Year: 2020

A chief financial officer (CFO) is the senior executive responsible for managing the financial actions of a company. The CFO’s duties include tracking cash flow and financial planning as well as analyzing the company’s financial strengths and weaknesses and proposing corrective actions.

The CFO is similar to a treasurer or controller because they are responsible for managing the finance and accounting divisions and for ensuring that the company’s financial reports are accurate and completed in a timely manner. Many have a CMA designation.

The CFO reports to the chief executive officer (CEO) but has significant input in the company’s investments, capital structure and how the company manages its income and expenses. The CFO works with other senior managers and plays a key role in a company’s overall success, especially in the long run.

For example, when the marketing department wants to launch a new campaign, the CFO may help to ensure the campaign is feasible or give input on the funds available for the campaign.

 In the financial industry, a CFO is the highest-ranking financial position within a company.

The CFO may assist the CEO with forecasting, cost-benefit analysis and obtaining funding for various initiatives. In the financial industry, a CFO is the highest-ranking position, and in other industries, it is usually the third-highest position in a company. A CFO can become a CEO, chief operating officer or president of a company.

The Benefits of Being a CFO

The CFO role has emerged from focusing on compliance and quality control to business planning and process changes, and they are a strategic partner to the CEO. The CFO plays a vital role in influencing company strategy.

The United States is an international financial hub and global economic growth increases employment growth in the U.S. financial industry. Companies continue to increase profits leading to a demand for CFOs. The U.S. Bureau of Labor Statistics predicts the job outlook for financial managers to grow 7% between 2014 and 2024.

Role of Chief Financial Officer (CFO)

1. The Strategist CFO

The first role of the CFO is to be a strategist to the CEO. The traditional definition of success for a chief financial officer was reporting the numbers, managing the financial function, and being reactive to events as they unfold. But in today’s fast paced business environment, producing financial reports and information is no longer enough.

CFO’s in the twenty-first century must be able to “peak around corners”. Therefore, they must be able to apply critical thinking skills, along with financial acumen, to the long term goals of the organization.

2. The CFO as a Leader

The second role of the CFO hand in hand with the first one. That is one of a leader implementing the strategies of the company. As a result, it is no longer sufficient for a CFO to sit back and analyze the effort of others. The chief financial officer (CFO) of today must take ownership of the financial results of both the organization and senior management team.

The chief financial officer of today must be responsible for providing leadership to other senior management team members, including the CEO. The CFO’s role can sometimes force them to make the tough calls that others in the organization don’t or can’t make. Occasionally, this can mean the difference between success and failure.

3. The CFO as a Team Leader

The third role of the CFO is that of a team leader to other employees both inside and outside of the financial function. Not only will a coach call plays for a team, but they are also responsible for getting the highest results out of the talent on their team.

An aspiring and successful coach will produce superior results by finding the strengths of their team members and obtaining a higher level of performance than the individuals might achieve on their own. The role of the CFO (Chief Financial Officer) is to bring together a diverse group of talented individuals to achieve superior financial performance.

4. The CFO with Third Parties

Last, but not least, the role of the CFO is that of a diplomat to third parties. People outside of the company look to senior management team for inspiration and confidence in the company’s ability to perform. In almost every case the financial viability of the company is vouched for by the CFO.

The CFO’s role becomes that of the “face” of the company’s sustainability to customers, vendors and bankers. Often these third parties look to the CFO for the unvarnished truth regarding the financial viability of the company to deliver on it’s brand promise.

5. Today’s Role of the CFO

In today’s fast paced environment the role of the CFO is extremely fluid. One day the CFO might be developing a compensation plan for employees. Then the next day taking their bankers on a tour of the facilities. Consequently, to be a successful CFO in the future you must be a more multi-functional executive with financial skills.

Financial management functions are vital for managing financial resources. Finance is referred to as the provision of funds at the time when it is needed for the business. Finance function involves the procurement of funds from a number of sources and their proper utilization in business concerns. The basic concept of finance comprises capital, funds, and amount. The core finance function is the process of acquiring and utilizing funds for a business. Finance functions are connected to the overall fund management of a business organization. The finance function is also concerned with the decisions such as business nature, size of the firm, type of machinery used, use of debt capital, liquidity position and so on. A brief discussion of major financial management functions is stated below:

1. Estimates the capital requirements of business

A financial manager firstly has to make the estimation with regards to overall capital requirements of the business. This will depend on several determinants like probable costs and expected profits and upcoming programs and policies of the company. Predictions have to be made in an adequate and concern manner which increases the earning capacity of business and which ensures proper use of financial resources. Thus financial management functions guide a financial manager to estimate organizational capital requirements.

2. Ascertains capital composition

Once the estimation of capital requirement has been made with the best effort, the capital structure of the enterprise has to be decided. This involves the analysis of short- term and long- term debt equity. This will depend on the proportion of possessed equity capital a company and other additional funds which have to be raised from outside parties through borrowing.

3. Makes the Choice of sources of funds

A financial manager needs to evaluate different sources of funds. A company has many choices for raising additional funds to be procured in the business like loans to be taken from banks and other financial institutions, issue of company shares and debentures, public deposits to be drawn like in form of bonds. Choice of a factor depends on the relative advantages and disadvantages of each source and financing period.

4. Investment of total funds

The finance manager has to decide how to allocate the total amount of funds into profitable ventures. He has to make sure that there is safety on investment and positive regular returns are possible. The capital should be invested in a wisely manner so that there is less possibility of losing funds or experience loses. For that, the manager can use different investment tools like portfolio analysis, net present value, internal rate of return, an average rate of return and so on.

5. Disposal of surplus

Financial manager calculates profits of business at the end of an accounting period. Then the net profits decision has to be taken by the finance manager of the company. This decision can be made in two ways. He can declare a dividend to the shareholders of a company where the ordinary shareholders will get the profits in the form of money or share or retain profits for some purposes like expansion, diversification or innovation of the business.

6. Manages of cash flow

Finance manager of a company has to make decisions regarding cash management. Cash is required for several purposes like payment of wages and salaries to the workers, payment to the creditors, payment of electricity and water bills, meeting current liabilities of the business, cost of maintenance of having enough stock, purchase of raw materials for daily production etc.

7. Controls Finances

The functions of a finance manager are not only to do a financial plan, procure fund and utilize the funds but he also has to control the finances involving in the business. This function can be done by many techniques like ratio analysis, forecasting of financials, cost analysis and control and profit distribution techniques etc.

8. Decisions regarding acquisitions and mergers

A business organization can either be expanded through acquiring other business or by entering into the business by mergers with other firms. While acquisition decision denotes a process of purchasing new or existing companies, the merger is a process where two or more companies join together in the formation of a new business. During such decision, a financial manager has to deal with many complex valuations of securities of each company.

9. Tax Planning and protection of Assets

It is the duty of a financial manager to lessen the tax liability of the business. This task should be performed wisely. It is very important that a finance executive properly examines various schemes and invest accordingly. He should also protect the assets engaged in the business to ensure the best use of the resources.

10. Decision on Capital Budgeting

Long-term decisions involve investing in share or bond, purchasing new equipment, building new plant etc. These decisions are called capital budgeting. In this decision making of the company financial managers faces many complicated situations. As the process requires a huge amount of capital, it is necessary that a financial manager identifies the investment opportunities and involved challenges.

The efficient use of financial management functions helps a company to maximize wealth. Financial management is a continuous and interrelated process which involves identifying the required amount of capital that is needed for running the business promptly, evaluating and selecting best alternative sources of funds, allocating the funds according to the need of business area and distributing earned profits.

1. Simplicity

A financial plan should be so simple that it may be easily understood even by a layman. A complicated financial structure creates complications and confusion.

2. Based on Clear-cut Objectives

Financial planning should be done by keeping in view the overall objectives of the company. It should aim to procure funds at the lowest cost so that profitability of the business is improved.

3. Less Dependence on Outside Sources

A long-term financial planning should aim to reduce dependence on outside sources. This can be possible by retaining a part of profits for ploughing back. The generation of own funds is the way of financial operations. In the beginning, outside funds may be a necessity but financial planning should be such that dependence on such funds may be reduced in due course of time.

4. Flexibility

The financial plan should not be rigid. It should allow a scope for adjustments as and when new situations emerge. There may be a scope for raising additional funds if fresh opportunities occur. Similarly, idle funds, if any, may be invested in short-term and low-risk bearing securities. Flexibility in a plan will be helpful in coping with the demands of the future.

5. Solvency and Liquidity

Financial planning should ensure solvency and liquidity of the enterprise. Solvency requires that short-term and long-term payments should be made on dates when these are due. This will ensure credit worthiness and goodwill to the concern.

Solvency will be possible when liquidity of assets is maintained. There should be sufficient funds whenever payments are to be made. Proper forecasting of future payments will be helpful in planning liquidity.

6. Cost

The cost of raising capital is an important consideration in selecting a financial plan. The selection of various sources should be such that the cost burden should be mimimum. As and when possible interest bearing securities should be returned so that this burden is reduced.

7. Profitability

A financial plan should adjust various securities in such a way that profitability of the enterprise is not adversely affected. The interest bearing securities and other liabilities should be so adjusted that business is able to improve its profitability.

Considerations in Formulating Financial Plan

A financial plan should be carefully determined. It has long-term impact on the working of the enterprise.

The following variables should be kept in mind while selecting a financial plan:

1. Nature of the Industry

The needs for funds are different for various industries. The asset structure, element of seasonality, stability of earnings is not common factors for all industries. These variables will influence determining the size and structure of financial requirements.

2. Standing of the Concern

The standing of a concern will influence a decision about financial plan. The goodwill of the concern, credit rating in the market, past performance, attitude of the management is some of the factors which will be considered in formulating a financial plan.

3. Future Plans

The future plan of a concern should be considered while formulating a financial plan. The plans for expansion and diversification in near future will require a flexible financial plan. The sources of funds should be such which will facilitate required funds without any difficulty.

4. Availability of Sources

There are a number of sources from which funds can be raised. The pros and cons of all available sources should be properly discussed for taking a final decision on the sources. The sources should be able to provide sufficient and regular funds to meet needs at various periods. A financial plan should be selected by keeping in view the reliability of various sources.

5. General Economic Conditions

The prevailing economic conditions at the national level and international level will influence a decision about financial plan. These conditions should be considered before taking any decision about sources of funds. A favourable economic environment will help in raising funds without any difficulty. On the other hand, uncertain economic conditions may make it difficult for even a good concern to raise sufficient funds.

6. Government Control

The government policies regarding issue of shares and debentures, payment of dividend and interest rate, entering into foreign collaborations, etc. will influence a financial plan. The legislative restrictions on using certain sources, limiting dividend and interest rates, etc.; will make it difficult to raise funds. So, government controls should be properly considered while selecting a financial plan.

‘Forecast’ means to form an opinion beforehand i.e. to make a prediction. Thus financial forecasting means a systematic projection of the expected action of finance through financial statements.

Financial forecasting is the processing, estimating, or predicting how a business will perform in the future. The most common type of financial forecast is an income statement, however, in a complete financial model, all three statements are forecasted. In this guide on how to build a financial forecast, we will complete the income statement model from revenue to operating profit or EBIT.

It is needless to mention that such forecasting needs past records, cash flow and fund-flow behaviour, the applications of financial ratios etc. along with the industrial economic condition. It is a kind of plan which will be formulated at a future date for a specified period.

The merits of the financial forecasting are noted below:

(i) It can be used as a control device in order to fix the standard of performances and evaluating the results thereof

(ii) It helps to explain the requirement of funds for the firm together with the funds of the suppliers

(iii) It also helps to explain the proper requirements of cash and their optimum utilization is possible and so surplus/excess cash, if any, invested otherwise.

Financial planning, on the other hand, is nothing but one part of a larger planning process within an organization.

“A complete planning system begins at the highest level of policy with the firm’s basic goals or purpose, usually stated in qualitative, mission-oriented, terms. From this it is derived the firm’s commercial strategy, defining the product or services it will produce and the markets it will serve. Supporting policies are developed in production, marketing, research and development, accounting and finance. The extent to which the system formalized with detailed planning and budgeting system in each area depends in part on the firm’s size and the complexity of its operation.” — E. Solomon and J. S. Pringle

Thus, in a broader sense, financial planning can be viewed as the representation of an overall plan for the firms in terms of finance and, similarly, in a narrower sense, it may refer to the process of determining the financial requirements which is needed in order to support a given set of plans in other areas.

Financial Forecasting Vs. Budgeting

When you create a budget for your business, you plan to set aside money for certain costs, taking into account your income and expenses. The budget you make may be based on info from your financial forecast, but it’s distinct from the forecast itself.

Think of financial forecasting as a prediction, and budgeting as a plan. When you make a financial forecast, you see what direction your business is headed in, based on past performance and other factors, and use that to anticipate the future.

When you make a budget, you plan how you’re going to spend money based on what you expect your finances to look like in the future (your forecast).

For instance, if your financial forecast for next year says you’ll have an extra $5,000 in revenue, you might create a budget to decide how it will be spent—$2,000 for a new website, $1,000 for Facebook ads, and so on.

Three steps to creating your financial forecast

Ready to peer into the crystal ball and see the future of your business? There are three steps you need to follow:

Step 1: Gather your records

If you’re not looking into the past to see how your business has grown, you’re not really forecasting—you’re just guessing.

You’ll need to gather past financial statements so you can see how your business has developed over time, and then project that development into the future.

Your bookkeeper or bookkeeping software should generate financial statements for you. If you don’t have either, and you don’t have financial statements, you’ll need to take care of that before you can start forecasting. You need complete bookkeeping in order to get the transaction history you base your financial statements on.

Put aside the task for financial forecasting for the moment, and learn How to Catch Up on Your Bookkeeping.

Once your books and financial statements are up to date, you’ll have everything you need to start planning for the future.

Step 2: Decide how you’ll make your forecast

Depending what resources you choose to use, the type of forecast you create will fall between two poles—historical and researched-based.

Almost every financial forecast includes a little bit of historical forecasting, and a little bit that’s research-based. The blend you choose will depend on your needs and the resources at your disposal.

Remember, the goal is to create a realistic, useful forecast—without breaking the bank or eating up all your time.

(i) Historical forecasting

When you use your financial history to plot the future, it’s historical forecasting. You’re looking at your last few annual Income Statements, Cash Flow Statements, and Balance Sheets to see how fast you’ve grown in the past. From there, you can make a guess about how fast you’ll grow this year.

The benefit of this is that it’s relatively easy to do and doesn’t take a lot of time, money, or expertise. The drawback is that you’re only using info about your own business, and not looking at broader market trends—like what your competition has been up to.

Historical forecasting is a good bet if you’re forecasting for modest growth, or else creating a quick-and-dirty forecast for your own use not putting together a presentation for potential investors.

(ii) Research-based forecasting

When you do research about broader market trends, you’re using research-based forecasting. You may look at how your industry has performed over the past ten years, investigate new technologies and consumer trends, or try to measure the progress of your competitors. You might look at how companies similar to yours have planned their own growth.

The benefit of research-based forecasting is that you get a detailed, nuanced view of how your business could grow, taking into account a lot of different factors. And it’s the kind of forecast that investors and lenders want to see.

The drawback is that researched-based forecasting can be expensive. You may find you need to hire outside consultants and researchers to handle the heavy lifting.

Research-based forecasting is a good choice if you’re courting investors, or planning on rapid, aggressive growth. It’s also good if your company is brand new, and doesn’t have a lot of financial history to draw on for making projections.

Step 3: Create pro forma statements

Once you’ve collected the information you need to build your forecast, you can create pro forma statements.

We’ll cover the three key financial statements here. Whether you use all of them is up to you.

If you’re creating a quick forecast for your own planning, you may only need to create pro forma Income Statements. If you’re presenting to lenders or investors, you’ll want to use all three.

Rule of thumb: Any form you’d use in the month-to-month operation of your business should be created pro forma. For instance, if you move a lot of cash around every month, and you rely on Cash Flow Statements to make sure you’ve got enough money on hand to pay your vendors, then it’s wise to create pro forma Cash Flow Statements as part of your forecast.

(i) Creating the pro forma Income Statement

First, set a goal—a projection—for sales in the period you’re looking at.

Let’s say you made $30,000 in sales this year. Next year, you want to make $60,000. So, your total sales will increase by $30,000.

Set a production schedule that will let you reach that goal, and map it out over the time period you’re covering. In our example, there will be 12 Income Statements in the year to come (one each month). Map out that $30,000 increase in sales over the 12 statements.

You could do this by increasing sales a fixed amount every month, or gradually increasing the amount of sales you make per month. It’s up to your instincts and experience as a business owner.

Then, it’s time for the “loss” part of “Profit and Loss.” Calculate the cost of goods sold for each month, and deduct it from your sales. Deduct any other operating expenses you have, as well.

It’s important to take every expense into account so you get an accurate projection. If part of your plan is quadrupling your online advertising, be sure to include an expense that reflects that.

Once you’re done, your pro Forma Income Statements show you how much you can expect to earn and how much you can expect to spend in the time ahead.

(ii) Creating the pro forma Cash Flow Statement

You create a pro forma Cash Flow Statement a lot like the way you’d create a regular Cash Flow Statement. That means taking info from the Income Statement, and using the Cash Flow Statement format to plot out where your money is going, and how much you’ll have on hand at any one time.

Your projected cash flow can tell you a few things. If it’s in the negative, it means you’re not going to have enough cash on-hand to run your business, according to your current trajectory. You’ll need to make plans to borrow money and pay it off.

If your net cash flow is positive, you can plan on having enough surplus cash on hand to pay off loans, or save for a big investment.

(iii) Creating the pro forma Balance Sheet

Drawing on info from the Income Statement and the Cash Flow Statement lets you create pro forma Balance Sheets. But you’ll also need previous Balance Sheets to make this useful so you can follow the story of how your business got from “Balance A” to “Balance B.”

As a business owner, there may be nothing more important to to get a handle on your company’s future cash at hand, several tools are available to help you analyze projected income and expenses. They range from rudimentary spreadsheets to slick visualization apps. Here are five tools that can help you forecast your figures.

1. Templates

For some, there’s nothing like rolling up their sleeves and getting their hands dirty with an Excel spreadsheet. If this is you, here are some templates you can use to get you started. Futurpreneur Canada provides a cash flow template that will cover everything from outlining startup costs through to projecting cash flow month by month for two years.

SCORE, a network of business mentors created by the U.S. Small Business Administration (SBA), has its own cash flow and financial projection

Templates to help project cash flow over a 12- month or three-year period.

2. QuickBooks cash flow projector

The desktop version of QuickBooks offers short-term cash flow predictions via two features. The first, cash flow forecasting, uses outstanding invoices and bills in the accounting system to tell you what your cash at hand will look like over the next month or so.

Alternatively, you can use the cash flow projector tool included in some desktop versions of QuickBooks. This lets you analyze your historical accounting data and tweak it with your own manual adjustments, while also taking in accounts payable data.

QuickBooks cash flow projector will only project out for the next six weeks. If you want a longer-term view with extra goodies, you’ll need something with more power.

3. Float

While some accounting packages might give you basic cash flow forecasting, there’s a lot to be said for a best-of-breed solution that does one thing well. Float is a dedicated cash flow forecasting system that integrates with QuickBooks and with two other popular online accounting packages, Xero and FreeAgent.

Float imports accounting data directly from those packages, using them to generate cash flow forecasts on a daily or monthly basis. Its “what if” analysis tools show you what happens to your cash on hand over time as you play with parameters, and also lets you create multiple scenario layers showing what would happen in different events, such as taking on a new employee.

The online tool includes budgeting options that let you describe how your business will spend its cash, and then tracks those budgets throughout the month.

4. Dryrun

Dryrun also takes input from Xero and QuickBooks to let you track your forward cash flow. It lets you track partial payments, and allows you to collaborate with employees and business advisors so that they know your position.

This system includes another feature: sales forecasting. It draws data directly from web-based CRM tool Pipedrive, so that you can factor potential deals into your cash flow forecast, making it more accurate.

Sales is just one part of the cash flow puzzle. What are you spending on? Dryrun’s budget system offers the ability to define your own categories and create auto-repeating budget items that you can view in varying levels of detail.

DryRun’s what-if modelling system lets you compare multiple scenarios together at once, using multiple data points in each forecast.

5. Pulse

Pulse lets you monitor existing cash flow on a weekly or monthly basis, and project future cash flow using tools to estimate the effect of a new project or expense on your cash at hand.

Input data from QuickBooks automatically to cut down your workload, and then use it to visualize cash flow in a series of reports. This tool also does cash flow tracking in multiple currencies for those doing business internationally.

With Pulse, you can set user accounts at multiple levels, ranging from Owner down to Read Only, with varying levels of access.

Whichever tool you use, the secret to accurate forecasting lies in accounting for costs and income as accurately as possible. Being honest about your financial expectations is a key requirement in cash flow planning. If you can pull data from your accounting system, then you’re already off to a great start.

Cash management is the process of collecting and managing cash flows. Cash management can be important for both individuals and companies. In business, it is a key component of a company’s financial stability. For individuals, cash is also essential for financial stability while also usually considered as part of a total wealth portfolio.

Individuals and businesses have a wide range of offerings available across the financial marketplace to help with all types of cash management needs. Banks are typically a primary financial service provider for the custody of cash assets. There are also many different cash management solutions for individuals and businesses seeking to obtain the best return on cash assets or the most efficient use of cash comprehensively.

Cash management is the efficient collection, disbursement, and investment of cash in an organization while maintaining the company’s liquidity. In other words, it is the way in which a particular organization manages its financial operations such as investing cash in different short-term projects, collection of revenues, payment of expenses, and liabilities while ensuring it has sufficient cash available for future use.

What is the definition of cash management? In the real world, organizations have strict cash management controls to monitor its inflows and outflows while retaining a sufficient amount in order to take advantage of attractive investments or handle unforeseen liabilities. Efficient management of cash prevents loss of money due to theft or error in processing transactions. Numerous best practices are adopted to enhance management of company’s funds.

This involves shortening of cash collection periods, regular follow ups for collections, negotiation of favorable terms with suppliers allowing delay in payment periods, and preparation of cash flow forecasts. Businesses also use of technology to speed up cash collection process. They must do all of this while maintaining adequate amount of funds to meet daily operations.

Cash is the primary asset individuals and companies use to pay their obligations on a regular basis. In business, companies have a multitude of cash inflows and outflows that must be prudently managed in order to meet payment obligations, plan for future payments, and maintain adequate business stability. For individuals, maintaining cash balances while also earning a return on idle cash are usually top concerns.

In corporate cash management, also often known as treasury management, business managers, corporate treasurers, and chief financial officers are typically the main individuals responsible for overall cash management strategies, cash related responsibilities, and stability analysis. Many companies may outsource part or all of their cash management responsibilities to different service providers. Regardless, there are several key metrics that are monitored and analyzed by cash management executives on a daily, monthly, quarterly, and annual basis.

The cash flow statement is a central component of corporate cash flow management. While it is often transparently reported to stakeholders on a quarterly basis, parts of it are usually maintained and tracked internally on a daily basis. The cash flow statement comprehensively records all of a business’s cash flows. It includes cash received from accounts receivable, cash paid for accounts payable, cash paid for investing, and cash paid for financing. The bottom line of the cash flow statement reports how much cash a company has readily available.

Example

A computer manufacturing company, Techno Ltd., uses supplier Beta & Co. to purchase its core materials. Beta & Co. has the policy of allowing its customers who buy on credit to pay within 30-days period.

At the moment Techno Ltd. has $20 million cash resources available and has to pay $5 million to Beta & Co. after 30-day period for the purchases. However, after 30-day period Techno Ltd. has an investment opportunity requiring use of the full $20 million cash resources.

If the company is able to renegotiate its terms with suppliers allowing 60-day period, the delay in payment will allow the company to benefit by using current funds for the investment and paying suppliers with cash generated next month from other projects. Thus, by properly managing its funds, Techno can take advantage of investment opportunities while maintaining its operations.

Define Cash Management: Cash management means a company’s ability to allocate its funds efficiently in an effort to cover operating expenses, make investments, repay shareholders, and maintain adequate reserves.

• Cash management is the process of managing cash inflows and outflows.
• There are many cash management considerations and solutions available in the financial marketplace for both individuals and businesses.
• For businesses, the cash flow statement is a central component of cash flow management.