CFO Insights: Enabling High Performance Through Leading Practices for Finance
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1 Overview of Finance Solutions Leveraging Leading Practices.
Introduction: A New Look at Finance ERP.
Defining Core Financials.
High-Performance Finance.
Defining ERP.
Programs—Not Projects.
Leading Practices Enabled with ERP.
ERP Journey Considerations.
The Hackett Group on World-Class Finance Organizations.
CFO Insights.
From Insight to Action.
2 Leveraging the Financial Close to Gain a Competitive Advantage.
Financial Close: An Overview.
Benefits from a World-Class Close Initiative.
World-Class Close Leading Practice Initiatives.
System/ERP-Specific Leading Practice Improvements.
Deciding Which World-Class Close Leading Practices to Adopt.
Future World-Class Close Trends.
Case Study Summary.
The Hackett Group on Leveraging the Financial Close to Gain a Competitive
Advantage.
CFO Insights.
From Insight to Action.
3 Financial and Management Reporting.
Financial and Management Reporting: An Overview.
Designing Financial and Management Reporting with ERP Solutions.
Non-Process-Related Considerations.
Role of Third-Party Software Solutions.
Future Trends.
The Hackett Group on Financial and Management Reporting.
CFO Insights.
From Insight to Action.
4 Procure to Pay for the Next Generation.
Procure to Pay: An Overview.
Process Design: Leading Practices & Emerging Trends.
Third-Party Software: Enhancing the ERP Solution.
Future Trends.
The Hackett Group on Procure to Pay.
CFO Insights.
From Insight to Action.
5 Asset Lifecycle Management.
Asset Lifecycle Management: An Overview.
Asset Lifecycle Management Benefits.
Beginning the Implementation Journey.
Asset Lifecycle Enabled with ERP.
Industry Adaptability.
Role of Third-Party Software Solutions.
Future Trends.
CFO Insights.
From Insight to Action.
6 Order to Cash Management.
Order to Cash: An Overview.
Order to Cash Enabled with ERP.
The Hackett Group on Order to Cash.
CFO Insights.
From Insight to Action.
7 Tax Management.
The Finance management
the management of the business decides to distribute funds back to the
investors. The goal of the financing decision is to obtain all the resources
necessary, to make all the investments that yield a return in excess of the cost
of the funds invested or the required rate of return, and to obtain these funds
at the lowest average cost, so as to reduce the required rate of return and
increase the net present value of the projects selected.Dividend policy is the
decision regarding funds to be distributed or returned to the equity investors.
This can be done with common stock dividends, preferred stock dividends, or
stock repurchase by the business of its own stock. The aim of this decision is
to retain the resources in the business that are required to run the business or
make additional investments in the business, as long as the returns earned
exceed the required return. In theory, management should return or distribute
all resources that cannot be invested in the business at levels in excess of the
required return. In practice, however, dividends are often maintained at or
changed to certain levels in order to convey the proper signals to the investors
and the financial markets. For example, dividends can be maintained at moderate
levels to demonstrate stability, maintained at or reduced to low levels to
demonstrate the growth opportunities for the business, or increased to higher
levels to demonstrate the restoration of a strong financial (capital) structure
(debt and equity capital) for the business.Capital is the total of financial
resources invested in the business. In terms of the sources, there are two types
of capital: interest-bearing debt funds, such as loans, bonds, short-term notes,
and interest-bearing payables to trade suppliers; and equity, such as common and
preferred stock and the earnings retained in the business that add to
stockholders' share of the entities. In terms of uses, there are also two types
of capital: net working capital, such as operating cash, inventory, and
receivables, less interest-free payables to trade suppliers; and fixed capital,
such as property, plant and equipment. Capital is managed to maximize wealth by
maximizing the rates of return on investments of capital and thus maximizing the
total net present value of the business. This can be done by minimizing the
amount of capital used for given business investments with given business
returns.Weighted average cost of capital is the weighted average of the returns
on investment or future dividends for the stockholders and interest rates on
debt for the creditors. This average return should be used as the required
return for investments, as mentioned earlier, because it represents the weighted
average of the required returns of all the different debt creditors and equity
investors. It also represents the weighted average of the costs that can be
saved by the business if the resources or financial funds are returned to the
creditors and investors instead of being used for investments within the
business.Capital structure is represented by the types of sources of capital
funds invested in the business. A common measure of sources is the percentage of
debt relative to equity that appears on a company's balance sheet. Usually, the
cost or required returns for the debt is much less than the equity, especially
on an after-tax basis. Thus, the total cost of capital declines when some debt
funds from creditors are substituted for equity funds from investors. Yet as
more debt is added, the business becomes riskier because of the higher amount of
fixed payments that must be made to creditors, whether or not the business is
generating adequate funds from earnings; and then the costs of both the debt and
equity funds are increased to the point where the weighted-average cost
increases.Acquisitions, which are purchases of other businesses, are merely
another type of capital budgeting investment for a business. Such purchases
should be evaluated in the same manner as any other capital investment, as
outlined earlier, to obtain the maximum positive net present value, though the
issues and data are often more complex to analyze.Price/earnings ratio is often
used in making acquisitions as an abbreviated measure of valuation. This ratio
is of the value or price of a business or its stock to its earnings. Yet the
actual decision to make an acquisition is a capital budgeting decision; the
resultant determination of price or net present value can then be described in
relative terms to the earnings in the price/earnings ratio.Returns for any
business or particular debt or investment made in the business are merely the
cash flows that will ultimately be earned by the business or particular
creditors and stockholders. These can be expressed in dollar terms or as
percentages, with the latter being the average annual percentage of the cash
flows relative to the overall investment in the business or the particular
amounts of debt or stock involved. For debt instruments, these percentage rates
are called interest rates. For specific investment decisions, the returns used
should be those that are incremental of the specific investment.
Return/interest rates are based on three components: pure return for the
investor or creditor providing funds; coverage of inflation rates, so that the
purchasing power of the proceeds is maintained apart from the true return; and
additional return for additional risk, such as an equity investment in a risky
business as opposed to a bond from the U.S. government. These components are
then compounded with each other, rather than merely added together, to obtain
the overall interest rate or required return on equity investment. When
calculating return or interest rates, any additional up-front money, such as
closing costs, must also be added to the investment; this amount increases or
reduces the return, depending on who pays for it.Residual values are a portion
of the returns to be earned in an investment that is returned to the business
when the investment is sold or the project is terminated. This can be most
important in the liquidation of inventory and receivables when operations of a
portion of a business are terminated or when real estate ceases to be required
and thus can be sold, for example, when a factory is closed or when a lease term
is complete.Maturities of debt instruments, such as bonds, loans, or notes
payable, are the amounts of time outstanding before the debt becomes due. The
financial management rule with respect to maturities is to match the duration of
the funds being borrowed by the debtor, or invested by the creditor, with the
timing of his or her own business needs for funds in the future. Thus, the
financing of a new business—with the likely future expansions of property,
plant, equipment, inventory, and receivables—can be done with longer-term debt
funds. Yet the financing of a specific shorter-term need, such as the outlays on
a construction project before completion payments are made, should be comparably
shorter in maturity. Similarly, the investment of temporary excess cash should
be in shorter-term instruments, such as short-term CDs or Treasury bills. If
maturities are not matched, then the additional time before the debt becomes due
from or to you becomes a period of speculation on the rise or fall of future
interest rates.International finance is concerned with the same methodology of
allocating financial resources, but with modifications or areas of emphasis
required by the restrictions of currency and capital movements among countries
and the differences in the currencies used in different countries. The following
paragraphs represent some of the major changes to the basic financial decisions:
Foreign capital budgeting requires the use of foreign cash flows and local tax
rates, but U.S. inflation rates and U.S. dollars at the current exchange rates
can be used. The required return or cost of capital then need only be adjusted,
as with any investment, for the greater or lesser risk of the project in which
the investment is made, which includes the greater or lesser risk of the country
in which the investment is being made.
Foreign capital markets are a source for both debt and equity funds, for both
foreign subsidiary operations and the general needs of the overall business.
Foreign subsidiary capital structures often utilize more local debt when legally
and practically available in order to reduce the risk of blockages of earned
funds from repatriation to the parent company in another country. In addition,
local-currency debt reduces the risk for the parent company if the exchange
rates for the local currency change adversely.
Foreign-exchange rates can change dramatically and therefore pose a significant
risk for the value of assets held in or future payments from foreign countries.
These exposures may be in dealings with third parties or within a company's own
foreign subsidiaries. Forward currency contracts or currency options,
instruments used to purchase one currency for another currency in the future at
guaranteed exchange rates, can be used to protect against such risk. While these
contracts are often also used to make profits by managers who believe the
exchange rates will change in a manner different from the expectations implicit
in the overall currency market, such use should be viewed as risky speculation.
Personal finance is concerned with the same methodology of allocating resources,
but with a greater emphasis on allocating some of them to obtain the maximum
consumption satisfaction at the lowest cost, as opposed to earning income and
cash flow returns on the investments.
Budgeting and financial planning are the processes used by financial managers to
forecast future financial results for a business, a person, or a particular
investment. Usually, the major components of earnings, cash flow, and capital
are projected in the form of forecasted income statements, cash-flow statements,
and balance sheets. The latter show where the capital funds are invested in the
components of fixed and working capital, as well as the sources of these capital
funds in terms of the debt, stock, and retained earnings
Financial Performance Management Leadership Topics for the CFO
The financial performance management practice at Ventana Research focuses on
business problems important to finance organizations that information technology
can play a major role in solving. While we assert that IT plays an important
role in enhancing the efficiency and capability of finance departments,
technology itself is not our focus. Still, often we find senior finance people
unaware of IT solutions to their issues, or they resist by invoking the six most
expensive words in corporate management: "We've always done it this way." With
this in mind, we offer suggestions for where CFOs, assisted by technology, can
make an important difference in their company's results.
View
We see four areas where finance and information technology intersect today to
provide CFOs with leadership opportunities: planning, closing, external
intelligence and cooperating with operations.
Better Planning and Budgeting
Planning is one of the activities finance organizations manage least
effectively, in our judgment. People routinely use "planning" and "budgeting" as
synonyms, yet they are not. Planning formulates a program for action, while
budgeting administers the financial position of an entity for a definite period,
based on estimates of expenditures during the period and proposals for financing
them. The purpose of planning is to set objectives in a coordinated fashion to
support the company's strategy and to create a framework and criteria to assess
success or failure in achieving those objectives. The purpose of budgeting is to
apportion resources. We find companies spend too little time on planning and too
much time on budgeting. Our research has found a majority of companies
continuing to use stand-alone spreadsheets as the supporting technology for both
processes; most finance executives remain unaware of how the time required to
overcome the technical limitations of spreadsheets saps the effectiveness of the
planning process. Although using dedicated software tools can improve planning
and budgeting, Ventana Research contends it takes corporations several years to
adopt best practices and make real progress - and even then it happens only if
the CFO takes an interest in improving the effectiveness of the process.
The Fast, Clean Close
In the 1990s, companies made substantial progress in shortening their accounting
cycles because of the introduction of technologies for enterprise resource
planning (ERP), business intelligence (BI) and reporting. Since then there has
been little further improvement, even though, according to our research, almost
three-fourths of our respondents say closing their books quickly is "important"
or "very important" and more than half of companies with more than 1,000
employees want to shorten their monthly and quarterly closing process. There are
several ways companies can use information technology to reduce the time spent
on the close. Eliminating manual steps through increased automation and
replacing stand-alone spreadsheets are two of the easiest to put in place. Based
on our research, we estimate that companies that limit use of spreadsheets close
their books 20 percent faster than those that don't. Using master data
management (MDM) to create a single, enterprise-wide "virtual" chart of accounts
can speed the close further because it facilitates automating calculations now
done in spreadsheets and manually.
Expanding Intelligence
Our research into corporate reporting found that most companies have addressed
the pressing management reporting issues they began to tackle in the 1990s. Yet,
while the majority say they get enough basic corporate financial and operational
information, most do not have enough information about how well their company is
performing against competitors. In the past, collecting such data was difficult,
and companies had their hands full simply dealing with internal data. Today,
XBRL-tagged data makes it easier to get reliable financial data about public
U.S. companies, and organizations such as APQC devise detailed performance
metrics about specific verticals that are available on a cooperative basis.
Finance organizations should recognize the importance of this type of
information and that it is more readily available. Having information about
internal operations is necessary, but business is about competition. The finance
organization is the most logical place in a corporation to collect, analyze and
present this information.
Collaborating with Operations
CFOs who want to play a more strategic role often are advised to avoid being
bean counters. Certainly this is not all there is to the job, but productive
bean-counting can add considerable value to a company's operations. Finance
organizations have analytical skills and an ingrained discipline to produce
accurate, auditable numbers that can be put to use in collecting, analyzing and
disseminating operational - not just financial - information across the
organization. One area where applying these organizational strengths can have an
important impact on company performance is in managing customer profitability.
Ventana Research believes doing this well will become an important
differentiator of business performance over the next three years. Companies must
develop a focused, consistent approach to managing profitability that
incorporates three essential elements: strategy, analytics and information
technology. We advise them to address this issue at the corporate level instead
of letting departments take a silo approach. For example, the sales organization
may think boosting revenues or increasing gross margin is a good thing, but
incentives that boost long-term costs, or pricing that is not in sync with a
company's strategy, may be counterproductive. Customer profitability is not a
program; it is a comprehensive approach to business. Information technology will
be a key component in the success of profitability enhancement initiatives by
enabling corporations to gain insights into what impacts margins and to measure
how well initiatives are paying off. CFOs should play a key role in managing
these efforts from a long-term, strategic perspective.
Assessment
Ventana Research advises CFOs looking for ways to enhance their careers through
a more strategic role in company management to consider how information
technology could play an important part in achieving their personal objectives.
In many larger organizations, the IT organization reports to the CFO, so this
could be a natural extension of the CFO's role. Managing this part of the
company's efforts well should be a priority for senior finance executives.
About Ventana Research
Ventana Research is the leading Performance Management research and advisory
services firm. By providing expert insight and detailed guidance, Ventana
Research helps clients operate their companies more efficiently and effectively.
These business improvements are delivered through a top-down approach that
connects people, process, information and technology. What makes Ventana
Research different from other analyst firms is a focus on Performance Management
for finance, operations and IT. This focus, plus research as a foundation and
reach into a community of over two million corporate executives through
extensive media partnerships, allows Ventana Research to deliver a high-value,
low-risk method for achieving optimal business performance. To learn how Ventana
Research Performance Management workshops, assessments and advisory services can
impact your bottom line,
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