New CFO Financial Leadership Manual

STEVEN M. BRAGG, CPA, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young and auditor at Deloitte. He is the author of over forty books primarily targeted toward controllers and their needs. He received a master’s degree in finance from Bentley College, an MBA from Babson College, and a bachelor’s degree in economics from the University of Maine. He is also the author of Accounting Best Practices and Wiley GAAP, both published by Wiley.

• Preface xiiiPart One: OverviewChapter 1: CFO’s Place in the Corporation 3First Days in the Position 3Specific CFO Responsibilities 4Overview of the Change Management Process 8Differences between the Controller and CFO Positions 9Relationship of the Controller to the CFO 12Other Direct Reports: The Treasurer 13Other Direct Reports: The Investor Relations Officer 13Summary 14Chapter 2: Financial Strategy 15Cash 15Investments 17Working Capital 19Inventory: Inventory Reduction Decision 21Fixed Assets: Lease versus Buy Decisions 23Payables 23Debt 26Equity 28Products: Product Elimination Decisions 32Fixed Expenses: Step Costing Decisions 35Payroll Expenses: Temporary Labor versus Permanent Staffing Decisions 36Entities: Divestiture Decisions 38Systems: When to Use Throughput Costing 39High-Volume, Low-Price Sale Decisions Using Throughput Costing 43Capital Budgeting Decisions Using Throughput Costing 44Make versus Buy Decisions Using Throughput Costing 46Summary 47Chapter 3: Tax Strategy 48Accumulated Earnings Tax 49Cash Method of Accounting 50Inventory Valuation 51Mergers and Acquisitions 51Net Operating Loss Carryforwards 52Nexus 53Project Costing 54S Corporation 55Sales and Use Taxes 56Transfer Pricing 57Unemployment Taxes 59Summary 60Chapter 4: Information Technology Strategy 61Reasons for Devising an Information Technology Strategy 61Developing the Information Technology Strategy 62Technical Strategies 65Specific Applications 67Summary 70Part Two: AccountingChapter 5: Performance Measurement Systems 73Creating a Performance Measurement System 73Asset Utilization Measurements 74Operating Performance Measurements 79Cash Flow Measurements 82Liquidity Measurements 85Solvency Measurements 90Return on Investment Measurements 91Market Performance Measurements 97Summary 99Chapter 6: Control Systems 100Need for Control Systems 100Types of Fraud 101Key Controls 103When to Eliminate Controls 118Summary 119Chapter 7: Audit Function 121Composition of the Audit Committee 121Role of the Audit Committee 122Purpose of the External Auditors 124Dealing with External Auditors 125Impact of the Sarbanes-Oxley Act on the Audit Function 126Role of the Internal Audit Function 128Managing the Internal Audit Function 131Summary 133Part Three: Financial AnalysisChapter 8: Cost of Capital 137Components 137Calculating the Cost of Debt 138Calculating the Cost of Equity 140Calculating the Weighted Cost of Capital 142Incremental Cost of Capital 144Using the Cost of Capital in Special Situations 146Modifying the Cost of Capital to Enhance Shareholder Value 148Strategizing Cost of Capital Reductions 151Summary 152Chapter 9: Capital Budgeting 153Hurdle Rate 153Payback Period 154Net Present Value 156Internal Rate of Return 158Throughput-Based Capital Budgeting 161Problems with the Capital Budget Approval Process 162Cash Flow Modeling Issues 164Funding Decisions for Research and Development Projects 165Capital Investment Proposal Form 167Post-Completion Project Analysis 170Summary 172Chapter 10: Other Financial Analysis Topics 173Risk Analysis 173Capacity Utilization 177Breakeven Analysis 183Business Cycle Forecasting 188Summary 194Part Four: FundingChapter 11: Cash Management and Consolidation 197Cash Forecasting Model 197Information Sources for the Cash Forecast 201Measuring Cash Forecast Accuracy 201Cash Forecasting Automation 202Cash Concentration Overview 204Physical Sweeping 204Notional Pooling 206Comparison of Account Sweeping and Notional Pooling 207Cash Management Controls 208Summary 212Chapter 12: Investing Excess Funds 213Investment Criteria 213Investment Restrictions 214Investment Options 214Investment Strategies 216Summary 219Chapter 13: Obtaining Debt Financing 220Management of Financing Issues 220Bank Relations 221Accounts Payable Payment Delay 222Accounts Receivable Collection Acceleration 223Credit Cards 224Employee Trade-Offs 224Factoring 224Field Warehouse Financing 225Floor Planning 226Inventory Reduction 226Lease 227Line of Credit 228Loans 228Merchant Card Advances 234Preferred Stock 234Sale and Leaseback 235Summary 235Chapter 14: Obtaining Equity Financing 238Types of Stock 238Private Placement of Stock 239Layout of the Offering Memorandum 240Establishing a Valuation for the Offering Memorandum 252Swapping Stock for Expenses 253Swapping Stock for Cash 254Stock Warrants 254Stock Subscriptions 255Private Investment in Public Equity 255Buying Back Shares 256Rule 144 257Rule 10b5-1 258Summary 261Part Five: Publicly Held CompanyChapter 15: Initial Public Offering 265Reasons to Go Public 265Reasons Not to Go Public 266Cost of an IPO 268Preparing for the IPO 269Finding an Underwriter 271Registering for and Completing the IPO 274Alternatives for Selling Securities 277Trading on an Exchange 279American Stock Exchange 280Overview of the NASDAQ 282New York Stock Exchange 283Comparing the Stock Exchanges 285Over-the-Counter Stocks 287Summary 287Chapter 16: Reports to the Securities and Exchange Commission 288Overview 288Form 8-K 289Form 10-Q and Form 10-K 294Form S-1 297Form S-3 299Form S-8 300Shelf Registration 300Declaring a Registration Statement Effective 301Reporting Insider Securities Ownership and Trading 302EDGAR Filing System 306Fedwire Payments 308Summary 310Chapter 17: Investment Community 311Introduction 311Analyst’s Perspective 311Finding the Right Analyst 313Sell Side: Analysts 314Negative Analyst Report 316Sell Side: Brokers 316Sell Side: Investment Bankers 318Sell Side: Investor Relations Specialists 318Buy Side: Types of Investors 319Buy Side: Institutional Investors 319Buy Side: Individual Investors 321Buy Side: Presentations to Investors 323Summary 323Chapter 18: Taking a Company Private 325Going Private Transaction 325Rule 13e-3 325Filling Out Schedule 13E-3 326300-Shareholder Limit 329Form 15 330Summary 330Part Six: ManagementChapter 19: Risk Management—General Concepts 333Risk Management Policies 334Risk Management Planning 335Manager of Risk Management 337Risk Management Procedures 338Types of Insurance Companies 341Evaluating the Health of an Insurance Carrier 343Claims Administration 344Insurance Files 345Annual Risk Management Report 346Summary 347Chapter 20: Risk Management: Foreign Exchange 348Foreign Exchange Quote Terminology 348Nature of Foreign Exchange Risk 349Data Collection for Foreign Exchange Risk Management 350Foreign Exchange Hedging Strategies 351Accept the Risk 352Insist on Home Currency Payment 352Currency Surcharges 353Get Paid on Time 353Foreign Currency Loans 353Sourcing Changes 353Foreign Currency Accounts 354Unilateral, Bilateral, and Multilateral Netting Arrangements 354Forward Exchange Contracts 355Currency Futures 357Currency Options 358Currency Swaps 360Proxy Hedging 362Summary 362Chapter 21: Outsourcing the Accounting and Finance Functions 363Advantages and Disadvantages of Outsourcing 363Contractual Issues 368Transition Issues 370Controlling Supplier Performance 372Measuring Outsourced Activities 373Managing Suppliers 379Dropping Suppliers 379Summary 381Chapter 22: Mergers and Acquisitions 382Evaluating Acquisition Targets 382Complexity Analysis 400Evaluate Acquisition Targets with Alliances 401Valuing an Acquisition Target 402Alternative Valuation Methods 402Control Premium 406Synergy Gains 406Discounted Cash Flow (DCF) Model 407Constructing Cash Flow Scenarios 409Cash Flow Adjusting Factors 410Earnout 412Qualitative Factors 413Which Valuation Method Is Best? 414Method of Payment 415Types of Acquisitions 416Tax Implications of an Acquisition 416Asset Acquisition 418Type ‘‘A’’ Reorganization 419Type ‘‘B’’ Reorganization 420Type ‘‘C’’ Reorganization 421Type ‘‘D’’ Reorganization 422Triangular Merger 423Reverse Triangular Merger 423Terms of the Acquisition Agreement 424When to Use an Investment Banker 424Summary 425Part Seven: Other TopicsChapter 23: Employee Compensation 429Deferred Compensation 429Life Insurance 431Stock Appreciation Rights 432Stock Options 432Restricted Stock Units 435Bonus Sliding Scale 435Cut Benefit Costs with a Captive Insurance Company 436Summary 436Chapter 24: BANKRUPTCY 437Applicable Bankruptcy Laws 437Players in the Bankruptcy Drama 438Creditor and Shareholder Payment Priorities 439Bankruptcy Sequence of Events 440Tax Liabilities in a Bankruptcy 446Special Bankruptcy Rules 447Bankruptcy Act of 2005 448Alternatives to Bankruptcy 448Summary 449Appendix A: New CFO Checklist 451Appendix B: Performance Measurement Checklist 456Appendix C: Due Diligence Checklist 465About the Author 474Index 477