Building a Small Business That Warren Buffett Would Love ... available Spring, 2012
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 feelthat 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 alternate 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, steal
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 company-wide
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.
Continues...
Excerpted from The New CFO Financial Leadership Manual
by Steven M. Bragg
Copyright © 2003 by Steven M. Bragg.
Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
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Table of Contents
| Acknowledgments | |
| About the Author | |
| Pt. 1 | Overview | |
| Ch. 1 | CFO's Place in the Corporation | 3 |
| Ch. 2 | Financial Strategy | 13 |
| Ch. 3 | Tax Strategy | 39 |
| Ch. 4 | Information Technology Strategy | 52 |
| Pt. 2 | Accounting | |
| Ch. 5 | Performance Measurement Systems | 63 |
| Ch. 6 | Control Systems | 88 |
| Ch. 7 | Audit Function | 104 |
| Ch. 8 | Reports to the Securities and Exchange Commission | 114 |
| Pt. 3 | Financial Analysis | |
| Ch. 9 | Cost of Capital | 131 |
| Ch. 10 | Capital Budgeting | 145 |
| Ch. 11 | Other Financial Analysis Topics | 157 |
| Pt. 4 | Funding | |
| Ch. 12 | Cash Management | 175 |
| Ch. 13 | Investing Excess Funds | 184 |
| Ch. 14 | Obtaining Debt Financing | 188 |
| Ch. 15 | Obtaining Equity Financing | 203 |
| Ch. 16 | Initial Public Offering | 221 |
| Ch. 17 | Taking a Company Private | 239 |
| Pt. 5 | Management | |
| Ch. 18 | Risk Management | 247 |
| Ch. 19 | Outsourcing the Accounting and Finance Functions | 258 |
| Ch. 20 | Operational Best Practices | 277 |
| Ch. 21 | Mergers and Acquisitions | 300 |
| Ch. 22 | Electronic Commerce | 334 |
| Pt. 6 | Other Topics | |
| Ch. 23 | Employee Compensation | 345 |
| Ch. 24 | Bankruptcy | 351 |
| Pt. 7 | Appendices | |
| App. A | New CFO Checklist | 365 |
| App. B | Performance Measurement Checklist | 371 |
| App. C | Due Diligence Checklist | 387 |
| Index | 395 |
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