tax carryforwards?

• How do I decide which products to eliminate?

• How can I use transfer pricing to reduce income taxes?

• What specific information technologies should I install for a certain type of business, such as a low-cost producer or rapid product innovator?

The CFO must also become involved in a variety of accounting topics, though not at the transactional level of detail with which a controller will be occupied. Key areas of concern are the development and maintenance of performance measurement and control systems. The CFO must also interact with the internal and external auditors, while also (if the company is publicly held) making regular reports to the Securities and Exchange Commission (SEC). Chapters 5 through 8 address these topics, and yield answers to all of the following questions, as well as many more:

• How do I set up a performance measurement system?

• What are the best performance measurements to install for tracking a variety of accounting and financial issues?

• What types of fraud can be committed, and what kinds of controls can reduce their likelihood of occurrence?

• Which key controls should I install?

• How do I identify and eliminate unnecessary controls?

• What is the impact of Sarbanes-Oxley on my company?

• Who serves on the audit committee, and what is its role?

• How do I deal with the external and internal auditors?

• Which reports do I file with the SEC, and what information should I include in them?

One of the CFO’s primary tasks is the analysis of a wide range of financial issues, resulting in recommendations for action to the management team. Chapters 9 through 11 address such topics as the cost of capital, capital budgeting, risk analysis, capacity utilization, and breakeven. With these chapters in hand, one can answer the following questions:

• How do I calculate my company’s cost of capital?

• How can I modify the cost of capital to increase shareholder value?

• What are the various methods for determining the value of proposed capital projects?

• How do I calculate net present value, the internal rate of return, and the payback period?

• How do I allocate funding to research and development projects?

• How do I determine capacity utilization, and what decisions can I make with this information?

• How can breakeven analysis be used to optimize profitability?

A CFO is sometimes given the primary task of obtaining funding, leaving all other activities up to the controller or treasurer. In this role, the CFO must know how to manage existing cash flows, invest excess funds, obtain both debt and equity financing, conduct an initial public offering, and take a company private. These topics are addressed by Chapters 12 through 17, which provide answers to all of the following questions, and more:

• How do I construct a cash forecasting model and measure its accuracy?

• How do I control cash flows?

• How do I construct natural hedges?

• What investment restrictions should I recommend to the Board of Directors?

• What are good short-term investment options?

• What is the role of credit rating agencies?

• What are the various types of available debt financing?

• How do I conduct a private placement of stock?

• How do I arrange a private investment in public equity?

• What information goes into an offering memorandum?

• How do I place a value on offered stock?

• Which steps do I follow to complete an initial public offering?

• How do I create a reverse merger?

• Why are companies using the Alternative Investment Market as their stock exchange of choice?

• How do I file with the SEC to take a company private?

Though a CFO can certainly be of great value to a company by properly managing its flow of funds, there are also a number of management areas in which he or she can enhance operations. These are addressed in Chapters 18 through 22, which discuss risk management, outsourcing, operational best practices, mergers and acquisitions, and electronic commerce. By perusing them, one can find answers to the following questions:

• How do I engage in risk planning?

• What types of company-wide policies and procedures should I install to mitigate risks?

• How do I evaluate insurance carriers?

• What are the advantages and disadvantages of outsourcing various aspects of the accounting and finance functions, and which contractual and transitional issues should I be aware of?

• What are some of the best practices I can implement in the accounting and finance functions to improve their efficiency?

• How do I evaluate acquisition targets?

• How do I place a value on an acquisition target?

• How do I value prospective synergies resulting from an acquisition?

• How does the e-commerce business model work, and how do I restructure the business to incorporate it?

There are also several topics that may require some degree of expertise by the CFO from time to time. One is employee compensation, which is addressed in Chapter 23. It covers such topics as deferred compensation, life insurance, stock appreciation rights, stock options, and the bonus sliding scale. One issue that a CFO certainly hopes never to experience is bankruptcy, which is described in Chapter 24. This chapter describes the sequence of events in a typical bankruptcy proceeding, as well as special bankruptcy rules, payment priorities, the parties that typically become involved in the process, and the impact of the Bankruptcy Act of 2005.

The CFO may also require checklists to perform certain aspects of the job. Toward this end, Appendix A contains a checklist that itemizes the usual priority of action items required during the first days of fitting into a new CFO position. Appendix B contains a summary-level list of performance measurements that are useful as a reference for those CFOs who are constructing performance measurement systems. Finally, Appendix C contains an extensive due diligence checklist that is most helpful for reviewing the operations of a potential acquisition candidate.

In total, this book is a comprehensive guidebook for the CFO who needs an overview of strategies, measurement and control systems, financial analysis tools, funding sources, and management improvement tips that will help provide the greatest possible value to the company. If you have any comments about this book, or would like to see additional chapters added in future editions, contact the author at [email protected]. Thank you!

Steven M. Bragg Centennial, Colorado December 2007

ACKNOWLEDGMENTS

The real work of preparing a book for publication begins only after the rough manuscript appears at the publisher’s doorstep. It is generally greeted with gasps of dismay by the group of editors who must review it in more detail than I ever did, working through several colored correction pencils to achieve a version that will not be immediately rejected with snorts of derision by the reading public. Thank you for making all the corrections that turn my words into a smoothly flowing and intelligible document.

ABOUT THE AUTHOR

Steven Bragg, CPA, CMA, CIA, CPM, CPIM, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young and auditor at Deloitte & Touche. He received a master’s degree in Finance from Bentley College, an MBA from Babson College, and a bachelor’s degree in Economics from the University of Maine. He has been the two-time president of the Colorado Mountain Club and is an avid alpine skier, mountain biker, and certified master diver. Mr. Bragg resides in Centennial, Colorado. He has written the following books published by John Wiley & Sons:

Accounting and Finance for Your Small BusinessAccounting Best PracticesAccounting Control Best PracticesAccounting Reference DesktopBilling and Collections Best PracticesBusiness Ratios and FormulasController’s Guide to CostingController’s Guide to Planning and Controlling OperationsController’s Guide: Roles and Responsibilities for the New ControllerControllershipCost AccountingDesign and Maintenance of Accounting ManualsEssentials of PayrollFast CloseFinancial AnalysisGAAP GuideGAAP Implementation GuideInventory AccountingInventory Best PracticesJust-in-Time AccountingManaging Explosive Corporate GrowthOutsourcingPayroll AccountingPayroll Best PracticesSales and Operations for Your Small BusinessThroughput AccountingThe Controller’s FunctionThe New CFO Financial Leadership ManualThe Ultimate Accountants’ Reference

Other titles by Mr. Bragg include:

Advanced Accounting Systems (Institute of Internal Auditors) Run the Rockies (CMC Press)

Free On-Line Resources by Steve Bragg

Steve issues a free bimonthly accounting best practices newsletter, as well as an accounting best practices podcast. You can sign up for free delivery of the newsletter and/or podcast (also available through iTunes) at www.stevebragg.com.

PART 1

OVERVIEW

CHAPTER 1

CFO’S PLACE IN THE CORPORATION

Years ago, Chief Executive Officers (CEOs) were satisfied with finance chiefs who could manage Wall Street analysts, implement financial controls, manage initial public offerings (IPOs), and communicate with the Board of Directors—who, in short, possessed strong financial skills. However, in today’s business environment, the ability to change quickly has become a necessity for growth, if not for survival. CEOs are no longer satisfied with financial acumen from their CFOs. They are demanding more from their finance chiefs, looking instead for people who can fill a multitude of roles: business partner, strategic visionary, communicator, confidant, and creator of value. This chapter addresses the place of the CFO in the corporation, describing how to fit into this new and expanded role.

FIRST DAYS IN THE POSITION

You have just been hired into the CFO position and have arrived at the offices of your new company. What do you do? Though it is certainly impressive (to you) to barge in like Napoleon, you may want to consider a different approach that will calm down your new subordinates as well as make them feel that you are someone they can work with. Here are some suggestions for how to handle the critical first few days on the job:

• Meet with employees. This is the number-one activity by far. Determine who the key people in the organization are and block out lots of time to meet with them. This certainly includes the entire management team, but it is even better to build relationships far down into the corporate ranks. Get to know the warehouse manager, the purchasing staff, salespeople, and engineers. Always ask who else you should talk to in order to obtain a broad-based view of the company and its problems and strengths. By establishing and maintaining these linkages, you will have great sources of information that circumvent the usual communication channels.

• Do not review paperwork. Though you may be tempted to lock yourself up in an office and pore through management reports and statistics, meeting people is the top priority. Save this task for after hours and weekends, when there is no one on hand to meet with.

• Wait before making major decisions. The first few months on the job are your assigned “honeymoon period,” where the staff will be most accepting of you. Do not shorten the period by making ill-considered decisions. The best approach is to come up with possible solutions, sleep on them, and discuss them with key staff before making any announcements that would be hard to retract.

• Set priorities. As a result of your meetings, compile an initial list of work priorities, which should include both efficiency improvements and any needed departmental restructurings. You can communicate these general targets in group meetings, while revealing individual impacts on employees in one-on-one meetings. Do not let individual employees be personally surprised by your announcements at general staff meetings—always reveal individual impacts prior to general meetings, so these people will be prepared.

• Create and implement a personnel review system. If you intend to let people go, early in your term is the time to do it. However, there is great risk of letting strong performers go if you do not have adequate information about them, so install a personnel review system as soon as possible and use it to determine who stays and who leaves.

The general guidelines noted here have a heavy emphasis on communication, because employees will be understandably nervous when the boss changes, and you can do a great deal to assuage those feelings. Also, setting up personal contacts throughout the organization is a great way to firmly insert yourself into the organization in short order and makes it much less likely that you will be rejected by the organization at large.

SPECIFIC CFO RESPONSIBILITIES

We have discussed how to structure the workday during the CFO’s initial hiring period, but what does the CFO work on? What are the primary tasks to pursue? These targets will vary by company, depending on its revenue, its industry, its funding requirements, and the strategic intentions of its management team. Thus, the CFO will find that entirely different priorities will apply to individual companies. Nonetheless, some of the most common CFO responsibilities are:

• Pursue shareholder value. The usual top priority for the CFO is the relentless pursuit of the strategy that has the best chance of increasing the return to shareholders. This also includes a wide range of tactical implementation issues designed to reduce costs.

• Construct reliable control systems. A continuing fear of the CFO is that a missing control will result in problems that detrimentally impact the corporation’s financial results. A sufficiently large control problem can quite possibly lead to the CFO’s termination, so a continuing effort to examine existing systems for control problems is a primary CFO task. This also means that the CFO should be deeply involved in the design of controls for new systems, so they go on-line with adequate controls already in place. The CFO typically uses the internal audit staff to assist in uncovering control problems.

• Understand and mitigate risk. This is a major area of concern to the CFO, who is responsible for having a sufficiently in-depth knowledge of company systems to ferret out any risks occurring in a variety of areas, determining their materiality and likelihood of occurrence, and creating and monitoring risk mitigation strategies to keep them from seriously impacting the company. The focus on risk should include some or all of the following areas:

• Loss of key business partners. If a key supplier or customer goes away, how does this impact the company? The CFO can mitigate this risk by lining up alternate sources of supply, as well as by spreading sales to a wider range of customers.

• Loss of brand image. What if serious quality or image problems impact a company’s key branded product? The CFO can mitigate this risk by implementing a strong focus on rapid management reactions to any brand-related problems, creating strategies in advance for how the company will respond to certain issues, and creating a strong emphasis on brand quality.

• Product design errors. What if a design flaw in a product injures a customer, or results in a failed product? The CFO can create rapid-response teams with preconfigured action lists to respond to potential design errors. There should also be product design review teams in place whose review methodologies reduce the chance of a flawed product being released. The CFO should also have a product recall strategy in place, as well as sufficient insurance to cover any remaining risk of loss from this problem.

• Commodity price changes. This can involve price increases from suppliers or price declines caused by sales of commodity items to customers. In either case, the CFO’s options include the use of long-term fixed-price contracts, as well as a search for alternative materials (for suppliers) or cost cutting to retain margins in case prices to customers decline.

• Pollution. Not only can a company be bankrupted by pollution-related lawsuits, but its officers can be found personally liable for them. Consequently, the CFO should be heavily involved in the investigation of all potential pollution issues at existing company facilities, while also making pollution testing a major part of all facility acquisition reviews. The CFO should also have a working knowledge of how all pollution-related legislation impacts the company.

• Foreign exchange risk. Investments or customer payables can decline in value due to a drop in the value of foreign currencies. The CFO should know the size of foreign trading or investing activity, be aware of the size of potential losses, and adopt hedging tactics if the risk is sufficiently high to warrant incurring hedging costs.

• Adverse regulatory changes. Changes in local, state, or federal laws—ranging from zoning to pollution controls and customs requirements—can hamstring corporate operations and even shut down a company. The CFO should be aware of pending legislation that could cause these changes, engage in lobbying efforts to keep them from occurring, and prepare the company for those changes most likely to occur.

• Contract failures. Contracts may have clauses that can be deleterious to a company, such as the obligation to order more parts than it needs, to make long-term payments at excessive rates, to be barred from competing in a certain industry, and so on. The CFO should verify the contents of all existing contracts, as well as examine all new ones, to ensure that the company is aware of these clauses and knows how to mitigate them.

• System failures. A company’s infrastructure can be severely impacted by a variety of natural or man-made disasters, such as flooding, lightning, earthquakes, and wars. The CFO must be aware of these possibilities and have disaster recovery plans in place that are regularly practiced, so the organization has a means of recovery.

• Succession failures. Without an orderly progression of trained and experienced personnel in all key positions, a company can be impacted by the loss of key personnel. The CFO should have a succession planning system in place that identifies potential replacement personnel and grooms them for eventual promotion.

• Employee practices. Employees may engage in sexual harassment, stealing assets, or other similar activities. The CFO should coordinate employee training and set up control systems that are designed to reduce the risk of their engaging in unacceptable activities that could lead to lawsuits against the company or the direct incurrence of losses.

• Investment losses. Placing funds in excessively high-risk investment vehicles can result in major investment losses. The CFO should devise an investment policy that limits investment options to those vehicles that provide an appropriate mix of liquidity, moderate return, and a low risk of loss (see Chapter 13, Investing Excess Funds).

• Interest rate increases. If a company carries a large amount of debt whose interest rates vary with current market rates, then there is a risk that the company will be adversely impacted by sudden surges in interest rates. This risk can be reduced through a conversion to fixed interest-rate debt, as well as by refinancing to lower-rate debt whenever shifts in interest rates allow this to be done.

• Link performance measures to strategy. The CFO will likely inherit a companywide measurement system that is based on historical needs, rather than the requirements of its strategic direction. He or she should carefully prune out those measurements that are resulting in behavior not aligned with the strategic direction, add new ones that encourage working on strategic initiatives, and also link personal review systems to the new measurement system. This is a continuing effort, since strategy shifts will continually call for revisions to the measurement system.

• Encourage efficiency improvements everywhere. The CFO works with all department managers to find new ways to improve their operations. This can be done by benchmarking corporate operations against those of other companies, conducting financial analyses of internal operations, and using trade information about best practices. This task involves great communication skills to convince fellow managers to implement improvements, as well as the ability to shift funding into those areas needing it in order to enhance their efficiencies.

• Clean up the accounting and finance functions. While most of the items in this list involve changes throughout the organization, the CFO must create an ongoing system of improvements within the accounting and finance functions—otherwise the managers of other departments will be less likely to listen to a CFO who cannot practice what he preaches. To do this, the CFO must focus on the following key goals:

• Staff improvements. All improvement begins with the staff. The CFO can enhance the knowledge base of this group with tightly focused training, cross-training between positions, and encouraging a high level of communication within the group.

• Process improvements. Concentrate on improving both the accuracy of information that is released by the department as well as the speed with which it is released. This can be accomplished to some extent through the use of increased data-processing automation, as well as through the installation of more streamlined access to data by key users. There should also be a focus on designing controls that interfere with core corporate processes to the minimum extent possible while still providing an adequate level of control. Also, information should be provided through simple data-mining tools that allow users to directly manipulate information for their own uses.

• Organizational improvements. Realign the staff into project-based teams that focus on a variety of process improvements. These teams are the primary implementers of process changes and should be tasked with the CFO’s key improvement goals within the department.

• Install shared services. The CFO has considerable control over many administrative tasks, and so can encourage cost reductions in those areas through the use of shared services (where the same task is completed from a central location for multiple company locations). This can result in major cost savings, and is typically completed in coordination with the Chief Operating Officer (COO), who may be responsible for some of the areas being consolidated.

• Examine outsourcing possibilities. A company should focus the attention of its management team on its core activity. The CFO can assist this effort by determining which noncore areas are absorbing large amounts of management time and/or funding, and seeing if they can be prudently outsourced. Though certainly not all noncore areas can be handled in this fashion, the CFO can conduct periodic reviews to see how the attractiveness of this option changes over time.

• Allocate resources. In its simplest form, the CFO is expected to review the net present value of proposed capital expenditures and pass judgment on whether funding should be allowed. However, the CFO can take a much more proactive stance. For example, he can set aside a block of cash for more radical projects that would not normally make it past the rigorous capital expenditure review process, thereby adding high-risk, high-return projects to the company’s portfolio of capital projects. Under this approach, the CFO becomes an internal venture capitalist and mentor to the teams undertaking these high-risk projects.

• Encourage innovation. The CFO can modify internal measurement, reporting, and budgetary systems to ensure that some original ideas are allowed to percolate through the company, potentially resulting in the implementation of high-return ideas. It is particularly important to take this approach in mature businesses that are most highly concerned with cost reductions, since an excessive focus on this area can drive out innovation.

Most of the responsibilities noted here rarely fall entirely within the capabilities of the CFO. Instead, he or she must coordinate activities with other department managers, including such specialized areas as the legal and human resources departments, to ensure that these target areas are addressed. This calls for a strong ability to work with other members of the company who are probably not directly supervised by the CFO.

OVERVIEW OF THE CHANGE MANAGEMENT PROCESS1

Becoming the business partner that CEOs demand means facilitating change that not only affects finance but also directly impacts the operating units. To accomplish this end, CFOs must become skilled in the following key management practices:

• Develop and communicate a compelling finance agenda. Based on both his own perceptions of a company’s situation and the recommendations of others, the CFO should create a list of bullet points for short-term and long-term accomplishments and memorize them so that he can repeat them to anyone at any time during the workday. Compressing the finance agenda in this manner is an excellent tool for communicating the CFO’s work to others. Review the list regularly, and spread any changes to the list around the organization on a regular basis.

• Build a commitment to change within the finance function. Besides talking about the agenda to everyone in the company, the CFO must reinforce the message with his behavior, which means demonstrating a full commitment of the time and money required to make the agenda a reality. This also means that the CFO must be seen personally working on the agenda for a significant proportion of his time. Building staff commitment also means listening to their views and letting this shape the CFO’s opinion of what should be included in the agenda.

• Change executive management practices. The director of strategic planning at a Fortune 500 company once pointed out that she spent 25% of her time determining the corporate direction, and 75% of her time convincing everyone in the organization that this was the right direction to follow. Though this sort of time distribution is extreme, the CFO must understand that many of the changes he advocates will impact other functional areas outside the accounting and finance functions, and so will require a hefty allocation of time to communicate the change vision. This requires regular meetings with managers throughout the organization, as well as strong listening skills to learn of any issues that may impact the implementation of the agenda. These meetings must be effective, requiring meeting agendas that are closely followed, have resultant minutes that identify who is responsible for the implementation of decisions reached, and a follow-up process to ensure that implementations are completed promptly.

• Enlist the support of the CEO. Work with the CEO to develop his role in creating and implementing the agenda. This requires frequent meetings to go over the agenda. In order to obtain the CEO’s full support, it is most useful to ask the CEO to assist in jointly solving problems arising from the agenda implementation effort.

• Mobilize the organization. With the CEO firmly supporting the CFO’s agenda, the rest of the organization must be mobilized to follow it as well. This calls for the creation of measurement and reward systems that are specifically designed to channel activities into the correct areas, plus visible and prolonged involvement by the senior management team and ongoing “communication events,” such as general or team meetings, that describe the company’s progress toward the completion of various items on the CFO’s agenda.

• Institutionalize continuous improvement. Once the agenda has been achieved, the CFO should continue to review and question the functions of all systems to see if better ways can be found to operate the company. If so, and changes are made, then he must alter the corporate measurement and reward system to ensure that the new initiatives are properly supported by the staff on an ongoing basis.

DIFFERENCES BETWEEN THE CONTROLLER AND CFO POSITIONS

Having already discussed what the CFO position should do, it is also worthwhile to point out those areas that the position should not become involved in. This issue is of particular concern to controllers who have been promoted to the CFO position, but who are having difficulty relinquishing their old chores in order to take up new ones. The result is that, with twice the workload, the newly promoted CFO does both the CFO and controller jobs poorly. Exhibit 1.1 describes the tasks that are most commonly assigned to the CFO and controller.

The exhibit indicates that there are a few areas in which the two roles may become jointly involved in the accounting area. However, their levels of involvement are entirely different. For example, when external auditors review the company’s accounting records, the CFO is most likely to maintain relations with the audit partner, and deal with any reportable audit issues uncovered. The controller, however, is more likely to be directly involved with the auditors in presenting the accounting books, explaining the reasons for specific accounting transactions, and providing labor for more menial tasks that the auditors would otherwise have to perform themselves.

The same issue arises in other accounting areas, such as the issuance of management reports, financial statements, or Securities and Exchange Commission (SEC) reports. The controller creates the reports, but the CFO must review them prior to their release, since the CFO is the one who must explain their contents to readers. The CFO also needs the information in order to see how the presented information fits into any other analyses being created; for example, if the CFO is building a case for an increased emphasis on product quality, a management report on material scrap trends would fit directly into this analysis.

The CFO and controller also have different roles in the budgeting process. The controller usually manages the nuts and bolts of obtaining information from other departments and incorporating it into a master budget. Meanwhile, the CFO is examining the data presented by the various departments to see how they have changed from the past year, how revenues and expenses reflect any changes in the company’s strategic direction, and the reasons for capital expenditure requests.

A primary part of the CFO’s job is to conduct financial analyses on various topics anywhere in the company, as well as to drive operational improvements, at least partially based on the results of the financial analyses. The CFO decides on which analyses to create and which improvements to push, while also presenting this information and proselytizing in favor of operational improvements with other department managers. Conversely, the controller is more likely to create the analyses mandated by the CFO and to implement improvements within the accounting function. Thus, there is a dual role for the CFO and controller in these areas, but on different levels.

Control systems also attract the attention of both positions. The CFO is extremely interested in controls, since any control problems reflect poorly on his or her performance. The controller is also interested, partially to spot problems for the CFO’s attention, but mainly to ensure that the existing set of controls are functioning as planned. The CFO can be of particular assistance in setting up or changing controls impacting other departments, since the CFO is responsible for building relations between the accounting function and other areas of the company.

EXHIBIT 1.1 Position Responsibilities

The finance area calls for minimal attention by the controller, who is only responsible for day-to-day activities in the areas of issuing credit and monitoring cash balances, which are simple activities that can easily be handled at the clerical level. In all other respects, financial activities involve a specialized knowledge of banking relationships, overall corporate strategy, and funds investment and procurement that falls directly within the CFO’s area of expertise.

The main point to be gained from this comparison of the controller and CFO positions is that the controller is responsible primarily for the daily administration of accounting activities, whereas the CFO must cordon himself off from these activities and concentrate instead on the general design of control systems, strategic direction, and funding issues. Anyone who attempts to perform both jobs, except in a small company where a lack of funding usually calls for the merger of both positions, will be overwhelmed by the multitude of tasks to be completed. Realistically, someone who combines the positions will tend to concentrate on the daily activities of the controller and not attend to CFO tasks because of the perception that daily transactional activities must be completed, whereas strategic issues can always be addressed when there is spare time. Though this may work for a short interval, improper attention to the CFO part of the job will eventually lead to stagnation, inefficiency, and poor development of potential funding sources.

RELATIONSHIP OF THE CONTROLLER TO THE CFO2

In a larger company, there is a clear division of tasks between the controller and CFO. However, there is no clear delineation of these roles in a smaller company, because there is usually no CFO. As a company grows, it acquires a CFO, who must then wrestle away some of the controller’s tasks that traditionally belong under the direct responsibility of the CFO. This transition can cause some conflict between the controller and CFO, which is discussed in this section. In addition, the historical promotion path for the controller has traditionally been through the CFO position; when that position is already occupied, and is likely to stay that way, there can be some difficulty with the controller. This section also discusses that issue.

In a small company, the controller usually handles all financial functions, such as setting up and maintaining lines of credit, cash management, determining credit limits for customers, dealing with investors, handling pension plan investments, and maintaining insurance policies. These are the traditional tasks of the CFO, and when a company grows to the point of needing one, the CFO will want to take them over from the controller. This can turn into a power struggle, though a short-lived one, because the controller always reports to the CFO and will not last long if there is no cooperation. Nonetheless, this is a difficult situation, for the controller has essentially taken a step down in the organizational structure upon the arrival of the CFO. For example, the CFO replaces the controller on the executive committee. If the controller is ambitious, this will probably lead to that person’s departure in the near term. If the controller is good, this is a severe loss, for someone with a detailed knowledge of a company’s processes and operating structure is extremely difficult to replace.

The controller should take a job elsewhere if he or she perceives that the person newly filling the CFO position is a roadblock to further advancement. However, this does not have to be a dead-end position. The controller should talk to the CFO about career prospects within the company and suggest that there may be other responsibilities that can replace those being switched to the CFO. For example, a small minority of controllers supervise the materials management department; this will become increasingly common as controllers realize that much of the paperwork they depend on originates in that area and that they can acquire better control over their processes by gaining experience in this area. There may also be possibilities in the areas of administration, human resources, and computer services, which are sometimes run by controllers. The fact that there is a new CFO does not mean that a controller should immediately quit; there may be other opportunities involving related tasks that can shift the controller’s career in other directions.

The CFO position is one with an extreme emphasis on money management, involving such tasks as determining the proper investment vehicles for excess cash, dealing with lenders regarding various kinds of debt, making presentations to financial analysts, and talking to investors. None of these tasks are ones that the controller is trained to perform. Instead, the traditional controller training involves handling transactions, creating financial statements, and examining processes. The requirements for the CFO position and the training for the CFO position are so different that it seems strange for the controller to be expected to advance to the CFO position, and yet that is a common expectation among accountants, which regularly causes problems between the controller and CFO when a CFO is initially hired.

SUMMARY

It may have become apparent in this chapter that the key attributes of the CFO do not lie in the area of accounting competency. If a CEO wanted skills in that area, he would hire a great controller and never fill the CFO position. Instead, the key CFO attributes are that person’s ability to find innovative ways to solve problems, and then to use change management skills to implement them. By focusing on these key areas, the CFO brings the greatest positive impact to overall corporate value.

In addition, the CFO must concentrate a great deal of his time on the formulation and implementation of appropriate strategies in the areas of accounting, taxation, and (if responsible for this area) information technology. These issues are addressed in Chapter 2, Financial Strategy; Chapter 3, Tax Strategy; and Chapter 4, Information Technology Strategy.

CHAPTER 2

FINANCIAL STRATEGY

This book is built around the concepts of financial management, analysis, and accounting, as well as the procurement of funding. However, the true test of the CFO is in the quality of decisions made on topics that impact a company’s finances. For the other topics, the CFO can hire quality controllers and financial analysts who can take care of matters quite nicely from an operational perspective. But in the area of making financial strategy decisions, the buck stops at the CFO’s desk. In this chapter, we will review a number of common decision areas that a CFO is likely to face. They are generally grouped in the order in which the topics can be found on the balance sheet and then the income statement. The chapter finishes with the discussion of throughput analysis, and how it can change your way of thinking about financial decisions.

CASH

Reducing Foreign Currency Exposure. A CFO whose company engages in international trade must be concerned about potential changes in the value of its trading partners’ currencies. For example, if a company sells products to a French company and receives payment after the euro loses value, then the company absorbs the reduction in value of the euro, creating a loss. Any one or a combination of the following approaches may be used to avoid incurring such a loss:

• If selling to a foreign customer, avoid long customer payment terms. If long terms are necessary in order to secure a sale, then offset the potential currency risk by charging interest on overdue payments, or encourage early payments with a discount.

• If buying from a foreign supplier, make purchases on the longest possible credit terms in order to pay later with less expensive funds.

• If buying from a foreign supplier, avoid advance payments to it. By waiting to make the payment, the company can pay in potentially less expensive currency.

• If running an operation in a foreign location, avoid storing excess cash there; instead, invest the funds in stronger currencies.

• If running multiple operations in many foreign locations, hedge the risk of exchange loss on one transaction by creating offsetting transactions in the opposite direction. For example, if one transaction calls for the conversion of euros to dollars in 90 days, then create another transaction, possibly with a different subsidiary, that calls for the conversion of roughly the same amount of dollars to euros in about the same time frame.

• In general, hedge potential exposure by purchasing a forward exchange contract.

If foreign currency transaction volumes are small, the potential risk of loss will be correspondingly small, and so is not worth much review by the CFO. However, the CFO should certainly review these issues if large foreign contracts are contemplated. If a company engages in substantial foreign trade, then reducing foreign currency exposure is so large an issue that the CFO should consider creating a hedging department that does nothing but track and mitigate this issue.

Decision to Change a Banking Relationship. A good banking relationship is extremely important to the CFO. It should involve excellent responsiveness by all departments of the bank, minimal transaction-processing errors, moderate fees, reasonable levels of asset collateralization on loans, on-line access to transactional data, and the ability to process more advanced transactions, such as letters of credit. Larger companies with massive transaction volumes and lending needs are the most likely to find all of these needs fulfilled. However, smaller entities will not represent enough business to a bank to warrant this level of service, and so will most likely suffer in the areas of customer service and advantageous loan terms.

Of particular concern to the CFO of an expanding business is growing beyond the capabilities of a small local bank that it may have begun doing business with when it first started. Smaller banks may offer reasonable attentiveness, but are most unlikely to offer on-line transaction processing or any form of international transaction support.

Given these issues, there are several key factors in deciding when to change a banking relationship. The first is a simple lack of responsiveness by the bank, which seems most common with large banks that service thousands of business customers—one gets lost in the shuffle. This is primarily a problem when special transactions are needed that require a bank officer, such as letters of credit or wire transfers. If no one picks up the phone or returns a call within a reasonable time frame, and these actions result in significant business problems, then the bank must go. A second reason is outgrowing the capabilities of the bank, as noted above. One should be certain that additional capabilities are truly needed before switching banks for this reason, given the difficulty of severing a banking relationship (see below). The third and least justifiable reason for changing banks is the cost of the relationship. When compared to the cost of other business expenses, banking fees are comparatively inexpensive, and so should only be a reason to sever a banking relationship when combined with some other factor, such as poor service.

A CFO may have multiple reasons for switching to a different bank, but must bear in mind the extreme difficulty of stopping all banking transactions with one bank and starting them up with another. The following list highlights the number of changes required to switch banks:

• Adopt a corporate resolution to switch banks.

• Open up accounts at the new bank.

• Order check stock for the new accounts.

• Contact suppliers who take direct deductions from the old accounts and have them switch to the new accounts.

• Create bank reconciliations for the old accounts until all checks have cleared.

• Wire funds from the old accounts to the new accounts.

• Close the old accounts.

• Shred all remaining old check stock.

• Have auditors review the old accounts as well as the new ones at year-end.

• Arrange for new loan agreements with the new bank.

• Draw down new loans and pay off old loans.

• Cancel old loans.

Clearly, the number of steps required to shift a banking relationship should give the CFO pause before proceeding. It is much easier to leave well enough alone unless there are significant factors favoring a change.

INVESTMENTS

Maximizing Return on Assets. A CFO can gain an excellent understanding of a company’s efficiency through close attention to the return on assets (ROA) measurement. Since this measure is also tracked by analysts and investors, it is wise to understand its components, how they can be manipulated to enhance the ROA, and how these changes should be made in light of overall company strategy.

As shown in Exhibit 2.1, the ROA measure is comprised of margins (on the left side of the exhibit) and asset turnover (on the right side of the exhibit). Multiplying the earnings percentage by asset turnover yields the return on assets. Many companies have a long tradition of squeezing every possible cost out of their operations, which certainly addresses the first half of the ROA equation. However, asset turnover is either ignored or given a much lower priority. The CFO should investigate this latter portion of the calculation to see what asset reductions, both in the areas of working capital and fixed assets, can be achieved in order to achieve a higher ROA.

Working capital reduction techniques are addressed in the “Working Capital” section later in this chapter. Fixed asset reductions can be achieved through a well-managed capital budgeting process (see Chapter 10, Capital Budgeting), as well as through constant investigation and disposal of potentially unused assets and the investigation of outsourcing in order to shift expensive facility and equipment costs to suppliers.

When investigating ROA improvement opportunities, the CFO should be aware that an excessive degree of cost and asset reduction can hurt a company by such means as reducing the quality of its products, giving it minimal excess production capacity to use during high-volume periods, and reducing the size of its research and development activities. Thus, improving ROA should not be taken to extremes, though it certainly requires continuing attention.

Bond Refunding Decision. A company can buy bonds back from investors prior to their due dates, but only if there is a call provision on the bond or if it was originally issued as a serial bond. The call provision gives the company the right to buy the bond back on a specific series of dates over the life of the bond, while the serial bond approach sets different maturity dates on sets of bonds within a total bond offering. Thus, the call provision gives a company the option to refund bonds, whereas the serialization feature requires the company to refund them. In either instance, the presence of these refunding features on a bond will decrease its value, resulting in a higher effective interest rate that the company must pay.

In this instance, the CFO must make a decision in advance of a bond offering to add refunding features to the bonds. If there is no reasonable prospect of having funds available to pay off the bonds early, and if the interest rate being paid appears reasonable, then there is no particular need for the refunding features. However, if this is not the case, the CFO would be well advised to add a call provision, since this option gives the firm the ability to refund the bonds without necessarily being required to do so. A serialization feature is less useful, since it incorporates a direct requirement to make cash payments at regular intervals to refund specific bonds, whereas the CFO may have better uses for these funds.

EXHIBIT 2.1 COMPONENTS OF THE RETURN ON ASSETS

If the CFO is concerned that the presence of either type of call feature will result in a more expensive interest rate, then she can add other features to the bonds, such as convertibility or warrants, that will increase the value of the bonds to investors, thereby keeping the effective interest rate from being increased.

WORKING CAPITAL

Working Capital Reduction Methodology. The typical CFO is constantly in search of a ready source of inexpensive funding for the company. One of the best sources is working capital, which is accounts receivable plus inventory, minus accounts payable. These are the “float” funds required to keep the business operating from day to day. By reducing the amount of accounts receivable and inventory or extending the payment terms on accounts payable, the CFO has access to a ready source of cash. Some of the actions one can take to access these funds are:

ACCOUNTS RECEIVABLE

• Automate collection record keeping. Tracking of collection calls, including who was reached, when the call occurred, and what was promised, is a time-consuming chore that is highly subject to error. By obtaining a computerized database that is linked to a company’s accounts receivable records, the collections staff can greatly increase its collection efficiency.

• Bill recurring invoices early. If a customer subscribes to a long-term service or maintenance contract, then it can be billed slightly earlier in the hopes of receiving payment sooner.

• Change the terms of commission payments. The sales staff should be paid commissions based on cash received from customers rather than on sales made to them. By doing so, the sales staff has a vested interest in finding creditworthy customers and in collecting from them.

• Encourage ACH payments. If a customer has a long-term relationship with the company, request that it set up Automated Clearing House (ACH) payments so that payments are wired directly into the company’s bank account, thereby avoiding any mail float.

• Encourage credit card payments. If billings are relatively small, note on the invoices that the company accepts a variety of credit card payments so that customers will be encouraged to use this approach to accelerate cash flow.

• Factor accounts receivable. Arrange with a lender to pay the company at the time of billing, using accounts receivable as collateral.

• Grant early payment discounts. Offer discounts to customers if they pay within a few days of receiving the invoice.

• Install lockboxes. Set up bank lockboxes near customer sites, and have them mail their payments to the lockboxes. By doing so, one can greatly reduce the mail float associated with the payments.

• Stratify collections. Stratify accounts receivable by size and assign the bulk of the collection staff’s time to the largest items so that the full force of the collections department is brought to bear on those items yielding the largest amount of cash.

• Tighten credit. Closely review the payment histories of existing customers and run more intensive checks on new customers, thereby cutting back on the amount of bad debt.

INVENTORY

• Consolidate storage locations. If there are many warehouses, then the company is probably storing the same inventory items in multiple locations. By consolidating storage locations, some of this duplication can be eliminated.

• Install a materials planning system. A material requirements planning system (MRP) will allow a company to determine exactly what material it needs, and by what date. These systems typically result in massive drops in inventory levels and the elimination of overpurchases.

• Install just-in-time (JIT) manufacturing techniques. There are many manufacturing practices that comprise the general JIT concept, such as rapid setup times, cell-based manufacturing, and minimal production runs. These techniques require minimal work-in-process (WIP) inventory, and also generate far less scrap.

• Maintain accurate bills of material. It is impossible to create a working MRP or JIT system without knowing exactly what parts are required to manufacture a product. Consequently, a bill of material accuracy rate of at least 98% is the foundation for other initiatives that will greatly reduce inventory levels.

• Return parts to suppliers. If parts are not needed, return them to suppliers for cash or credit.

• Stock fewer finished goods. The distribution of product sales follows a bell curve, where the bulk of all sales are concentrated into only a few inventory items. The CFO should review the inventory items that rarely sell to see if they should be stocked at all.

• Store subassemblies rather than finished goods. Inventory subassemblies can potentially be configured into a multitude of finished goods, whereas a finished good must be sold “as is.” Consequently, a strategy to keep inventory at the subassembly level until the last possible moment will result in fewer stock-keeping units (SKUs), and therefore a smaller inventory investment.

ACCOUNTS PAYABLE

• Avoid prepayments. If a supplier insists that the company make prepayments on various goods or services, try to reduce the amount of the prepayments or spread out the payment intervals, thereby reducing the up-front cash commitment.

• Draw checks on remote banks. One can set up an account at a bank in a remote location and pay checks from that account. By doing so, checks will take slightly longer to clear, allowing the company to have use of its cash for one or two additional days.

• Extend payments a reasonable amount.