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Archive for July, 2008

Becoming a company’s first CFO…

July 31st, 2008 Comments off

Recently, I’ve been fortunate enough to be included on a discussion thread about the opportunities and experiences of becoming a company’s first CFO. Although I have not found myself in the situation of a first time CFO hire, I have been on the receiving end of a number of opportunities where I have been the hire for a newly created position.

The approach that I have always taken into the position has been that I could set the benchmark for the position, and hopefully in a way, that any successor would have a very hard time matching.

However, the recent forum that I participated in portrayed a very different light for the first time CFO, and most feedback, was slanted toward a negative outcome. The feedback that was posted was very informative and I’ve archived all the emails so that I could refer back to them if I ever find myself in this same position.

The premise of the forum was the discussion of 3 candidates who had accepted newly created CFO positions at their respective companies. These were not incumbent hires nor were these first time CFO’s in their career history. However, none of the three candidates who were hired were with the company a year later, and further, the positions were left vacant in the company. The forum was asking one question – What were the reasons for the failure and how could it have been avoided?

Read more of what was shared by the forum…..

First CFO

What resources will you need for an IFRS conversion?

July 31st, 2008 Comments off

When we went through our IFRS implementation in 2005, we did so under the mandated schedule within the European union.  Since our corporate headquarters were based in Grenoble, France, our North American operations became a necessary participant in this effort. Never did we believe at the time that IFRS might one day become the global standard with reporting and that GAAP might play second fiddle. In hindsight, I feel fortunate to be a part of that early effort and to have a strong perspective on the resources it took to implement these new reporting standards.

One of the larger challenges we faced was the need to put these new reporting efforts in place, maintain our current focus on the business, but keep our headcount static.  We were not being given the latitude to hire new position(s) to assist with the effort.  It was huge task. I certainly would not endorse this approach again. I had been through other new reporting implementations but this one topped them all.  There was also the need to coordinate our efforts with our staff in Grenoble and develop global reporting and consolidation templates that would be used by each entity. Although we were not publicly traded in the U.S., we still needed to go through the efforts of comparing our GAAP-based results with proforma results calculated under the pending IFRS guidelines. For our entity, there were numerous considerations to the treatment of our R&D expenses and how those would be capitalized, as well as the overall cost-structures for our product. It also necessitated a review of our tax structure along with corporate policies on royalty and dividend payments.

I cannot include the elements of our timeline and all the other aspects we needed to cover in a summary post, but it was extensive.  We had to review areas such as contracts and other agreements to see if a conversion might trigger any covenants. There was also the issue of implementing certain reporting aspects that were required under IFRS but which we were not currently reporting, which needed to be coordinated with our IT team. We needed to ensure that our North American staff was properly trained & understood what was driving the effort.  We worked with the auditors to plan future engagements and how the scope would change under IFRS.  The list goes on.  The schedule for the U.S. conversion has not been defined as of yet, but when you start considering the forward-looking notifications and proformas that public companies will need to compile, it’s a huge undertaking. Today, the earliest estimation that U.S. companies might begin reporting under an IFRS-based format is 2011.  We’re certainly in for a very interesting period of transition….

Thanks for reading . . . .

Do you know the financial strength of your customers?

July 30th, 2008 Comments off

     I’ve posted a number of commentaries regarding Working Capital and the necessity in managing this portion of your financial portfolio. A significant element is obviously the management of your receivables and ensuring that your DSO metric is maintained at a healthy level. One of the largest areas of focus each month is the top receivables outstanding and the aging report. Within this report there are always those names that we quickly recognize since we have been doing business with those customers for years, and in some cases, decades. However, in the current economic environment, do you know the current financial strength of your customers?

     We all played a role in defining the credit policies that our staff employs for the approval of new customers and the credit levels assigned.  On an ongoing basis, there’s usually no need for concern so long as the customer is paying within normal parameters. However, what happens when those payments start slipping a bit and there’s perhaps been some turnover in staff, and they’re not quite up to speed on the history of the customer?  When is the status of the customer elevated to you for further decision making? At what point do you start asking for updated financials from your customer? At what point do you track the commercial successes or failures of your key customers?  The answer to these should be that your tracking this information on an ongoing basis.

     The financial partnerships that we develop with our customers should not be centered around the initial credit approvals or the periodic payments received.  For significant customers, that partnership should be an active one and it shouldn’t be unusual or viewed as intrusive to be contacting our financial peers at our customers to request this updated information.  For customers losing significant contracts, ending strategic partnerships, or other material events, these would be a significant enough events to revisit the credit decisions made on the account and whether the original credit decision should be reaffirmed or reduced.  It’s the continued maintenance of your customer relationships that may aid you in prevention of significant bad debt exposure.

Thanks for reading . . . .

How well documented are your internal controls?

July 29th, 2008 Comments off

     Regardless of the size of organization you might be managing, one of the best documents that you can have in place is the one that sets the groundrules for spending and entering into commitments on behalf of the company.  Depending on the company, this document can be referred to as a Schedule or Delegation of Authority.  I’ve learned to refer to it as the D.O.A. (no pun intended for those that do not adhere to the guidelines…..).  This is the document that doesn’t leave anything to chance regarding approval levels and notifies each managing level as to their spending / commitment capabilities.

     The typical Delegation of Authority will state the purpose & applicability of the document and covers the ground rules for executing documents, engaging in binding agreements, or approving material decisions on behalf of the company.  This document will typically break decision makers into primary categories, which individually address Managers, Directors, Vice Presidents, and Executive Officers.  Considering the wide scope of purchases that could be covered by such a document, it usually tries to cover those areas that could have a materially negative impact on the company.  These areas might include leases, service contracts, capital expenditures, credit limit authorizations, or check signing authority.  Keep in mind that these are only a sampling of the areas, and depending on complexity of the organization, may involve dozens of areas to specify.  Further, depending on the global footprint of your company, this should also be coordinated with all foreign offices.  In one particular version that we drafted, orders of certain magnitude were required to be approved by the Chairman to ensure that appropriate margin levels were achieved and key global managers were also aware of the transaction.

     If you’re currently operating without a DOA, then now may be the perfect time to address this area and start putting together that first draft.  There won’t be a single version that you’ll draft and distribute. This is a dynamic document that will continue to evolve as your company grows and hopefully begins moving into new segments.  I’ve been mentored by some fantastic Finance professionals and the constant message has been one of paranoia.  What’s going to get you next?  This is one additional tool that will hopefully mitigate adverse reactions on the part of employees, that while not intentionally malicious or fraudulent, could have a material effect on your results.  And that’s really what this document is about…increased communication throughout the company.

Thanks for reading . . . .

How dynamic is your Forecasting process?

July 28th, 2008 Comments off

     Recently I commented on contingencies in the forecasting process and having not only your Plan B…but your Plan C and Plan D.  However, some of the follow-up converstations I’ve had on this topic is the burden in putting together additional forecasts and the time it takes to change embedded assumptions and degree to which forecsating models can be manipulated.  For the majority of my colleagues, Excel seems to be the most prevalent modeling and offline analysis tool.  In my discussions, I posed the question of how the model would reflect changes on the income statement, by functional area, if there was a simple shift or reduction in headcount and the collection of benefits expenses associated with those positions. A very difficult dilemma for each one of them in an Excel-based format.

     One of the tools we used at a previous company was Hypierion Pillar. We used this for all our budgeting and forecasting needs. Although it’s being phased out by Hyperion, along with available support, there are similar tools with the same functionality. It was an incredibly dynamic tool that allowed for an easy categorization of headcount, expenses, and variable benefits by functional area.  If we were to move a handful of individuals from one functional area to another, all the expenses associated with those folks moved with them. If we were to see a change in our workman’s compensation expense we could easily change the assumptions and it would flow through the entire model. Through the use of global calculations we had an incredibly dynamic tool that allowed multiple scenarios with ease. 

     With solid Excel skills, some of these same assumptions can be built in but you end up having a VERY complicated model that can be highly prone to error without the appropriate cross checks built in. Within the Hyperion platform it was very easy to audit for errors, run checks on cost centers that shouldn’t be used, or for inactive cost centers that have inappropriately had costs booked against them. Which leads me to the next point, there’s the ability to combine actual and forecasted data in a very easy to use and TIME EFFICIENT format.  In the end, it’s all about having the ability to produce accurate, timely, and dynamic forecasts that eliminate guesswork & allow for intelligent decision making.

Thanks for reading . . . .

Are you an Expense or an Accretive Asset…?

July 25th, 2008 Comments off

     Over the years as I have looked to add members to my team, or more recently, navigating my way through the interview process, there has always been one question I have asked regarding a new hire – What will be the value you will create for the organization? 

 

     The view that I have always taken is that headcount needs to be increased in the same manner that you are making an investment in a new product line, additional inventory, or a new ERP system.  The investment needs to have a calculated ROI and the impact to the bottom line assessed.  If I’m being told that a number of new hires are not going to support an additional increase in sales or be associated with a specific project aimed at operating efficiencies, then I would need to question the true need.  This was the question that I would pose to all managers within the organization throughout the year.

 

     For any mid or senior level Finance position, the investment in a new hire is absolutely huge. Between the time spent recruiting, potential recruiter fees, salaries, additional benefits, and the short-term investment to bring that person up to speed, the investment is significant. The expectation for any position is not to just cover the expenses, but to realize a return that is a multiple of that investment. What will I do for the organization to help them achieve a multiple of their investment in me?

 

     As Finance professionals we have an obligation to not only generate timely and accurate reporting that will enable good decision making, but to identify areas within the operation that can be improved so as to increase revenues, margins, or result in a decreased expense structure. The same holds true of your staff, including cost accountants, A/P and Credit personnel, or your IT staff.  All have their specific expertise that should enable them to identify inefficiencies within their functional area.

 

Read the remainder of my commentary –   Expense or Accretive Asset? 

 

Thanks for reading . . . .

Brand longevity & the Hertz history…

July 24th, 2008 Comments off

     I received the latest edition of one of my favorite magazines yesterday, The Deal, and found an interesting article on Hertz rental cars and the history the brand had gone through relative to the different suitors that had acquired the company.  What jumped out at me immediately was how old the brand actually was, and what a great fun fact this info is.  The brand was started in 1918 by a Walter Jacobs who founded the company in Chicago with a dozen Model T’s!  Within 5 years the company was already doing $1 million in revenue.  Adjusted for a modest 3% annual inflation figures it’s almost $15 million in todays figures. The company then went through a number of acquisitions over the next 5 decades.  One of the more notable though was it’s acquistion by United Airlines in 1967 for a price of $567 million from RCA Corp. Now we don’t usually equate corporate M&A performance with that of the folks specializing in it, especially airline M&A, but United ended up divesting Hertz in one of the largest LBO’s (that is until the $25 billion purchase of Nabisco). That’s a multiple most would be envious of. 

     The article went into more detail on the current financial sitution of the company, their strategic direction, and some further changes. What’s always fun though is to learn of the history behind a brand, especially those that aren’t as recent as the iPod, Prius cars, or even IBM. 

Thanks for reading . . . .

Categories: CorpFin Cafe, M&A Tags: , , ,

Passive-Aggressive Organizations

July 23rd, 2008 Comments off

     With as much reading as we do on a daily basis, it’s refreshing to find the occassional article that really deserves to be archived and referred back to for it’s ongoing validity.  One of those articles for me was one I found a few years ago on the Harvard Business Review site; The Passive-Aggressive Organization.  The article is writtern by Gary Neilson, Bruce Pasternak, and Karen Van Nuys.  The article does a fantastic job of identifying where energy within the corporate structure is diverted from the main objected and is rechanneled into efforts that hinder the process.

     Almost every company I have been involved with has exhibited some of the characteristics highlighted in the article. Some more than others.  I constantly refer back to the article to help put things in perspective and help me through major projects that seem to see the progress stalling.  In the article there’s a great breakdown of the different corporate profiles that might characterize an organization.  The most ideal is that of a Resilient company where the entity is highly adaptable to external market shifts and is focused and aligned on a coherent business strategy.  The least desirable being the Passive-Aggressive entity in which all seems congenial and conflict free, seems to achieve concensus, but struggles to implement any plans due to conflict avoidance.

     There’s so much more to read in the article and it’s worth the 15-minute investment to read the article. You can find the article at Passive-Aggressive Organization .  I hope you find as much value in this article as I have.

Thanks for reading . . . .

Book Review: Reinventing the CFO

July 22nd, 2008 Comments off

     Reinventing the CFO, by Jeremy Hope, is an absolutely fantastic book if you’re looking for a little perspective on how you’re approaching your own Finance department and the value you are bringing to the company.  It goes without saying that the role of the CFO is has moved beyond that of a simple Accountant or Controller and has progressed to that of financial strategist and partner to the rest of the executive team.  There’s extensive commentary that prompts the introspective question of what value you are bringing to the organization outside of month-to-month reporting. It questions the approach you take in your personal approach and whether you are seeing realizing the highest levels of efficiency within your group.  A must read for any finance professional who has achieved, or aspires to, a senior finance position.  It never hurts to question your own approach……after all, it never hurts to have a little more humility within a Finance department.

Thanks for reading . . . .

Q3 and your FY Forecast…

July 22nd, 2008 Comments off

     Okay, we’re only 3 weeks into Q3 and moving into the busy summer season, atleast depending on the industry that you’re in.  Hopefully, your close for the first half is also completed and you’ve had a chance to review your YTD results against the original Budget and made the appropriate updates to your Forecast.  For most of my colleagues there is a single Forecast that they play off of for the remainder of the year, and typically only the consolidated income statement, or one for each business segment.  However, have these same efforts been taken to the Cash Flow and Balance Sheets as well?

     My bigger concern at this point would be making sure that there are a number of Forecast scenarios that have been developed. While the Forecast usually incorporates the elements not known at the time of budgeting, it’s usually still an optimistic view of the current business climate. I don’t think any of my colleagues were honestly anticipating such a challenging environment, but it’s here…especially in the consumer and retail sector.  It’s also being felt by companies delivering infrastructure products that are reliant on corporate capital expenditures, which are also being scaled back.

      Does you current forecasting process include a realistic “worst case” scenario that you’ve also taken to the Balance Sheet and Cash Flow levels? Are you comfortable that you have the resources to weather such a downturn without resorting to extreme measures such as headcount reductions, capital investment reductions, and working capital management that may anger your vendors?  These may have a short-term boost but the long-term effects are harder to bounce back from.  If your “worst case” truly becomes a reality do you have good relationships with your banking contacts and have you kept in touch with them during through the year? 

       For most that I have talked to, results are modest, resources are being managed, and they are closely watching headcount, but most believe the current environment will not deteriorate further.  What if it does?  I’m still trying to dial in my crystal ball, and until I do, I’ll make sure I have Plan B…and Plan C, and Plan D.

Thanks for reading . . . .