THE NEW CFO F INANCIAL LEADERSHIP MANUAL SECOND EDITION STEVEN M. BRAGG THE NEW CFO F INANCIAL LEADERSHIP MANUAL Second Edition THE NEW CFO F INANCIAL LEADERSHIP MANUAL SECOND EDITION STEVEN M. BRAGG This book is printed on acid-free paper. Copyright  2007 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the Web at www.copyright.com. 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CONTENTS Preface xv Acknowledgments xix About the Author xxi Part 1 Overview 1 1 CFO’s Place in the Corporation 3 First Days in the Position 3 Specific CFO Responsibilities 4 Overview of the Change Management Process 8 Differences between the Controller and CFO Positions 9 Relationship of the Controller to the CFO 11 Summary 12 2 Financial Strategy 13 Cash 13 Investments 15 Working Capital 17 Inventory: Inventory Reduction Decision 19 Fixed Assets: Lease versus Buy Decision 20 Payables 21 Debt 23 Equity 25 Fixed Expenses: Step Costing Decision 31 Payroll Expenses: Temporary Labor versus Permanent Staffing Decision 31 Entities: Divestiture Decision 33 Systems: When to Use Throughput Costing 34 High-Volume, Low-Price Sale Decision Using Throughput Costing 38 Capital Budgeting Decision Using Throughput Costing 39 Make versus Buy Decision Using Throughput Costing 40 Summary 41 3 Tax Strategy 42 Accumulated Earnings Tax 43 Cash Method of Accounting 44 Inventory Valuation 45 Mergers and Acquisitions 45 vii viii CONTENTS Net Operating Loss Carryforwards 46 Nexus 47 Project Costing 48 S Corporation 48 Sales and Use Taxes 49 Transfer Pricing 50 Unemployment Taxes 53 Summary 53 4 Information Technology Strategy 55 Reasons for Devising an Information Technology Strategy 55 Developing the Information Technology Strategy 56 Technical Strategies 59 Specific Applications 60 Summary 63 Part 2 Accounting 65 5 Performance Measurement Systems 67 Creating a Performance Measurement System 67 Asset Utilization Measurements 68 Operating Performance Measurements 72 Cash-Flow Measurements 76 Liquidity Measurements 79 Solvency Measurements 83 Return on Investment Measurements 85 Market Performance Measurements 90 Quality of Earnings Ratio 92 Summary 92 6 Control Systems 93 Need for Control Systems 93 Types of Fraud 94 Key Controls 95 When to Eliminate Controls 111 Summary 112 7 Audit Function 113 Composition of the Audit Committee 113 Role of the Audit Committee 114 Purpose of the External Auditors 115 [...]... or Securities and Exchange Commission (SEC) reports The controller creates the reports, but the CFO must review them prior to their release, since the CFO is the one who must explain their contents to readers The CFO also needs the information in order to see how the presented information fits into any other analyses being created; for example, if the CFO is building a case for an increased emphasis on... discussed what the CFO position should do, it is also worthwhile to point out those areas that the position should not become involved in This issue is of particular concern to controllers who have been promoted to the CFO position, but who are having difficulty relinquishing their old chores in order to take up new ones The result is that, with twice the workload, the newly promoted CFO does both the CFO and... communicating the CFO s work to others Review the list regularly, and spread any changes to the list around the organization on a regular basis Mobilize the organization With the CEO firmly supporting the CFO s agenda, the rest of the organization must be mobilized to follow it as well This calls for the creation of measurement and reward systems that are specifically designed to channel activities into the correct... that falls directly within the CFO s area of expertise Relationship of the Controller to the CFO* 11 The main point to be gained from this comparison of the controller and CFO positions is that the controller is responsible primarily for the daily administration of accounting activities, whereas the CFO must cordon himself off from these activities and concentrate instead on the general design of control... to the CFO part of the job will eventually lead to stagnation, inefficiency, and poor development of potential funding sources RELATIONSHIP OF THE CONTROLLER TO THE CFO In a larger company, there is a clear division of tasks between the controller and CFO However, there is no clear delineation of these roles in a smaller company, because there is usually no CFO As a company grows, it acquires a CFO, ... traditional tasks of the CFO, and when a company grows to the point of needing one, the CFO will want to take them over from the controller This can turn into a power struggle, though a short-lived one, because the controller always reports to the CFO and will not last long if there is no cooperation Nonetheless, this is a difficult situation, for the controller has essentially taken a step down in the organizational... perceives that the person newly filling the CFO position is a roadblock to further advancement However, this does not have to be a dead-end position The controller should talk to the CFO about career prospects within the company and suggest that there may be other responsibilities that can replace those being switched to the CFO For example, a small minority of controllers supervise the materials management... analysis The CFO and controller also have different roles in the budgeting process The controller usually manages the nuts and bolts of obtaining information from other departments and incorporating it into a master budget Meanwhile, the CFO is examining the data presented by the various departments to see how they have changed from the past year, how revenues and expenses reflect any changes in the company’s... favor of operational improvements with other department managers Conversely, the controller is more likely to create the analyses mandated by the CFO and to implement improvements within the accounting function Thus, there is a dual role for the CFO and controller in these areas, but on different levels Control systems also attract the attention of both positions The CFO is extremely interested in controls,... its funding requirements, and the strategic intentions of its management team Thus, the CFO will find that entirely different priorities will apply to individual companies Nonetheless, some of the most common CFO responsibilities are: • Pursue shareholder value The usual top priority for the CFO is the relentless pursuit of the strategy that has the best chance of increasing the return to shareholders . THE NEW CFO F INANCIAL LEADERSHIP MANUAL SECOND EDITION STEVEN M. BRAGG THE NEW CFO F INANCIAL LEADERSHIP MANUAL Second Edition THE NEW CFO F INANCIAL LEADERSHIP MANUAL SECOND. 424 Index 425 PREFACE The second edition of the New CFO Financial Leadership Manual is designed to give the Chief Financial Officer (CFO) a complete overview of his or her place in the corporation, and. priorities, the parties that typically become involved in the process, and the impact of the Bankruptcy Act of 2005. The CFO may also require checklists to perform certain aspects of the job. Toward this