The New CFO Financial Leadership Manual, 3rd Edition

Preface xiii

Part One: Overview

Chapter 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 12

Other Direct Reports: The Treasurer 13

Other Direct Reports: The Investor Relations Officer 13

Summary 14

Chapter 2: Financial Strategy 15

Cash 15

Investments 17

Working Capital 19

Inventory: Inventory Reduction Decision 21

Fixed Assets: Lease versus Buy Decisions 23

Payables 23

Debt 26

Equity 28

Products: Product Elimination Decisions 32

Fixed Expenses: Step Costing Decisions 35

Payroll Expenses: Temporary Labor versus Permanent Staffing Decisions 36

Entities: Divestiture Decisions 38

Systems: When to Use Throughput Costing 39

High-Volume, Low-Price Sale Decisions Using Throughput Costing 43

Capital Budgeting Decisions Using Throughput Costing 44

Make versus Buy Decisions Using Throughput Costing 46

Summary 47

Chapter 3: Tax Strategy 48

Accumulated Earnings Tax 49

Cash Method of Accounting 50

Inventory Valuation 51

Mergers and Acquisitions 51

Net Operating Loss Carryforwards 52

Nexus 53

Project Costing 54

S Corporation 55

Sales and Use Taxes 56

Transfer Pricing 57

Unemployment Taxes 59

Summary 60

Chapter 4: Information Technology Strategy 61

Reasons for Devising an Information Technology Strategy 61

Developing the Information Technology Strategy 62

Technical Strategies 65

Specific Applications 67

Summary 70

Part Two: Accounting

Chapter 5: Performance Measurement Systems 73

Creating a Performance Measurement System 73

Asset Utilization Measurements 74

Operating Performance Measurements 79

Cash Flow Measurements 82

Liquidity Measurements 85

Solvency Measurements 90

Return on Investment Measurements 91

Market Performance Measurements 97

Summary 99

Chapter 6: Control Systems 100

Need for Control Systems 100

Types of Fraud 101

Key Controls 103

When to Eliminate Controls 118

Summary 119

Chapter 7: Audit Function 121

Composition of the Audit Committee 121

Role of the Audit Committee 122

Purpose of the External Auditors 124

Dealing with External Auditors 125

Impact of the Sarbanes-Oxley Act on the Audit Function 126

Role of the Internal Audit Function 128

Managing the Internal Audit Function 131

Summary 133

Part Three: Financial Analysis

Chapter 8: Cost of Capital 137

Components 137

Calculating the Cost of Debt 138

Calculating the Cost of Equity 140

Calculating the Weighted Cost of Capital 142

Incremental Cost of Capital 144

Using the Cost of Capital in Special Situations 146

Modifying the Cost of Capital to Enhance Shareholder Value 148

Strategizing Cost of Capital Reductions 151

Summary 152

Chapter 9: Capital Budgeting 153

Hurdle Rate 153

Payback Period 154

Net Present Value 156

Internal Rate of Return 158

Throughput-Based Capital Budgeting 161

Problems with the Capital Budget Approval Process 162

Cash Flow Modeling Issues 164

Funding Decisions for Research and Development Projects 165

Capital Investment Proposal Form 167

Post-Completion Project Analysis 170

Summary 172

Chapter 10: Other Financial Analysis Topics 173

Risk Analysis 173

Capacity Utilization 177

Breakeven Analysis 183

Business Cycle Forecasting 188

Summary 194

Part Four: Funding

Chapter 11: Cash Management and Consolidation 197

Cash Forecasting Model 197

Information Sources for the Cash Forecast 201

Measuring Cash Forecast Accuracy 201

Cash Forecasting Automation 202

Cash Concentration Overview 204

Physical Sweeping 204

Notional Pooling 206

Comparison of Account Sweeping and Notional Pooling 207

Cash Management Controls 208

Summary 212

Chapter 12: Investing Excess Funds 213

Investment Criteria 213

Investment Restrictions 214

Investment Options 214

Investment Strategies 216

Summary 219

Chapter 13: Obtaining Debt Financing 220

Management of Financing Issues 220

Bank Relations 221

Accounts Payable Payment Delay 222

Accounts Receivable Collection Acceleration 223

Credit Cards 224

Employee Trade-Offs 224

Factoring 224

Field Warehouse Financing 225

Floor Planning 226

Inventory Reduction 226

Lease 227

Line of Credit 228

Loans 228

Merchant Card Advances 234

Preferred Stock 234

Sale and Leaseback 235

Summary 235

Chapter 14: Obtaining Equity Financing 238

Types of Stock 238

Private Placement of Stock 239

Layout of the Offering Memorandum 240

Establishing a Valuation for the Offering Memorandum 252

Swapping Stock for Expenses 253

Swapping Stock for Cash 254

Stock Warrants 254

Stock Subscriptions 255

Private Investment in Public Equity 255

Buying Back Shares 256

Rule 144 257

Rule 10b5-1 258

Summary 261

Part Five: Publicly Held Company

Chapter 15: Initial Public Offering 265

Reasons to Go Public 265

Reasons Not to Go Public 266

Cost of an IPO 268

Preparing for the IPO 269

Finding an Underwriter 271

Registering for and Completing the IPO 274

Alternatives for Selling Securities 277

Trading on an Exchange 279

American Stock Exchange 280

Overview of the NASDAQ 282

New York Stock Exchange 283

Comparing the Stock Exchanges 285

Over-the-Counter Stocks 287

Summary 287

Chapter 16: Reports to the Securities and Exchange Commission 288

Overview 288

Form 8-K 289

Form 10-Q and Form 10-K 294

Form S-1 297

Form S-3 299

Form S-8 300

Shelf Registration 300

Declaring a Registration Statement Effective 301

Reporting Insider Securities Ownership and Trading 302

EDGAR Filing System 306

Fedwire Payments 308

Summary 310

Chapter 17: Investment Community 311

Introduction 311

Analyst’s Perspective 311

Finding the Right Analyst 313

Sell Side: Analysts 314

Negative Analyst Report 316

Sell Side: Brokers 316

Sell Side: Investment Bankers 318

Sell Side: Investor Relations Specialists 318

Buy Side: Types of Investors 319

Buy Side: Institutional Investors 319

Buy Side: Individual Investors 321

Buy Side: Presentations to Investors 323

Summary 323

Chapter 18: Taking a Company Private 325

Going Private Transaction 325

Rule 13e-3 325

Filling Out Schedule 13E-3 326

300-Shareholder Limit 329

Form 15 330

Summary 330

Part Six: Management

Chapter 19: Risk Management—General Concepts 333

Risk Management Policies 334

Risk Management Planning 335

Manager of Risk Management 337

Risk Management Procedures 338

Types of Insurance Companies 341

Evaluating the Health of an Insurance Carrier 343

Claims Administration 344

Insurance Files 345

Annual Risk Management Report 346

Summary 347

Chapter 20: Risk Management: Foreign Exchange 348

Foreign Exchange Quote Terminology 348

Nature of Foreign Exchange Risk 349

Data Collection for Foreign Exchange Risk Management 350

Foreign Exchange Hedging Strategies 351

Accept the Risk 352

Insist on Home Currency Payment 352

Currency Surcharges 353

Get Paid on Time 353

Foreign Currency Loans 353

Sourcing Changes 353

Foreign Currency Accounts 354

Unilateral, Bilateral, and Multilateral Netting Arrangements 354

Forward Exchange Contracts 355

Currency Futures 357

Currency Options 358

Currency Swaps 360

Proxy Hedging 362

Summary 362

Chapter 21: Outsourcing the Accounting and Finance Functions 363

Advantages and Disadvantages of Outsourcing 363

Contractual Issues 368

Transition Issues 370

Controlling Supplier Performance 372

Measuring Outsourced Activities 373

Managing Suppliers 379

Dropping Suppliers 379

Summary 381

Chapter 22: Mergers and Acquisitions 382

Evaluating Acquisition Targets 382

Complexity Analysis 400

Evaluate Acquisition Targets with Alliances 401

Valuing an Acquisition Target 402

Alternative Valuation Methods 402

Control Premium 406

Synergy Gains 406

Discounted Cash Flow (DCF) Model 407

Constructing Cash Flow Scenarios 409

Cash Flow Adjusting Factors 410

Earnout 412

Qualitative Factors 413

Which Valuation Method Is Best? 414

Method of Payment 415

Types of Acquisitions 416

Tax Implications of an Acquisition 416

Asset Acquisition 418

Type ‘‘A’’ Reorganization 419

Type ‘‘B’’ Reorganization 420

Type ‘‘C’’ Reorganization 421

Type ‘‘D’’ Reorganization 422

Triangular Merger 423

Reverse Triangular Merger 423

Terms of the Acquisition Agreement 424

When to Use an Investment Banker 424

Summary 425

Part Seven: Other Topics

Chapter 23: Employee Compensation 429

Deferred Compensation 429

Life Insurance 431

Stock Appreciation Rights 432

Stock Options 432

Restricted Stock Units 435

Bonus Sliding Scale 435

Cut Benefit Costs with a Captive Insurance Company 436

Summary 436

Chapter 24: BANKRUPTCY 437

Applicable Bankruptcy Laws 437

Players in the Bankruptcy Drama 438

Creditor and Shareholder Payment Priorities 439

Bankruptcy Sequence of Events 440

Tax Liabilities in a Bankruptcy 446

Special Bankruptcy Rules 447

Bankruptcy Act of 2005 448

Alternatives to Bankruptcy 448

Summary 449

Appendix A: New CFO Checklist 451

Appendix B: Performance Measurement Checklist 456

Appendix C: Due Diligence Checklist 465

About the Author 474

Index 477