The Finance Gem ๐Ÿ’Ž Week #36: The Budget, The CFO and The Corporate Finance Cheat Sheet

The Budget, The CFO and The Corporate Finance Cheat Sheet

Welcome to a new edition of The Finance Gem ๐Ÿ’Ž

weekly strategic finance gems to accelerate your career and grow your business

This Weekโ€™s Strategic Finance Insights

Once upon a time, a CFO, a Budget and a Corporate Finance Cheat Sheet were walking togetherโ€ฆ.

  • 10 Steps you need to follow for the perfect Master Budget.

  • The place and purpose of the CFO Office

  • Controllership vs. FP&A vs. Strategic Finance

  • The Cash Conversion Cycle (CCC) drives your profitability.

  • The Corporate Finance Cheat Sheet.

Letโ€™s see what happens next!

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Letโ€™s get into this weekโ€™s strategic finance insights:

10 Steps you need to follow for the perfect Master Budget

โžก๏ธ 1. The Master Budget is a detailed financial plan that allocates resources and shows your income and expense expectations for a year or more into the future.

โžก๏ธ 2. Itโ€™s built off historical trends, known changes in the present, anticipated future changes and extrapolations of existing data, all of which you should be able to support with appropriate evidence.

โžก๏ธ 3. It includes an Operating Budget and several Financial Budgets, including a full set of Budgeted Financial Statements (income statement, balance sheet and cash flow statement).

โžก๏ธ 4. It starts with the Sales Forecast for the period which presents your anticipated sales volumes in units.

โžก๏ธ 5. Your Sales Forecast drives the Revenue Budget, which drives both the Production Budget (for manufacturers) and the SG&A Budget

โžก๏ธ 6. If youโ€™re a service company, you donโ€™t sell products so you wonโ€™t have Production Budgets and Cost Of Goods Sold.

Instead you will typically have Cost of Sales (COS).

โžก๏ธ 7. If however you do have a Production Budget, it will drive the next 3 Budgets for Direct Labor, Direct Materials and Manufacturing Overhead.

These in turn will drive your COGM and your COGS.

โžก๏ธ 8. Your SG&A Budget is driven by your Sales Forecast and all non-manufacturing expenses.

These include sales, marketing, research and development, and general administration.

They also include your non-manufacturing overhead.

โžก๏ธ 9. Your Operating Budget will further drive 3 other inter-connected budgets:

>> Your Investment or CAPEX Budget, which will list expected cash invested in or driven from fixed asset purchase and sale transactions

>> Your Financing Budget, which will list expected cash paid or received from debt or equity financing transactions

>> Your Cash Budget, which will list your total expected receipts and disbursements for the period

โžก๏ธ 10. Once all your Budgets are completed, youโ€™ll finally be able to get a unified view of your projected future performance through your Budgeted Income Statement, Balance Sheet and Cash Flow Statement.

The place and purpose of the CFO Office

Do you know the place and purpose of the CFO Office in your Org Chart?

Think about it like this: if your organization was a building, the org chart would be its blueprint.

Your org chart:

๐ŸŽฏ outlines your company structure

๐ŸŽฏ shows different departments and teams

๐ŸŽฏ provides a plan for organizing resources

๐ŸŽฏ defines roles, inter-relations, and reporting hierarchies

๐ŸŽฏ promotes communication and coordination

The design of your org chart may vary, but it still needs to perform relevant functions for your business.

The CFO Office has three primary functions: controlling, treasury, and FP&A.

1๏ธโƒฃ Controlling ensures financial reporting compliance:

โšซ financial reporting involves preparation of monthly, quarterly, and annual financial statements

โšซ compliance involves ensuring legal and regulatory adherence

โšซ risk management involves mitigating financial reporting risk

โšซ audit management involves coordinating the annual audit process

โšซ budget oversight involves ensuring budget data accuracy

โšซ tax management involves regulatory reporting and tax filings

2๏ธโƒฃ Treasury ensures your company meets financial obligations:

โšซ cash management involves forecasting daily cash requirements

โšซ banking management ensures efficient banking operations

โšซ currency risk management involves mitigating foreign currency exposure

โšซ risk management involves assessment and mitigation of key threats

โšซ financing coordinates long-term and short-term funding needs

โšซ investment management identifies suitable investment opportunities

3๏ธโƒฃ FP&A provides decision-making support:

โšซ budget management involves creating the budget

โšซ financial analysis interprets company financial information

โšซ forecasting provides timely financial and operational trend analysis

โšซ scenario analysis helps identify and manage critical threats

โšซ strategic planning provides decision-making assistance

โšซ performance management involves establishing performance indicators

Controllership vs. FP&A vs. Strategic Finance

โžก๏ธ Controllership:

๐ŸŽฏ focuses on accounting and financial reporting

๐ŸŽฏ responsible for ensuring that financial statements are accurate, timely, and compliant with local GAAP

๐ŸŽฏ roles: Controller, Assistant Controller, Accounting Manager

๐ŸŽฏ competencies: accounting and financial reporting, budgeting and forecasting, internal controls, regulatory compliance

๐ŸŽฏ key relationships: other finance functions & other departments (operations, sales, procurement)

๐ŸŽฏ professional designations:

1. CPA (Chartered Professional Accountant /Certified Public Accountant)

2. CMA (Certified Management Accountant)

3. CGMA (Chartered Global Management Accountant)

4. ACCA (Association of Chartered Certified Accountants)

โžก๏ธ FP&A (Financial Planning and Analysis)

๐ŸŽฏ focuses on insights into financial performance for strategic decision-making

๐ŸŽฏ responsible for providing guidance on strategic business decisions based on financial data and analysis

๐ŸŽฏ roles: FP&A Manager, Financial Analyst, Budget Analyst

๐ŸŽฏ competencies: financial modeling, data analysis and visualization, budgeting and forecasting, strategic thinking, communication and influence

๐ŸŽฏ key relationships: other finance functions, other departments (sales, operations, procurement)

๐ŸŽฏ professional designations:

1. CPA (Chartered Professional Accountant /Certified Public Accountant)

2. FP&A (Certified Corporate Financial Planning & Analysis Professional)

3. CFA (Chartered Financial Analyst)

4. CMA (Certified Management Accountant)

5. CGMA (Chartered Global Management Accountant)

and others.

โžก๏ธ Strategic Finance

๐ŸŽฏ focuses on the long-term financial planning and analysis of the company

๐ŸŽฏ provides insights into investment decisions, mergers and acquisitions, and capital raising

๐ŸŽฏ roles: Director of Strategic Finance, Corporate Development Manager, Treasury Manager

๐ŸŽฏ competencies: financial analysis and modeling, business strategy, investments, M&A, capital markets, corporate banking, communication and leadership

๐ŸŽฏ key relationships: other finance functions, other departments (legal and operations) to execute investment and acquisition opportunities

๐ŸŽฏ professional designations:

1. CPA (Chartered Professional Accountant /Certified Public Accountant)

2. CFA (Chartered Financial Analyst)

3. FRM (Financial Risk Manager)

and others.

The Cash Conversion Cycle (CCC) drives your profitability.

โ˜‘๏ธ To learn how to master these and many other essential cash flow concepts, check out my 5* Cash Flow Masterclass.

โ˜‘๏ธ What is the CCC:

1. a cash flow KPI used to evaluate the efficiency of your company's working capital management

2. an essential tool to understand how effectively your company is managing liquidity and cash flow

โ˜‘๏ธ How to use the CCC:

3. Track over periods, compare against historical and forecasted results, use to forecast future cash availability, compare with peers

4. The shorter the CCC, the faster your company converts inventory into cash, the better your liquidity, efficiency and operating cash flow

5. The longer the CCC, the longer your company takes to collect receivables & pay suppliers, which can result in cash flow issues and potential financial distress

6. Negative CCC indicates youโ€™re leveraging your substantial bargaining power with suppliers and strong supply chain management to finance your working capital assets, operations and growth - i.e you only pay suppliers after collecting payment from customers

โ˜‘๏ธ How to calculate the CCC:

7. The Formula for the CCC = DIO + DSO - DPO

8. Days Inventory Outstanding (DIO) = the average number of days it takes your company to sell its inventory

= Average Inventory / Purchases x 365

- Simplified formulas use COGS instead of Purchases in the denominator

- Purchases = Ending Inventory - Opening Inventory + COGS

9. Days Sales Outstanding (DSO) = the average number of days it takes your company to collect payment from customers

= Average Accounts Receivable / Credit Sales x 365

10. Days Payable Outstanding (DPO) = the average number of days it takes your company to pay suppliers for goods and services received

= Average Accounts Payable / COGS x 365

โ˜‘๏ธ How to manage the CCC:

11. The correct approach to managing the CCC is focused on optimization:

>> reduce DIO without jeopardizing sales due to stock outs

>> reduce DSO without loosing sales opportunities

>> increase DPO without jeopardizing supplier relationships

12. Working capital management can dramatically change your profitability by impacting inventory holding costs, terms with suppliers, speed of sales turnover and ability to support your sales growth.

The Corporate Finance Cheat Sheet

Because one insightful page can hold most of the knowledge you need.

Corporate Finance can be tough to understand.

But having the right perspective can change everything.

๐Ÿ‘‰ ๐‡๐ž๐ซ๐ž ๐ข๐ฌ ๐ฐ๐ก๐š๐ญ ๐ญ๐ก๐ข๐ฌ ๐„๐ฑ๐œ๐ฅ๐ฎ๐ฌ๐ข๐ฏ๐ž 10-๐ข๐ง-1 ๐‚๐จ๐ซ๐ฉ๐จ๐ซ๐š๐ญ๐ž ๐…๐ข๐ง๐š๐ง๐œ๐ž ๐‚๐ก๐ž๐š๐ญ ๐’๐ก๐ž๐ž๐ญ ๐‹๐ข๐ญ๐ž ๐ข๐ง๐œ๐ฅ๐ฎ๐๐ž๐ฌ:

๐ŸŽฏ1. Financial model assumptions for growth, cost breakdown, CAPEX and working capital investments, salvage values, tax rate and initial equity investment

๐ŸŽฏ2/3/4. Vertical dynamic 3-statement financial model linked to assumptions for the Income Statement, Balance Sheet and Cash Flow Statement

๐ŸŽฏ 5. Working Capital Schedule linked to financial statement model with component calculations for the Cash Conversion Cycle (DSO, DIO and DPO)

๐ŸŽฏ 6. Break-even Analysis: Contribution Margin & Break Even Revenue

๐ŸŽฏ 7. Capital Budgeting: NPV, IRR, Payback Period

๐ŸŽฏ 8. Financial Analysis Ratios & Metrics

๐ŸŽฏ 9. Vertical / Common Size Analysis

๐ŸŽฏ 10. Horizontal / Trend Analysis

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