Archive for September, 2008

Do you have your financial diagnostic checklist?

September 25th, 2008 Comments off

As I start getting situated into a new CFO position, the first thing I do is run through a preliminary diagnostic of the processes in place, the quality of the information, and the depth of information that management has at their disposal for key decision making. As I’ve mentioned in my posts on internal audits and other control-related commentaries, I want to know what my immediate areas of risk are to the firm and address them immediately. While I have a much more comprehensive list, some of the areas listed below are those I start addressing in the early stages.

-Review of the most recent audit report for insight on potential issues.
-Skills assessment of the existing staff and their commitment levels.
-Review of current systems and the ability to extract accurate reporting.
-Review of all working capital elements and exposure to potential write-offs not recognized.
-Determine the health of current bookings and pending shipment pipeline.
-Assess any current or pending litigation issues.
-Assess the current banking relationships and determine potential issues.
-Assess the dynamic among the Executive team as well as the Board.
-Determine if overall compensation levels are in line or if there is risk to a broad-based increase.
-Review current insurance levels and confirm coverage levels are appropriate.

After reviewing the list above the first question is “Why wouldn’t these items be questioned or reviewed during the hiring process?”. In fact, they should be, but as we all know for the interview process, there’s the process of kicking the tires when you’re on the lot and actually getting a feel for the performance of your new purchase after you’ve had it for a week or two. This is not necessarily a negative situation, but sometimes the Company wants you as bad as you might want the position and you might only get that 80% view. Regardless, if you enjoy what you do and you appreciate a challenge, make the most of it and ensure that the efforts you commit are those you can be proud of and strive for nothing less than success.

Thanks for reading . . . .

Due diligence doesn’t stop at the financials. . . .

September 22nd, 2008 Comments off

This week I received my new copy of “The Deal” magazine, which focuses on all activities that are M&A related. One article that was a pretty enjoyable, not too mention dramatic read, was about the path that a Las Vegas-based company, Xyience, has taken in its path to raise capital and achieve sales goals. The name of the article, “Rumble”, followed the various paths of investor fraud and malfeasance that had occurred over the years. It also detailed the history of it’s main executive, Russell Craig Pike. The article documented the various entities that Pike had been involved with and his history of criminal fraud. The biggest question the article left me with was how on earth did this individual continue to raise investor funds and how none of the investors, atleast it appears, did any type of due diligence on the company and the executive team.

The simple concept of due diligence shouldn’t just stop at the financials, but should extend to all aspects of securing resources for your organization. One of the areas that I put in every effort to ensure integrity is in my personal network. Everyone manages their network differently, but I put a significant effort into my LinkedIn profile and the contacts that I keep. There is no one person that I add to my network that I haven’t met with directly or that shares multiple points of contact directly within my network. I also want to make sure that I follow the work of my contacts and the levels of service they provide if I make a recommendation. And these efforts are just for service referrals. When it comes to funding activities, I would advocate nothing less than a complete background and reference check. Know who you are doing business with, their history of success, and their reputation.

Looking at investing in a business, purchasing a business outright, or entering into a strategic partnership? You should know exactly who you’re going to be risking your reputation and funding on. After all, due diligence doesn’t stop at the financials . . . .
Thanks for reading. . . .

Jeffrey Ishmael

Corporate valuations – Premiums start w/ the foundation

September 18th, 2008 Comments off

Some recent conversations and emails have prompted discussions regarding the valuations placed on a company and how to move towards achieving a premium. While there are some PE / VC firms that seem to have their “formula”, the process of applying a valuation is a very fluid process that is affected by an unlimited number of elements. The most obvious are trends within an industry, the company’s market share within that industry, as well as the market’s view of the company in question. There dozens of data points to start with. One thing is for certain….securing a premium valuation does not happen over night. It starts with methodical planning that begins with a solid internal foundation and extends to the external efforts directed at satisfying the customer base. It’s a journey and not the result of impatience.

This is not rocket science but it does take the formulation of a specific goal and a disciplined approach. Whether your company is working on a succession plan or working towards an acquisition, discipline is the key. And it’s not going to be just a discipline focused on financial results. The discipline has to start at the operational foundations of a company. The potential buyer of your company does not want to inherit a myriad of headaches or a company that needs a complete facelift. They want a company that will be a complement to their bottom line, their operations, and will be accretive in a very short amount of time. Any areas that are viewed as a “fix” are going to bring down your valuation.

1. What is the state & accuracy of your budgeting, forecasting, and planning process?
2. What is the quality of your working capital elements? Inventory, A/R, etc….
3. What is the quality of your employee base and their skill sets? Tenure, degrees, etc.
4. What is the extent of processes documented within the company?
5. What is the quality of the information systems that are in place? Quality of data….?
6. What is the state of the customer base? Strong relationships, reliance on one customer….
7. What is the state of the vendor base? Is there any single source risk……

This is far from any type of an exhaustive list and the typical due diligence checklist will make most managers heads spin. When these elements are not in place and they need to be addressed last minute before any type of a potential deal, it will typically result in mistakes or the identification of weaknesses in the business. It also means that the efforts of management will be pulled away from the day-to-day operations, which might result in decreased short-term performance. The few issues listed above cannot be remedied in a month or two. They need a much longer planning window to address. When these elements, and many more, are dialed in it will result in a much higher premium in placed on the entity. Strong foundations result in premium valuations.

Thanks for reading . . . .

Jeffrey Ishmael

Quality Control…or is it Quality of Controls?

September 17th, 2008 Comments off

It’s a bit disheartening to continue reading about so many instances the last few days of internal fraud carried out at both private and public companies. There’s no need to look any farther than to see examples in the last few day, which include American Intl. Pasta Company (fraudulent reporting), Hilfiger ($19m embezzled), and Quest ($10m “questionable” transfer). As a Finance professional who has worked at both smaller and larger entities, the biggest question I have is what were the levels of audit / control that were supposed to be in place and why didn’t they detect this activity sooner? It’s an easy question to ask but we don’t need to look any farther than some of the most recognized institutions, which have some of the most stringent controls, for examples of controls gone bad. Do you recall the collapse of that English banking institution formerly known as Barings as a result of the futures trading and wiping out the banks reserves entirely? How about more recently, Jerome Kerviel of Societe Generale and his 7.2 billion Euro loss on his futures trading?
Whether public or private, every company needs to have these levels of control in place to detect potential mis-dealings by employees. And it’s not going to be found just within the Finance department. It’s going to be found in Purchasing, Marketing, Logistics, and every other functional area of the organization. It’s not just going to be in the form of embezzled funds, but in inappropriate relationships, kickbacks, or even something as elaborate as a shell corporation, which I discovered had been set up by a country manager at our Mexican subsidiary. The foundation for having these controls is not just the documentation of certain processes. It needs to start at the top of the organization and putting in place an environment of control that communicates to employees what their span of authority is. Defining what their decision making limits are, and if pending decisions are outside of those limits, what the escalation process is for approval.

Within the scope of a SOX framework, it outlines the need for a “suitable and recognized control framework”. There are a number of segments that comprise this framework, but from overall view, there key areas to address. These areas include, as discussed, a Control Environment, Risk Assessment, Information / Communication, and Monitoring. Now, as I’ve mentioned with all my posts, this is only meant as a summary and not an exhaustive commentary. Our ultimate goal as Finance professionals should be the ability to generate company financials that are free from error and allow the key players in the organization to make informed business decisions. To generate information that can be trusted and relied on in the growth of the business. Only after we have managed to deliver this, as a functional area, can we fullfill the remainder of our role as an advisor on other corporate matters.

It would be easy to spend a week discussing the topic of internal controls, structuring an internal audit, and the follow-up activities of such an audit. Not quite possible here. The intent here is to have you consider the topic, whether it’s appropriately addressed within your organization, or that maybe it’s in need of a refresher due to material changes in staff, market, or regulations. What is the Quality of your Controls?

Thanks for reading . . . .

Sales & Ops Planning: Where do I start . . .?

September 16th, 2008 Comments off

My apologies again, but it has been a very hectic couple of weeks between a client project and possible career considerations. But let’s jump back in with a link to our last post of Sales & Operations Planning (S&OP). As I’ve mentioned, this is not a simple process and will reach across the entire organization. In my last post I outlined the significant funtional areas that will be involved in such a project. Let’s keep pushing down and look at some of the steps involved and where we’re headed in our further analysis.

Please note that each one of the areas listed below is an entire discussion in themselves and deserving of a dedicated post. However, there are 5-key steps that that fall within the S&OP process. These steps include:

1. Data Gathering.
2. Demand Planning.
3. Supply Planning.
4. Preliminary S&OP Review.
5. Executive Review.

The amount of data that will contribute to this process is extensive and will range from your closed financials, to bookings, pending projects, and other considerations potentially affecting the Forecast. The data gathering will extend into data points relative to the Production process and the ability to deliver on Forecast in the necessary time constraints. There will be various time considerations with respect to the short-term and long-term goals, both of which will be considered in this process.

When I was first brought in to be a part of this process, I had no prior S&OP experience and was a bit frustrated at being pulled away from my “core duties” and having to spend time on a process that seemed more “Production-oriented”. However, it didn’t take much more than the project introduction to see the value that this project was going to play in the validation of our financial forecasts and to bring an even higher degree of accountability and transparency to the planning process. It also further strengthened what was already a healthy relationship with the Production department. From a Finance-perspective, it allows for a much higher level of information support and accuracy in budgeting, forecasting, and more importantly, working capital management.

Thanks for reading . . . .

You’ve not been forgotten . . . .

September 9th, 2008 Comments off

Sorry for the lack of postings over the last few days but I have been extremely consumed in a client project, which has not allowed me to dedicate the necessary attention for a quality post. Quality over Quantity.

See you with an updated posting tomorrow…..

Categories: CorpFin Cafe Tags:

Performance Indicators & Balanced Scorecards. . . .

September 5th, 2008 Comments off

With all the discussions this week regarding IFRS I felt compelled to step back a bit and cover a slighter broader organizational topic – Balanced Scorecards. For myself, I love any indicator that is going to provide me some insight as to how the organization is performing, and hopefully the tracking has been in place long enough that I can start making year-over-year comparisons. However, the question I still have yet to see answered by any one team is “How many indicators are sufficient to provide you with an overview of corporate performance?”. Granted, these need to be broken up into financial and non-financial, but let’s just take one area. If you refer back to the book “The Ultimate Question”, there is really only one indicator that needs to be tracked….whether or not your customer will recommend you to others. Ok…perhaps a bit simplistic. But let’s look at the average approach.

For the companies I have been at, there have been anywhere from 6-50 indicators tracked on a monthly basis. If there are indeed 40-50 being tracked do I need to see these figures every month and draw some type of conclusion? Probably not. But I am VERY interested in the trends that these indicators may take over a period greater than a quarter. While I do want to see the data compiled monthly, a month does not make a trend. I also believe that it’s very difficult to narrow your indicators down to very small amount and gauge the performance for what could be a very complex organization. Are you going to only pick 6-10 indicators for a company that has R&D, Engineering, Quality, and Call Center functions? By the time you pick one indicator for each area you’ve hit your limit.

Aside for the standard financial indicators, I want to know about others that are directly affecting our customers. For instance:
– What are the number of current or past due “service” calls? Are we servicing our customers and delivering on contractual obligations?
– What are the number of warranty related issues? Not from a $$ perspective but from a “customer touch” perspective.
– Are our Service technician training levels appropriate for the install base in their region?
– What are the system performance measures from IT so that employees remain productive?
– What is our On-Time Delivery performance? I care that we booked the revenue but I also want to make sure we met our customer expectations.
– What is our performance for the accurate shipment of customer orders? How many orders were processed incorrectly?
– What is our order return rate? While not necessarily negative, it is a cost to the company.
– What is our employee turnover and is it due to termination or resignation?
– What is our capacity utilization / labor absorbption rates?

While not necessarily a “financial” performance measure, all of these indicators, and dozens more, have the ability to directly impact the bottom line financial performance. When the financials are closed at the end of the month and we see the final story I want to know exactly what was influencing our results and how we might be able to improve them moving forward. Perhaps there have been areas that have improved dramatically versus the prior year and it’s time to start fine tuning some of our process. How is your organization performing and how do you track it?

Thanks for reading. . . . .
Jeffrey Ishmael

IFRS planning & IT collaborations

September 3rd, 2008 Comments off

In my post this morning about making the jump into an IFRS conversion, I wrote about the platform upgrade we had completed prior to our move into the adoption of IFRS. We had implemented Hyperion HFM, which would allow us to report under the new standards. I wrote that a word of caution was necessary knowing whether your current or planned system would be able to support IFRS since not all platforms are capable at this time. Just posted to is a great article regarding the necessary collaboration that needs to happen with the Finance and IS departments. Definitely worth the few minutes to read. article:Can your CIO spell IFRS?

IFRS conversions . . . Planning your jump.

September 3rd, 2008 Comments off

Now that the SEC has just moved the U.S. one step closer towards IFRS conversion, have you really started considering the staffing needs that it will take to develop your new reporting platforms? Likely the biggest issue at this point is the available guidance on making the actual conversion. Approximate statistics reflect approximately 25,000 pages of GAAP/FASB related documentation while there is only 1/10th of that currently available for IFRS. Not to mention the small amount of knowledge resources that are available to assist corporations in this effort. This is an area that will see huge growth in the coming years. Keep in mind, with this being a summarization of info, that this is not intended to be a detailed oultine of all that should be considered.

In consideration to the conversion, there are 38 key areas (IAS and IFRS) that have been documented in the form of released statements covering their respective areas. While our conversion was a very time-consuming effort, we had a very good reporting foundation to work from and had already transitioned to a new reporting software that would accommodate our IFRS initiatives. Previous to our conversion, we had implemented Hyperion HFM for all our reporting and consolidation needs. It should be noted that not all software platforms are currently capable of supporting IFRS reporting needs. We also had to start bridging the gaps of what we were not reporting in North America, which would be required under IFRS. It was necessary to go through each of the standards and bridge the differences.

As you get down into the statements that have been released, they are as basic as IAS 1, which outlines the presentatation of financial statements. However, once you start moving into some of the other areas, the new reporting could be a bit more problematic. Under IAS 2, which relates to the reporting of inventories, there is no LIFO reporting allowed, whereas it is in the U.S.. Fortunately, this was not an issue, but for some it clearly will be. Not too mention the impact to the financial results when the change is made. For our company, IAS 18, which dealt with Revenue Recognition, was another key area. Unlike GAAP, where there is extensive guidance in this area, there is little with IFRS at the current time. For a company that dealt with large projects as well as deferred revenues related to Service contracts, this was an area we could not be loose in our applications. We defaulted to GAAP guidance in this area with the assumption that eventually IFRS would become more stringent, which still has not happened….

There will be further discussions on each one of the areas covered under IFRS and a summary of differing points between the two formats. Some of the more notable areas we’ll be looking at will be:
IAS 8 Changes in Accounting Methods
IAS 18 Revenue Recognition
IAS 14 Segment Reporting
IAS 36 Impairment
IFRS 3 Business Combinations
IFRS 5 Discontinued Operations

This is a large subject to tackle but it will be an interesting path.
Thanks for reading . . . .
Jeffrey Ishmael