Corporate Finance

At the beginning of the new year, the time is right to assess where your company is going and examine strategic initiatives. It’s also a terrific time to put a plan together to see what resources would be required to bring those initiatives to fruition. It’s also time to ask a lot of questions to determine which plans are “pie in the sky” dreams, and which plans are in realistic alignment with the company’s long-term goals.

Bridgepoint Consulting has offered the following sample questions to help CFOs put the right talent, technology and resources in place for the new year. These questions will get you moving in the right direction.

1. Do you have the right financial growth plan for the coming year?

Most companies are already well down the path of financial planning for the upcoming year, but as the year kicks off, a reminder never hurts. An ideal budget forecast is built from the bottom up – not mandated by the CEO/CFO – with a strong go-to-market perspective that factors in all the elements necessary to bring new or expanded products and services to market. A robust financial growth plan should be both strategic and operational: tied into the organization’s long-term goals, but granular enough to make sure everything makes sense and is achievable. Such breakdowns typically include not only yearly numbers, but monthly or quarterly milestones as well.

2. Have you begun assessing the impact of Revenue Recognition and Lease Accounting?

The new revenue recognition standard is one of the most far-reaching accounting policy changes in recent history, and following hot on its heels is the complex new lease accounting standard. Together, these two changes may have a monumental impact on your business, which is why you should begin focusing on them sooner rather than later.

3. Have you buttoned up your IT security?

In many cases, the IT function reports to the CFO, and we are hearing from our conversations with boards that they are becoming more and more concerned about IT security issues. And if you already have a significant presence in the cloud, make it a priority this year to review and update your risk management strategy so that you can move with confidence along your path to digital transformation.

4. Have you identified changes or upgrades you need to make?

Speaking of digital transformation, the beginning of the year is also an excellent time to take a strategic look at your company’s approach to digital technology. To the extent that any IT system changes are anticipated for 2018, you need a thorough plan for their implementation – and sufficient lead time for those efforts. Many organizations have made the mistake of thinking ERP or CRM upgrades can be tackled over a long weekend, when the reality is that these projects can take three months or more to complete and can easily spin out of control, taking budgets with them. Our advice is to start planning now – and to make sure your upgrade budget is incorporated into your financial growth plan.

5. Have you put a plan in place to retain high-quality talent?

Here’s something we have seen demonstrated time and time again: It is far easier to keep really good people than to lose them and be forced to hire more good people. Replacing good people can be  expensive.  The SHRM Foundation suggests that when you factor in severance, productivity and recruitment costs, the true cost of replacing an employee can be as much as two times their annual salary. Do you have an environment that encourages innovation, leadership and teamwork? Do your people feel that they make a difference in the success of your company? Your compensation package may be part of what attracts great employees, but creating a culture in which people are valued and engaged will keep them excited about coming to work and helping your company achieve its business objectives.

Don Mal, CEO and co-founder of Vena Solutions identifies some additional ways that finance will further impact the C-Suite in 2018, as noted in Accounting Today (each link will provide additional details for each point):

• It’s time to go beyond just record-keeping
• Spearheading the adoption of analytics
• Bringing In More Non-Financial Data For A More Holistic Look
• Leading the C-Suite on long-term and predictive-based decisions
• Providing new and better insight into what drives revenues
• Evolving from data collection to storyteller role

In conclusion, the overriding concept is adequate planning. Have the right questions been asked? Is the plan well thought out and consistent with the company’s long-term strategic plans? Have planning decisions been under-taken by group?

This is the mindset needed to move the company in fruitful directions, and asking practical, pointed questions can help you act in immediate and effective ways.

An intriguing survey was recently conducted by BeeBole with several CFOs and financial experts, asking them to predict which tech trends will shake up financial management in 2018.

As noted in the survey, plenty of answers had to do with artificial intelligence, cloud technology, automated accounting, and how different tech developments are transforming the role of the CFO in business and turning the CFO into a strategic partner.

Although it’s often difficult to predict which trends will succeed and expand and which trends will fade into the background, the following answers from BeeBole’s survey will help you pinpoint the technology that you should consider using in your business.

BeeBole’s 6 Technology Trends for CFOs in 2018

A real test For artificial intelligence (AI)

There were big expectations for AI in 2017. In fact, some people expected to see voice control and smart assistants like Alexa or Siri exploding in the workplace. However, AI hasn’t been fully integrated into financial management yet. According to Mark Gandy, a consultant providing CFO services for small to medium-sized businesses at G3CFO, the financial field still needs to catch up with that.

Automated accounting and transactions gain momentum

One of the ‘natural’ outcomes that comes with the development of AI is automation. Some experts think that 2018 will be the year where automated accounting will flourish. For instance, Ralph Wilson, Group Finance Director for reach4entertainment enterprises and former Head of Finance for BBC Worldwide, expects to see “more user-friendly and more automated accounting systems” this year. He also thinks that “automated purchase and sales ledger transaction processing between clients and suppliers” will play a big role in the upcoming months. Similarly, Chris Bevelander believes that “integration and large scale application of automatic processing of digital invoices and further digitising invoices” will have a major impact in financial management. In fact, the adoption of this kind of technology will change the face of the financial field. According to John Orlando, Executive Vice President and CFO of the budgeting company Centage, one of the benefits that comes with the adoption of these kinds of automated tools is that finance departments will “become more focused on developing and evaluating key strategies.”

Real-time insights (will) become essential

Last year, Jeff Thomson, an expert in CFO matters, wrote an article in Forbes Magazine predicting several things for 2017. One of his predictions was the following: “finance will become increasingly dependent on automation and analytics to deliver real-time, clear actionable and forward-looking insights.” According to the group of experts who contributed to this article, this is one of those trends that will maintain its appeal throughout all of 2018.

Better decisions through data management and business intelligence

In 2018, CFOs will have new and improved tools that will help them to standardise and provide quick access to data. As a result of that, data visualisation will represent “a big advantage and a great tool in the decision making process for financial processes, in particular” argues Vanessa Goscinny, Finance Director for the Open Society Foundations in Haiti.

Further (and better) integration through cloud technology

According to Vanessa Goscinny, “cloud based applications and devices, will continue to strongly influence the way organizations work,” something she sees quite relevant in terms of collaborative working and access to data and other information from anywhere in real time.

As far as financial management goes, cloud-based solutions (vs all-in-one software) are here to stay for the long run. As a matter of fact, making a reference to a research published by Bain, Roy Golden, CFO at Zerto, recently stated in cfo.com that the global cloud market is expected to grow to $ 390 billion by 2020.

“Cloud computing is one of the biggest tech trends in a generation… and one of the biggest areas of impact is how it presents a new landscape for chief financial officers to work within”

A more strategic focus for a digital CFO

According to Michele Zangri, Vice-President of Operations and CFO for Unit 4 in North America, “modern technology has played a big hand if no the entire hand” in the evolution of finance roles. With all the on-going digital disruption in AI, automation, real-time data and cloud technology, the role of the chief financial officer will inevitable continue to evolve throughout 2018.

This year, we will continue to see that evolution with more CFOs engaging in a whole variety of tasks highly influenced by new technology. “We will have to learn how to analyze data in real-time, how to detect future risks for our companies, where to find data, and especially how to add value to that data” advanced Miguel Losada.

While it’s difficult to predict how many of these trends will become the most prominent gamechangers in 2018, one thing is certain: the role of the CFO is itself changing rapidly, and that pace of change is only going to increase.

Entrepreneurial finance is the process of making financial decisions for new ventures (i.e. startups).  New ventures are inherently different from established ventures, as are entrepreneurs inherently different from conventional business managers. The financial decisions faced by each are starkly different as well.

Entrepreneurs face very different finance challenges than do corporate managers. The most obvious, which most entrepreneurs are familiar with, is “financing."  To the average entrepreneur, this means simply "finding money.”  It is this process of finding investors that tends to consume nearly all of the focus of most entrepreneurs. While extremely important, it is not the only financial decision that an entrepreneur faces, as this blog by Randolfe notes. 

Also noted by Randolfe: corporations can sell financial claims (capital stock) in the public market at market rates. They can also often fund projects through allocation of internally generated funds. New ventures, on the other hand, do not have a market for their financial claims, and thus must raise funds for projects from investors.

Small Biz Trends notes the four following points on this topic:

1. Seeking outside financing isn’t worth your time.  Unless your business has a lot of hard assets that can be used as collateral for a loan, or one of a handful of startups that has the super-high growth potential and exit plan to attract accredited angel investors and venture capitalists, seeking outside money is unlikely to be fruitful.

2. Personal credit matters.  Data from the Federal Reserve’s Survey of Small Business Finances shows that the owners of one quarter of corporations less than five years old, and nearly half of sole proprietorships that age, personally guarantee the debts of their businesses. With personal debt, the lender’s decision depends less on the potential of the business than on the entrepreneur’s credit and collateral.  If you don’t have great personal credit and you have few assets to pledge against a loan, you will have a hard time borrowing to finance your new business.

3. You are more likely to get a loan. Only a tiny percentage of startups are financed by selling equity to accredited angels or venture capitalists.  The statistics show that around 1 percent of companies get their financing from these two sources combined.  Research shows that these sources are actually more likely to lend money than to take an equity stake.

4. Tapping trade creditors is where your odds of obtaining financing for the business itself are highest. According to analysis of the Federal Reserve’s Survey of Small Business Finance, next to having a checking account, trade credit is the most common financial tool used by small businesses.

In conclusion, the matter of financing for a startup is not the only issue that distinguishes “entrepreneurial finance” from other more mature forms of business finance. We highly recommend you look into the matter carefully and conduct your own research to learn about other financial realities faced by the entrepreneur when contemplating a start-up.

According to McKinsey & Company, the rapid shift of economic activity from established markets in Europe and North America to developing ones in Africa, Asia, and Latin America has many CFOs asking treasurers to improve their performance. In an effort to help corporate treasurers improve their performance in core activities, 120 treasurers were surveyed and an additional 50 in-person interviews were conducted. Those sources, as well as experience working with treasurers, has led to the conclusion that companies should focus on five moves to improve their global treasury function, as noted by this report that has the following recommendations:

1. Centralize The Treasury Function Globally

The ideal model would centralize policy setting, decision making, and execution—though not necessarily personnel. Consolidating the treasury function under the global treasurer can help by giving managers an aggregate view of their cash flow and risk positions.

One caveat: a centralized treasury organization does come with trade-offs; for instance, it might leave a company with less information about local banking and country-specific regulations.

2. Strengthen Governance

Strengthening treasury governance requires a thorough review of policies and processes for core activities, followed by testing to ensure that they work well in practice and by comprehensive training. One way to start is to test how processes work under stress.

3. Enhance Treasury Management Systems

The rapid pace of software development over the past 20 years has brought to market a range of sophisticated tools that facilitate the treasury function. In our survey, we found that nearly half of the companies with less than $10 billion in revenue still used spreadsheets as their primary treasury system.

4. Increase the Accuracy of Cash Flow Forecasting

The treasury function should aggressively analyze cash flow forecasts and different cash-flow scenarios, and consult with the company’s businesses in all global regions on how they might best utilize cash economically.

5. Manage Working Capital In Developing Markets

Managing working capital globally is a challenge, especially in developing markets, where the task can be complicated by differences in business culture. Managing working capital is complicated because it requires spending a lot of time with business units in their various regions to understand how they pay their suppliers and figure out customer behavior.

Overseas Treasury Expansion

The Journal of Accountancy goes on to recognize that understanding regulatory requirements and standard operating procedures in international locations is essential for domestic corporations expanding into overseas markets. The following tips are just a few out of a larger list compiled by Wells Fargo’s international banking division that can help companies establish an effective global treasury policy:

1. Consult With Key Advisers Early. 

Draft the overall scope and plan for international expansion with the help of tax advisers, bankers, legal consultants, and IT experts.

2. Assess the Risks. 

Unstable currency markets that pose devaluation risks must be taken into consideration. Corporations should understand the laws and economic and regulatory risks that exist in the markets where they are expanding.

3. Set Policies For Capital Management. 

A framework for treasury, foreign exchange, liquidity, and investment management practices must be established and communicated throughout the organization. Decide on protocol as you would for your U.S.-based treasury system.

As companies migrate to a global viewpoint they need to recognize that the degree of complexity entailed in achieving a streamlined treasury function is many times more complex than just a purely domestic scenario.

For companies experiencing temporary cash shortages, asset-based financing may be an alternative that makes sense as a viable way of meeting its cash shortfalls. With this method of financing, a cash-strapped business can use the assets that they have to overcome its cash flow shortages.

As noted by FinWeb, there are two primary means of asset-based financing, as follows:

1) asset-based loans

2) factoring.

As FinWeb explains, to obtain an asset-based loan, a business must apply for a secure loan from a lending institution, collateralized by pledging one or more assets. Asset-based loans are used generally by companies with somewhat spotty credit. As such, the fees and interest rates for these loans will typically be higher than market prices. Accounts receivable and business inventory are the most common assets used as collateral, but any asset might be accepted by the lender.

Secondly, there is a method of asset-based funding known as factoring. It is often used by rapidly-growing companies in need of immediate cash. Using this process, the business will actually sell its accounts receivable to a factoring company for cash (as opposed to pledging them as collateral for an asset-based loan). For newer invoices, the company could receive up to eighty percent of their value up front. The factoring company assumes all credit risk for the outstanding accounts.

The principal disadvantage of asset-based financing is its expense. Using assets to bolster cash flow increases a business's cost of funds, thereby significantly affecting its bottom line: the profits.

REVOLVING LINES OF CREDIT (REVOLVERS)

As noted by the Journal of Accountancy, a revolver is a line of credit established by the lender for a maximum amount. The line of credit typically is secured by the company’s receivables and inventory. It is designed to maximize the availability of working capital from the company’s current asset base. The borrower grants a security interest in its receivables and inventory to the lender as collateral to secure the loan. In most cases, lenders require personal guarantees from the company’s owners.

The security interest creates a borrowing base for the loan. As receivables are collected, the money is used to pay down the loan balance. When the borrower needs additional financing, another advance is requested. The borrowing base consists of the assets that are available to collateralize a revolver. It generally consists of eligible receivables and eligible inventory.

USE OF A LOCKBOX

A typical asset based loan agreement, as observed in this analysis, gives the asset-based lender control of the company’s incoming cash receipts from customers. A “lockbox” or a “blocked account” is established by the lender for the receipt of collections of the accounts receivable. The lockbox account usually is created at the bank where the borrower does business. The company’s customers are instructed to pay their accounts by mailing remittances to the lockbox. These payments are deposited in a special account set up by the lender. The lender credits these funds against the loan balance. The lender then makes new advances against the “revolver” as requested.

A revolver differs significantly from a term loan. As discussed, the loan balance in a revolver typically is secured by receivables and inventory, which can fluctuate daily. With a term loan, the outstanding balance is fixed for a period ranging from a month to several years. A term loan has an agreed-upon repayment schedule. Generally, once an amount has been repaid in a term loan, it cannot be re-borrowed. In a revolver, however, the company can borrow, repay and re-borrow as needed over the life of the loan facility.

Upside

Entrepreneur notes that asset-based loans can be a much-needed source of capital for companies that are rapidly growing, highly leveraged, in the midst of a turnaround or undercapitalized. Sometimes a company simply needs that infusion of cash to get over a financial hump or prevent growth from stalling out.

The loans are especially well-suited for manufacturers, distributors and service companies with a leveraged balance sheet whose seasonal needs and industry cycles often hamper their cash flow.

Downside

However, asset-based loans are more expensive than traditional loans. For this reason, banks will, at times, include additional "audit" and due diligence fees to the overall cost of an asset-based loan. Furthermore, banks may not deem sales to individuals or small businesses as "eligible receivables."

The position of Chief Financial Officer (“CFO”) is typically the “top of the pyramid” in the career path for those seeking advancement within a finance career. The following information is provided to assist anyone seeking to pursue such a position.

1. What Does a CFO Do?

As the Your Future Blog notes, the CFO has complete oversight of an organization’s financial operations and has a significant amount of responsibility for the overall business strategy and performance. ‘The CFO role comes with wide-ranging responsibility and accountability, as well as a high level of job satisfaction,’ says Paul McDonald, Robert Half senior executive director. ‘Today's financial executives influence all areas of their organization, from operations to information technology to human resources.’

In addition, the blog observes that the CFO is responsible for ensuring and developing revenue streams and driving business strategy. They do this by determining risk controls and developing innovative funding and capital-raising strategies to drive expansion, modernization or product development. They need to be technologically competent and able to integrate technology strategy into the business. A CFO works closely with the CEO to influence and drive business strategy and will often be a board member responsible for corporate investment.

2. How can candidates best prepare themselves for the CFO role?

As CPAs consider their career paths, many aspire to become a CFO in industry. A limited number of these positions are available, and the competition is intense.

This analysis from Journal of Accountancy notes the following traits needed for a CFO role:

Skills and Knowledge

CPAs with designs on a CFO position need to distinguish themselves with skills that go far beyond the basic foundation of accounting competencies. The significance of these skills varies based on the company’s size and industry, but all of them should be considered in a self-assessment to prepare for a career move.

Business and Operational Experience

Some CPAs have strong accounting and finance backgrounds but no operational experience. To get it, aspiring CPAs can volunteer for projects outside of finance, take lateral positions in different areas, and seek out and visit others who work in operational areas such as manufacturing and sales. CPAs can broaden their perspectives by asking questions, even if it is uncomfortable; reading contracts from a business perspective; and attending and participating in meetings.

People Skills and Negotiation

Effectiveness in leadership roles requires being open with other employees. A positive attitude and enthusiasm are essential. Having an executive presence is critical, as you will be dealing with customers and shareholders, bankers and lawyers, partners, and boards of directors. But while it’s important to be able to speak the language of the boardroom, you must also be able to alter your behavior and learn different ways to communicate with all levels of an organization, and to build relationships with people with different levels of education and experience.

Leadership Skills: Creativity and Courage

To be a CFO, you must be tough and confident. You must be able to make difficult, reasoned decisions and explain complex accounting, financial, and business concepts to others in a way that they can understand. You must be a good storyteller to communicate the story behind the numbers to management or third parties. CFOs need to go beyond the numbers to be strategic partners to CEOs.

Strong Personal Values

While pursuing higher positions on the career ladder, it’s important to be true to yourself and not deviate from your values, CPAs say. Getting the job you want can leave you feeling empty if you sacrifice your beliefs to get there.

Networking and Mentoring

While having a large number of connections can be valuable, successful networking is more than just collecting contacts. It is important to assess your current network and to build quality contacts in targeted areas that can help you attain the role of CFO.

Next Steps

As you consider your strengths and areas for improvement against these recommendations, it is important to do a thorough self-analysis of your abilities and talents. Talk to friends, families, peers, and subordinates to get others’ perspectives. Assess what you are passionate about and what defines success for you (beyond compensation). No matter what steps you take in your career search, there is always an element of luck involved. Be open to opportunities presented at all times and always have your “antenna up.”

3. Robert Half Finance and Accounting provides the following additional tips for navigating the CFO career path:

• Gain broad financial experience
• Widen your customer service experience
• Broaden your understanding of technology
• Earn a CPA or MBA
• Consider controller and treasury positions
• Prepare to take on expanded roles

Although nothing guarantees success in a world of variables that you can’t always control, if you keep the principles above in mind and put them into practice, it will at least increase your odds.