The CFO’s role within an organization depends on several factors. These components may include the expectations coming from the CEO and board of directors, and may also vary depending on the industry, corporate strategy, and the goals of the business. A company’s size can also have a significant influence on the CFO’s role.
Below, the Signature Analytics team has outlined some general responsibilities that every business should expect from their CFO.
The Importance of Forward-Looking Financial Analysis
The foundation of any company’s accounting and finance function is to produce timely and accurate financial information for the business. The CFO oversees these accounting and finance functions, but their true value comes from the ability to provide forward-looking financial analysis. This analysis should be focused on driving additional profitability and value to the company.
Whether you have a full-time, part-time, or outsourced CFO, below are some examples of the forward-looking financial analysis you should expect from the CFO role:
1. Cash Management & Forecasting
Can you predict when your business will have a surplus of cash that needs to be managed or when you will have a shortage of money that requires financing?
Cash flow problems can kill businesses that might otherwise survive. Your CFO should be monitoring cash flow and analyzing cash flow projections regularly to ensure your business does not run out of cash.
2. Budgeting & Expense Control
Does your business have a budget? Do you receive an analysis comparing prior year actual, current year actual, and current-year forecast on a regular basis?
Your CFO should own the budgeting process by incorporating input from each department for the most accurate and complete projections. They should also be monitoring budgeted versus actual results on a quarterly or monthly basis and reforecasting accordingly.
Is the compensation of your employees aligned with the goals of the company?
The CFO of a company should help to structure employee compensation plans that incentivize efficiency and align with the financial goals of the company.
4. KPI Development & Analysis
Are you maximizing margins? Are profits analyzed by revenue stream? Are employees being utilized appropriately to maximize profitability?
KPIs (Key Performance Indicators) are different for every business. They should act as the company’s compass, and the CFO serves as the navigator.
It is the responsibility of the CFO to work with those in operations to help develop KPIs applicable to the company and support the analysis of those KPIs regularly. The CFO should be using the data from the KPIs to assess business performance in real-time. Making changes that directly improve KPIs can help build the future value of the company.
Are you providing valuable financial information to your Board of Directors so they can review the trends of the company’s operations and assist in making appropriate decisions? Is the information presented professionally?
Your CFO should be preparing presentations for your board members that effectively communicate the company’s financial information in an organized manner. The information should illustrate trends to visualize projections so the data can help drive business decisions.
6. Securing Financing & Raising Capital
Do you review your banking relationships regularly? Are you confident you have access to financing on the best possible terms for your business? What are the capital needs of the company now and in the future? What is the best way to meet those needs?
Your CFO should play a key role in identifying and securing investment and financing. They should identify capital requirements before approaching financial institutions and investors to ensure you raise the appropriate amount of capital required to support your growth plans.
A successful CFO should also prepare presentations of the company’s financial information, allowing potential investors or lenders to understand the data and the companies performance.
7. Tax Planning
How often are communications occurring with the company’s tax advisor to maximize all tax-related strategies?
Your CFO should maintain consistent communication with tax preparers to minimize your company’s potential tax liability.
8. Ongoing Analysis & Review
All of these responsibilities should be considered ongoing processes that are revisited on a regular pre-determined schedule and modified based on the most recent financial information available.
Furthermore, all of the results should be measurable to track the success of the performed analysis.
A Solution That’s Right For You
If your CFO is providing forward-thinking analysis, they are providing infinite value to your company.
Each of the outlined goals above can help maximize profitability and value for the business, and, if managed appropriately and adequately, companies with the correct financial infrastructure can witness significant operational improvements and growth. Having this kind of efficiency will allow you to think about your business in new ways and likely uncover new possibilities for what’s next.
If your business requires any (or all) of the forward-looking financial analysis mentioned above, but you’re not in a position to hire a full-time CFO or may have a team that just needs additional support, the team of experts at Signature Analytics can help.
Our highly experienced accountants can act as your entire accounting department (CFO to staff accountant). If that solution isn’t the right fit, our team can complement your internal accounting staff, to provide the ongoing accounting support, training, and forward-looking financial analysis necessary to effectively run your company, analyze operations, and guide business decisions.
We have heard it again and again. This phrase seems to be the creed of the business world. There is something about assigning a number and correlating that with meaning to prove we are being successful.
Just like in sports, success is measured by the score. In business, success is measured managed by numbers. In many cases, these measurements are tracked and monitored to help management gauge the performance of the company, and these kinds of metrics are referred to as Key Performance Indicators (KPIs).
In business, many of a CFO’s responsibilities are to develop KPIs applicable to the company, regularly support the analysis of those KPIs, and driving changes that directly improve KPIs. All of these actions are done to hopefully improve the future value of the company.
The Importance Of KPIs To Business Success
Businesses are multi-faceted and so a company needs to monitor several different KPIs to provide insight into how the business is performing. Some of these measurements may be more basic, like inventory turnover. While other KPIs can be more involved, such as employee utilization or profitability by an individual client or product line.
Once KPI goals are defined, it is important to understand how those measurements can be used to enhance the performance of the business. For example, JPMorgan Chase & Co was able to reduce their fully burdened labor costs by $3.2 million annually by eliminating voice mail for consumer-bank employees.
Another great example is with one of our very own brewery clients. We were able to increase profits by 15% after adjusting their pricing and distribution strategies following a detailed analysis of their profit margins by individual product line.
It’s important to understand that knowing what to measure matters and then making operational changes to influence those measurements directly can have a significant impact on the bottom line. If you measure many things that don’t matter, you’ll end up with a ton of meaningless data.
What Are The Examples Of Key Performance Indicators?
KPIs will be different for every business. Below are some basic examples, how they can be calculated, what they measure, and the best way to use the measurement to improve profitability.
Days Sales Outstanding
(Accounts Receivable) / (Sales on Credit or Terms) x (Number of Days the Sales Represent)
This KPI measures how many days of sales are in accounts receivable. Hopefully, this measurement will be at (or near) what your credit terms are. For example, if you have credit terms of 45 days, your day’s sales outstanding should be close to that number. This KPI can be impacted by offering a slight discount for early payment to reduce outstanding accounts receivable.
(Cost of Goods Sold) / (Average Inventory) x (12 Months)
This KPI measures the number of times the inventory is sold–or the amount of turnover–in one year. An inventory turn of 1 would mean you sell all your inventory once a year, whereas an inventory turn of 12 would indicate you sell your inventory every month. This KPI is influenced by reducing slow-moving or excess inventory, or by increasing sales, which will, in turn, improve cash flow.
Days Sales in Inventory
(Average Inventory) / (Cost of Goods Sold) x (Number of Days)
This KPI measures how many days of inventory is on hand. It is similar to inventory turnover but indicates the number of days until inventory is sold. For example, if the day’s sales in inventory are 30 days, then the inventory turns would be 12 (or once a month). You can affect this KPI by carrying the least amount of inventory necessary to meet demand.
(Current Assets) – (Current Liabilities)
This KPI measures the available assets to meet short-term financial obligations. These types of assets can include cash, investments, or accounts receivable. A company can analyze financial health by seeing which available assets can meet short-term financial debts. To calculate working capital, subtract current liabilities from current assets such as the examples mentioned earlier.
Return on Assets
(Net Income) / (Total Assets)
This financial KPI measures the rate of earnings generated from invested capital in assets and can be affected by increasing earnings and/or reducing invested capital.
Return on Equity
(Net Income) / (Shareholder’s Equity)
This financial KPI measures the return on capital invested by shareholders of the company and can be affected by increasing earnings and/or reducing the amount invested by shareholders.
What KPIs Are Important To Measure?
KPIs for capital-intensive industries (manufacturing, distribution, telecommunications, transportation, etc.) often focus on how effective and efficient assets are utilized to produce a return. Whereas KPIs for service-based organizations (i.e., companies that bill people, hours, or projects to clients) tend to focus on utilization (percentage of total working time charged to customers) to drive profitability.
Most businesses, regardless of the industry, should measure KPIs that focus on generating positive cash flow from operations. Companies should also monitor how quickly it can turn sales into cash (days sales outstanding) or how long the money is invested in inventory (days sales in inventory).
The important thing is to determine what measurements are most appropriate for your specific business and industry. One way to do that is to look at other companies in the same industry and identify what measurements they are using. Those analyses can also be used as benchmarks to compare your business against others in the same industry.
Profitability is the easiest and most straightforward measurement of a company’s success. However, if you want to take your business to the next level, it is also important to look at other key performance indicators that can drive profitability and how they can be influenced to increase and drive performance. If you need help identifying, monitoring, and influencing KPIs to improve the current and future value of your business, contact us today for a free consultation.
It’s Your Money and Your Life is a talk radio show on 760AM KMFB San Diego. On the show, Richard Muscio and co-host Joe Vecchio feature notable guests providing valuable information on financial and business matters as well as issues about your life, your leisure and your legacy.
On July 22, 2015, Richard and Joe interviewed the President of our San Diego office, Jason Kruger. In the audio below, you can hear Jason discuss Signature Analytics and the ways we support growing business by acting as their accounting and finance department. A few of the topics discussed include: how the cloud has changed accounting, ways to maximize the value of your company in preparation for an acquisition or liquidity event, the importance of internal accounting controls, avoiding overpayment of taxes, and much more.
Listen to the Interview
Listen to more It’s Your Money and Your Life podcasts commercial-free at www.iymoney.com.
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CNBC’s hit show, The Profit, provides viewers with a glimpse into some of the difficulties faced by business owners as successful investor, Marcus Lemonis, steps in to help them grow or rehabilitate their struggling businesses.
On the show, Marcus approaches each business with the same concept: Business success is about the three P’s: People, Process and Product. If a business has the right people, operates the business using the right processes, and has a strong product, then it has positioned itself to be successful.
While his concept is meant to assess a business as a whole, it can also be used to evaluate other aspects of a business as well, including its accounting.
With the New Year underway, now is an excellent time to evaluate the accounting and finance function of your business and using Marcus’ “People, Process, and Product” concept could help.
Without the right accountants, a business runs the risk that transactions are not posted timely or accurately and therefore do not produce reliable information upon which to make decisions. For that reason, it is important to have a strong accounting team; however, it is also important to ensure that those qualified accountants are being properly utilized.
In some cases, a business may employ a strong, experienced accountant and feel that their accounting department is in good hands; however, if that individual is tasked with performing basic accounting entries, as well as the more complex analysis, the business may be paying too much for the more basic processes which could be done by someone with less experience.
Alternatively, companies may have a strong staff accountant or bookkeeper who can perform most of the basic accounting processes; however, they may not be able (or qualified) to provide key financial analyses the executive team requires to analyze operations and guide business decisions.
One common issue with the businesses appearing on The Profit is their lack of accurate financial statements which Marcus uses to evaluate the business and identify any concerns. To ensure financial statements are maintained correctly, the accounting department needs to establish the appropriate processes (daily, weekly, monthly, and annually). At a minimum the accounting department should be able to close the monthly financial statements within 15 days after month end so they are relevant for executives.
Aside from the typical close process, there are also processes that need to be established relating to approving bills, making cash payments, issuing invoices, and reimbursing employees for expenses, among others. Proper approvals and oversight are critical in these processes as businesses are at risk to errors and potential employee fraud without them – regardless how large or small the organization is.
Within the accounting department, the “Products” include monthly financial statements, board/management reports, cash flow projections, and any other financial reporting or analyses used by others. Without these products from the accounting and finance departments, the executive team will not have visibility into the performance of the operations or be able to make critical decisions.
Evaluating Your Accounting Function Using the 3 P’s
Entrepreneurs and executives should periodically re-evaluate their company’s accounting and finance function (at least annually) confirming their accounting People, Processes and Products are appropriate to help manage the business.
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#2Analyzing Employee Utilization Rates to Drive Profitability
Knowing where and how employees are spending their time enables professional services firms to appropriately set their rates, properly asses how much to invoice clients, and determine if they are over or understaffed. Therefore, it is imperative for all professional services firms to analyze employee utilization. In this post we explain how utilization summary reports and if-then analyses will enable you to analyze utilization rates and make key strategic decisions that drive profitability. Read this post →
#3Preparing for an Annual Audit: Eliminate the Pain and Overage Fees
If your company is looking for financing from investors or financial institutions, considering a potential acquisition, or foresees an IPO within the next 3 years, you may need to have an annual financial statement review or audit. If you’re not prepared, the process can be an expensive undertaking, both in employee time and company money. It does not have to be though! This post identifies ways to eliminate the pain and overage fees from the annual audit process. Read this post →
Where to invest a company’s finite resources is one of the most important decisions faced by business owners—and where they spend a significant amount of time. When companies have poor visibility of financial information, it undermines management’s ability to make informed decisions on where to invest money and where to cut spending.
Choosing Where to Invest
Successful investment management strategies rest on the anchor of good financial information. It is critical that decision makers have accurate and reliable financial information (historical and projected) on the performance of various departments, product lines, services, etc. Only with this visibility can decision makers be provided with clear choices which enable them to make strategic decisions about which areas should get more resources and which areas should receive less based on dispassionate hard facts.
Cost Cutting vs. Cost Control
The best cost cutting strategy is to have robust cost control in place from the beginning, making a cost cutting strategy superfluous. But let’s face it, even the best run businesses run into snags and bumps which require a cost cutting program at some point.
Across the board cost cutting (e.g., mandating each department, business unit, product line, etc. cut 10% of all costs) is never the right approach. Rather–similar to determining where to invest–when deciding where to cut costs you ideally want to have 100% visibility of direct spend (e.g, raw materials) and indirect spend (e.g., rent and utilities) across the entire business and the ability to allocate that spend to the various products, services, or strategic priorities they relate to.
It should be said though, cost cutting is not an end game. Without a good cost control program, cost cutting will be a futile exercise as any gains made will eventually reverse as cost creep back into the business.
It’s also important to manage the budget by individual line item, not by department, unit, or other overall totals. This is because timing differences in the accounting for various transactions can give the appearance of favorable variances, offsetting other over-budget line items; however, when those timing differences catch up to you, it may be too late to take corrective action, or at a minimum, you are months behind.
The Role of Accounting
Accounting plays a central role in bringing transparency and visibility to key financial information and in supporting budget performance analysis. The bottom line is that having accurate, reliable and appropriate financial information is essential if you want to make the best strategic decisions for your business.
Improve Decision Making Through Visibility of Financial Information
We can also provide accurate forecasts and budgets that enable our clients to properly manage costs on an ongoing basis and improve cash management strategies. All of these accounting and financial reports empower our clients with the financial information they need to make smarter decisions based on dispassionate financial analysis.
Want to learn more about all the ways Signature Analytics can help improve your decision making through visibility of financial information? Contact us for a free consultation.
“Don’t buy a Fiat 500e electric car” says the company’s chief executive, Sergio Marchionne. According to Mr. Marchionne, it has nothing to do with the quality and price of the car, but rather the cost associated with producing the car – specifically the battery – and its impact on the product’s profit margin. The chief executive admitted at a recent appearance, “I hope you don’t buy it because every time I sell one it costs me $14,000.”
As a business owner, it is easy to see if you are profitable, just take a look at your company’s net income; however, that number alone does not provide a complete picture. Fiat is a perfect example. Overall, the company is profitable; however, when you look at the profit margins for their individual products, they are actually losing money on one of their product offerings.
For a more accurate measure of how your company is doing, it is imperative to calculate your profit margins by product line.
Calculating Profit Margins
Profit margin is an accounting measure designed to calculate your profit as a percentage of sales. It can be used to evaluate your business as a whole or for each individual product line.
Why is this useful? The two main reasons are 1) to compare your profit margins on a monthly and/or yearly basis and 2) to establish your position against other companies in your industry.
To calculate gross profit margin, divide your gross profit, which is sales minus cost of goods sold, by sales.
Analyzing Profit Margins by Product Line to Increase Profitability
Let’s assume your company has $10,000 in sales for the month and your gross profit for that same month is $5,000. That would mean your company’s gross profit margin is 50%.
Some business owners may see these numbers and think “we’re doing great” and they might be; however, by taking a closer look at the company’s profit margins by individual product line, they may be able to identify opportunities to increase profitability even more.
Using the same example above, let’s assume that Product A generated $7,000 in sales for the month and had a gross profit of $3,000. Product B generated $3,000 in sales and had a gross profit of $2,000. In this example, the gross profit margin for Product A would be 42.9% and for Product B would be 66.7%.
Using this information, a company could consider adjusting their pricing and distribution strategies to increase their overall profits. One way to achieve this would be to increase the price or reduce the cost of goods sold for Product A to improve the gross profit margins for that product line. Alternatively, the company could adjust their promotional efforts to focus more on selling Product B since the margins are greater.
Referring back to the Fiat example, the company is unable to increase the price for their electric vehicle because the market will not bear it. They should eventually be able to reduce the manufacturing costs of the car battery, but that will take time. So for now, it seems that Fiat is taking the alternate approach and focusing their promotional efforts on their other product lines.
Improve Your Company’s Profitability
At Signature Analytics, we work with our clients’ management teams to properly identify and understand the profit margins of their business. This is accomplished by producing a detailed understanding of the cost structure and related sales price associated with each product line and revenue stream of the company. This profit analysis can also be shared with company investors and banking relationships to enhance investor relations and participation.
In addition to profit margin analysis, we can provide accurate forecasts and budgets that enable our clients to properly project EBITDA growth and allow for better cash management strategies. All of these accounting and financial reports – profit margin analysis, forecasts, and budgets – empower our clients with the financial information they need to make informed business decisions that help to increase overall margins and improve profitability.
Signature Analytics was engaged by a rapidly growing San Diego brewery which, at the time, did not have an internal accounting function. The brewery’s management team spent the majority of their time on the operations of the business, so it was not possible to make maintaining proper account records a priority; however, they recognized that it was critical to have accurate financial information to make proper business decisions. So they reached out to Signature Analytics to provide outsourced accounting services.
Within a one month period, the Signature Analytics team was able to update all of the accounting records for the previous months which had been neglected. Our accounting team also set up a monthly close process which included proper reconciliation of all bank and balance sheet accounts, the implementation of a system to track inventory, and ensured proper Generally Accepted Accounting Principles (GAAP) and accrual basis of accounting. Additionally, we established monthly meetings with brewery management to review historical performance and discuss future activity and projections. Communications with the Brewery’s management were ongoing and imperative, allowing the engagement to maintain flexibility and drive effectiveness.
While these procedures were exactly what the management team expected of Signature Analytics, we knew there was more that we could do to assist with the most crucial business decisions. During the month that the accounting information was updated and while we learned about the business, the Signature Analytics team noted that more focus should be placed on the gross profit margins of the brewery’s products. Once the data was properly structured and accurate, a seasoned CFO put together a custom margin analysis and was able to identify several opportunities for improvement. The insights from this analysis enabled the Brewery to properly evaluate profits and increase margins.
In addition to getting the Brewery’s accounting records in order and providing a custom margin analysis, the Signature Analytics team prepared a 13-week cash flow forecast to assist with cash management and the payment of bills. This analysis helped the management team better understand each of the inflows and outflows the Brewery experienced and identify areas where they could improve the business financially.