The New CFO Financial Leadership Manual

Steven M. Bragg

• Publisher: Wiley
• Year: 2010
• ISBN:
  9780470918401
• Edition: 3
• Topic: Commerce
• Subtopic: Comptabilité de gestion

The comprehensive guide for CFOs who need an overview of leadership basics from strategies to management improvement tips

Filled with pragmatic insights and proactive strategies, The New CFO Financial Leadership Manual, Third Edition is destined to become your essential desktop companion. This thorough guidebook is filled with best practices to help you, as CFO, to improve efficiency, mitigate risks, and keep your organization competitive.

• Includes updated information on the relationship of the CFO with the Treasurer, registration statements and Fedwire payments, acquisitions integration, legal types of acquisitions, and government regulations
• Contains control flowcharts for the main accounting cycles
• Provides new chapters on Investor Relations and Risk Management for Foreign Exchange and Interest Rates
• Features an itemized list of the key tasks every new CFO should complete when first entering the position, a checklist of 100 performance measures, and a detailed discussion of employee compensation plans

The reference CFOs and other financial managers can turn to for quick answers to questions they have as well as to help them plan their financial strategy, The New CFO Financial Leadership Manual, Third Edition is mandatory reading for every CFO wanting to play a strategic role in their organization.

Part One

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. It also describes the roles of three key subordinates—the controller, treasurer, and investor relations officer.

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 might 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 might 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,” during which 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 doing so 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, here are some of the most common CFO responsibilities:

• 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 online 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. Sometimes employees 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 12, “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. Although 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 by tightly focusing 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 might 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...