Periodic Self-Assessment to Free-up Capital to Grow

“The strategic CFO and finance organization must spend considerable time and effort understanding the company’s markets and customers, competitors and suppliers. Which markets and customers represent the greatest value-creating potential? What are competitors doing, and likely to do, relative to the company’s customer base?” (CFOs: Not Just for Finance Anymore by Robert A . Howell, Wall Street Journal 11/12/2012)

Potential outcomes in response to this intelligence gathering will be as follows –

1) Do nothing, as your business perfectly aligns with the market and customer’s needs;

2) Modify the order fulfillment process;

3) Alter products and services offered; or,

4) Combination of 2 and 3.

As most businesses have a limit on financial resources available, a product or process investment will require an adjustment or elimination in the current offerings of your company, i.e. a reallocation of your working capital.

Periodically every business should review its product lines and services, to understand the profitability generated.  The natural result will be an emphasis on the most profitable activities; while de-emphasizing the less profitable or money loosing activities.  Through this exercise, you will quickly identify problems in products and service fulfillment.  You will also begin to analyze the value of your largest customers.  You may notice that certain customers are not as profitable as others, potentially requiring you to change pricing.

For example – In an organization where I was employed, we reviewed credit products every other year.  How were these products performing?  Was usage as expected?  What were competitors offering?  These products were portfolio products, and a certain allocation of the portfolio was held exclusively for the product being reviewed.  If we found that the product was no longer in demand, it would be canceled, to free up capital within the portfolio for new credit products.

This strategy will help you understand if funds are being allocated properly to support the most profitable endeavors.

Interestingly, based on a recent survey conducted by American Express and CFO Research, working capital for mid-size businesses will be obtained through an emphasis on receivables – “In a survey of 275 senior finance executives at companies with $4 million to $2 billion in annual revenue, 38% said that receivables performance would be their top priority for working-capital improvement over the next year, compared to 34% who cited inventory management, and 7% who pointed to payables performance. Another 20% said that all three categories would be a top priority.” (CFOs at Mid-Size Firms Target Working-Capital Improvements: Survey by James Willhite, Wall Street Journal 5/21/2013)

These survey responses from the CFO’s are counter to what has been disclosed in the press.  Large customers have recently adopted a strategy of paying vendors within 90 to 120 days, benefiting from the use of the vendor’s cash.  Note my recent blog posting – The New Cash Management Approach – Pay Slower (http://cfotips.com/?p=513)

Alternatively, if re-allocating cash resources are not an option, you may need to consider factoring receivables, acquiring a bank loan, issuing a debt offering or issuing an equity offering, to finance your growth.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Accounting Discretion or Earnings Management?

Surveys completed by 169 CFO’s showed , “…CFOs believe that in any given period about 20% of firms manage earnings…only about 60% of earnings management is income increasing, while 40% relates to income-decreasing activities…CFOs believe that it is difficult for outside observers to unravel earnings management…” (Earnings Quality: Evidence from the Field, September 2012).

There are policies and practices within GAAP, that allow for a certain amount of flexibility, i.e. where reasonable individuals may disagree , such as revenue recognition timing; depreciation and amortization policies; allowance for doubtful accounts projections; pension expense estimates; and inventory valuation.

These discretionary practices are also causing issues within the Auditing community.  Based on a recent report issued by the Public Company Accounting Oversight Board – REPORT ON 2007-2010 INSPECTIONS OF DOMESTIC FIRMS THAT AUDIT 100 OR FEWER PUBLIC COMPANIES (PCAOB Release No. 2013-001 February 25, 2013), audit deficiencies identified include – auditing revenue recognition; auditing fair value measurements; auditing accounting estimates; and, auditing procedures to respond to the risk of material misstatement due to fraud.

Issues arise when these policies allow for abuse.  Private companies may wish to increase expenses and lower earnings, to minimize taxes; while public companies may wish to decrease expenses and increase earnings, to achieve a higher stock valuation.  These strategies primarily move earnings from period to period.  To sustain the desired approach, successive quarters will need to be manipulated.  Regardless of your initial reason to manage the earnings, the end result will be a strategy where you mislead investors and lenders, i.e. commit fraud.

Additionally, there are also policies within GAAP that make targeted manipulation possible.  Common manipulation techniques include – over-accruing “cookie-jar reserves”; and establishing a reserve for restructuring charges “big-bath reserves.”

To avoid this situation – institute a strong control environment; and, retain a CFO with sound ethical convictions.  While it may be difficult to identify earnings management for an outsider looking in, an insider with the proper training in Accounting, Finance, that understands the business model, should easily identify the issue and implement corrective measures going forward.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

CFOs … Beyond Bean Counters

Re-Post of a blog written by Cindy Kraft, first posted on www.CFO-Coach.com.

The American Banker addressed the evolving role of Chief Financial Officers in banking.

The CFO’s responsibilities have broadened since the financial crisis, becoming more challenging and requiring executives to have an understanding of areas beyond accounting.

The Finance Chief’s role has been evolving and expanding for years, and not just within banking, but across every industry.

So what does make a Chief Financial Officer marketable today, regardless of industry?

Thought Leadership

Marketable CFOs have the proven ability to envision a direction and/or initiative, execute that vision, and deliver a positive impact for the organization. Sitting at the executive table is different than being a leader who sits at the table and strategically contributes to the executive team.

Operational Knowledge & Impacts

Head knowledge without proof of ability to use it … is just head knowledge. A marketable CFO will have CAR+SI (Challenge – Action – Bottom-line Result + Strategic Impact) stories that illustrate his depth of understanding of dollars and operations – and – operations and profitability.

Operational CFOs with proven track records of positive impact are in high demand, and will remain so. They also make great CEO candidates.

Soft Skills

As the CFO, your finance skills are a given … and your marketing documents should reflect that fact with stories of solving real problems and delivering a tangible impact. However, today that is not enough.

The evolution of CFO from bean counter to strategic leader means soft skills matter. If no one is following you, you’re not leading; and without great communication and negotiation skills, you probably can’t be an effective leader.

Marketable CFOs are strategic, operational leaders, not numbers nerds.

Targeted Audience

Not everyone needs you, nor will your message resonate with everyone. But a Subject Matter Expert can help a well-defined market, will understand who that market is, and target his message to that audience.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The Best Way to Avoid Fraud is to Remove the Opportunity

According to the Association of Certified Fraud Examiners (“2012 Report to the Nations”) – Most fraud was committed by a first-timer with a clean employment history.  The longer the employee tenure, the greater the financial loss was to the company.   The majority of all fraud situations occur in the following areas – accounting, operations, sales, executive/upper management, customer service, or purchasing.  Common fraud schemes involved billing, check tampering, and skimming and expense reimbursement.  Frauds lasted a median of 18 months before being detected. (http://www.acfe.com/rttn.aspx)

It is not uncommon to hear about an owner of a business not knowing a long term employee was stealing until the person was out of the office for a prolonged period.  Revenues and profits seemed to increase without a discernible increase in Sales.

Following are seven strategies that you can employ to reduce the probability of Fraud:

1)      Establish and maintain policies and procedures of roles and responsibilities.  Every role should have a back-up that can step in and carry out the assigned tasks; as well as validate that tasks are being carried out in accordance with policies.  No one employee should be responsible for every step of a single financial process.  Consider carrying out a Segregation of Duties Analysis, i.e. a review of all financial tasks and the title of the responsible individual handling each task. (http://wp.me/p2aImN-7Z).

2)      Foster an ethical culture within your firm which includes training and ongoing reinforcement throughout the year.  The ethical culture must start from the top and go down. If your employees question your ethical behavior, they will only consider their actions in the context of the standard you set. (http://wp.me/p2aImN-2y)

3)      Educate staff on the proper policies and procedures and their responsibility to report abuses, without fear of retaliation, i.e. a “Whistleblower Program.  It is unlikely that an external source will advise you of any potential fraud.  Not knowing your company’s acceptable policies, they will not know if fraud is being committed.  Alternatively, employees are the best source to understand if something does not appear quite correct. (http://wp.me/p2aImN-4n)

4)      Conduct regular audits for validation.  During the review of your financial tasks, you will quickly identify those areas where a risk of fraud is greatest.  Develop ways to test the area, to proactively identify abuse.  Basic tests simply compare what you expect with actual results, allowing for a small tolerance range. (http://wp.me/p2aImN-5f)

5)      Listen to the results.  This point is very important.  If during your testing you discover results that you did not expect.  Thoroughly investigate the reasons for the variance.  Either the tolerance ranges are too small or you have discovered an issue.  These tests and the results do not need to be trended.  If a tolerance range is breached, further investigation is necessary.

6)      Report audit results.  Senior Managers should become accustomed to reviewing results and gain comfort in knowing fraud has not been identified.

7)      Annually reassess your policies and procedures and the corresponding tests, to ensure the proper business risks are identified and tested.

What is your experience?

 

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Judging a Book By Its Cover

Re-Post of a blog written by Cindy Kraft, first posted on www.CFO-Coach.com.

And not only books, we judge all sorts of things. And people. And other people make judgments about each of us every single day. So,

– If you were a book … what would people say about you?

– When they read the title, is it worthy of reading the inside cover?

– Does the inside cover entice the reader to know more, to want to buy and read the entire book?

– If the book is read, is it everything they hoped for … and more?

You know where I’m going with this, right? Branding. Authentic branding. An authentic personal brand always precedes you. All day, every day who you are perceived to be is being judged by the people with whom you interact. Is that perception accurate? Is it compelling? Is it non-existent, because that, too, is judge-worthy.

Why is a strong, personal brand important?

Let’s go back to the book analogy. Once the worthiness of the book title is judged, there’s one of two actions. Reject it or read more.

So it is with your brand. It is what your brand inspires someone to do that matters. And that perception is typically established within the first few seconds of your encounter.

What if that first perception is wrong?

The title of the book may be appealing. The inside cover may be intriguing. The book itself, though, is a colossal disappointment.

Have you ever met an incredibly polished and professional executive at a networking meeting who turns out to not be who you thought he was in the initial conversation? In fact, far beneath what you initially thought?

Authenticity matters. Why? Because once that mask is removed, the word is out and spreads quickly. Just like a bad public book review, it’s difficult to rebound once an initial bad/poor/wrong judgment has been made.

You are being judged … and it’s by your cover (brand). The question is, what’s the belief of those who are doing the judging?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Six Tips to Improve Your Internal Controls Audit

Re-Post of a blog written by Teresa Bockwoldt, first posted on www.vibato.com

Many organizations feel ambivalent about their yearly audit. They know it’s important, but there’s a sense of dread at the impending disruption and costs to the organization that, frankly, bring little to no obvious positive effect to the bottom line.

Fortunately there are ways to enhance the value of your audit – and even cut your audit-related costs over time. We recommend starting with your internal controls over financial reporting, which auditors are now required to review in order to meet legislative guidelines.

1. Be Proactive

Understanding what your auditors will be doing, how they do it, and what they expect – before the audit starts – is key to an efficient, successful audit. The traditional practices of hall-roaming, constant disruptions, and off-topic discussions should be mitigated in advance by having a plan to host, manage, and focus your auditors. Being proactive can include all of the activities identified in steps 2 through 6, and will lead to fewer headaches for everyone involved. Establishing a proactive effort around your audit will also set your auditor’s expectations, and help them understand how to be more effective as well. They want you to be organized, have the appropriate information available, and be willing to discuss or address any issues they find. Having a formal plan for your audit is the first step in showing them that you are ready.

2. Actively Manage the Audit Staff

Assign one member of your internal team – the controller or internal audit manager – to actively manage the audit staff. Make it clear to the auditors that all requests for information and documentation must be fielded through that single employee. This will reduce disruptive behavior – such as an auditor storming into an office and demanding the immediate delivery of something – to employees inside and outside your finance team.

3. Complete the Risk Assessment and Segregation of Duties Analysis Yourself

Regulations require auditors to scope their audit based on risk. In this environment, the risk assessment and segregation of duties analysis take on a new level of importance. Traditionally, auditors will spend time preparing these assessments themselves. We recommend taking this on internally, or outsourcing to a third-party expert that charges less per hour than your auditor. The key is to get your auditor’s approval of the methodologies behind the work and the results prior to starting the audit. Also, be sure you can support independence and objectivity when internal personnel are used. By working with the auditor on what you have prepared, you are already limiting and controlling the potential scope of the audit – and this can make a big difference in both the duration and the outcome.

4. Balance Your Control Counts

Strive to balance your internal control counts, since too few controls put you at risk, and too many result in high audit and maintenance costs. Look at how many internal controls you have per employee in the finance department and, if the numbers seem skewed, consider undertaking a control rationalization effort before the end of your fiscal year. The best way to determine how many controls you need is to use a risk assessment to identify the highest areas of risk in your business, and focus mainly on those areas. Having redundant controls to mitigate the same risk is a good starting point, but over time you should be able to reduce this ideally down to one control per risk – saving you significant cost and effort as time goes on.

5. Document for Audit-ready Review

Documentation is another area where some simple, proactive work internally pays big rewards down the road. Find out how your auditor wants to see your documentation, and then follow an organized system that maps to their standards. Vibato recommends storing your monthly and quarter-end documents in binders that are tabbed out by topic (such as journal entries or bank statements). This kind of organization not only gives you a better sense of how far along you are at any given moment, it also makes it easy to find what you need during the audit – and ensures that your organization isn’t paying an auditor for something your own team could have done more cost-effectively.

6. Bring in a 3rd Party

Consider bringing in a reputable and experienced third party consultant for audit-related help that requires more independence or expertise than your internal team can offer. The right consultant acts as a client sounding board and advocate– which auditors no longer do—who can deliver focused, high quality service for a lower hourly rate than what an audit firm would charge for its senior partners. Rely on consultants when you need assistance with your risk assessment and segregation of duties analysis; for testing and documentation efforts; and for control implementations or rationalization efforts. The best consultants will offer established methods that have been proven to work, ensuring you get the most not only out of their expertise but out of your entire audit as well.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The Value of Shareholder Concerns to the CFO

“CFOs have become key contacts for the investment community, auditors, and ratings agencies, and are the day-to-day access to shareholders that directors do not have.”  (Bloomberg BusinessWeek, 9/22/2009) Boards and the Expanding Role of the CFO, by Karen D. Quint and T. Christopher Butler.

Regardless of the size of your company, there is a value in understanding the general issues and perceptions of the shareholder community.  You may find that your investors have beliefs and concerns that align closely with the general beliefs and concerns of all shareholders.  This assumption will be especially true if you have or are looking to secure a sophisticated investor for your business.

The Annual Meeting season is off and running and the trends that were observed in 2011 and 2012 are expected to continue in the 2013 season. 

So how is 2013 shaping up?

According to Proxy Monitor (www.proxymonitor.org/), a review of shareholder proposals for 170 companies, whose annual meetings are scheduled from 01.09.2013 through 05.23.2013, show three primary concerns:

  • Corporate Governance (74 proposals) – This category includes such items related to the legal structure of the organization, i.e. voting rules, separation of Chairman and CEO, special meetings, written consent, proxy access…   Current Events – (Wall Street Journal,  2/20/2013) Investors Seek to Split J.P. Morgan Top Posts, by Dan Fitzpatrick
  • Executive Compensation (202) – This category includes items such as say-on-pay, equity compensation rules, golden parachutes…
  • Social Policy (78) – Includes items which include animal rights, employment rights, sustainability…

Who is sponsoring these shareholder proposals?

According to Ernst & Young LLP “Proxy season 2013 Preview “, individual investors account for 27% of the proposals; socially responsible investors 21%; public funds 20%; labor funds 16%; faith based funds 10%; and Other 6%.

What is not included in this review are the proposals that do not make it to the annual meeting, either because there is no substantial support or the issue is resolved/negotiated, prior to reaching the annual meeting.

How does your organization compare?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.