The New CFO Financial Leadership Manual

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