The Finance Gem 2023💎 Week #3

Welcome to this week's edition of The Finance Gem 💎 where I bring you my unabbreviated Linkedin posts you loved - so you can save them, and those posts you missed - so you can enjoy them.

This newsletter edition is brought to you by Chris Reilly. Chris is an Expert Financial Modeler & Solopreneur with over 15 years of experience in Corporate Finance, Consulting, Private Equity, & Entrepreneurship. His highly recommended financial modelling courses have helped thousands of finance and accounting professionals around the world learn the critical business skills needed to advance their careers, and they come with a 100% money back guarantee. Try them out today, and remember to also check out Chris's email series The Finance Solopreneur for tips to start, grow or automate your financial consulting business.

This week's highlights at a glance:

• How do you plan your Finance and Accounting career?   

• What's it really like being a CFO? 

• 10 Things You Didn't Know about Cash Flow  

• Porter’s 5 Forces can Hurt your Cash Flow  

Without further ado, let's begin:

Are you strategic in your approach, or do you plan as you go?

To build a successful career in finance and accounting, you need to take a long-term, goal oriented approach.

You need to develop both your professional skills and your network at the same time.

🎯You need people who will mentor you.

🎯You need people to help you do your job well.

🎯You need people to connect you to others in your company.

🎯You need people to teach you the fine points of your position.

🎯You need people to help with the right information at the right time.

🎯You need people to advocate for you and for your differentiating skills and abilities.

🎯You need people who will guide you when you need to make sensitive and critical decisions.

🎯You need people who will sponsor you for your next career opportunity and help you get that next role.

Here’s a 10-step strategic infographic framework to help you network strategically:

🎯 If you’re a CFO in a small and medium sized company, you may well also be the OFO (Only Financial Officer).

🎯 If you’re a CFO in a large organization, you have an entire CFO Office helping you deliver on your 3 key areas of responsibility:

⚫ Reporting and Compliance (Controllership)

⚫ Treasury (Cash Flow Planning)

⚫ Financial Planning and Analysis (Strategic Planning)

🎯 As the Chief Financial Officer (CFO) you’re the highest-ranking financial professional in the organization.

🎯 You’re like the Physician to the King, responsible for the fiscal health of the business.

🎯 You’re also the bridge between Finance and Operations and you enable your organization to achieve 3 critical objectives:

⚫ make informed decisions

⚫ allocate resources effectively

⚫ align with its strategic objectives

Here are the Top 10 responsibilities of a CFO in the form of an infographic:

And here are 3 Critical Skills to position you for success as a CFO:

1️⃣ Background in accounting or finance

As a CFO you are relied upon to provide strategic guidance and leadership in these areas.

You don't need to have a CPA designation, but one would give you the breadth and depth of knowledge to make the job much easier.

2️⃣ An advanced business degree, generally including an MBA

As a top-level executive of the company, you are responsible for setting and managing business strategy, as well as effective communication, conflict management and negotiations.

3️⃣ Advanced knowledge or, and working experience with financial technology

As a CFO, you need to keep up with the evolving fintech solutions available to support financially sound decisions about business IT infrastructure investments.

1️⃣ The term “Cash Flow” is loosely used to refer to Net Cash Flow or Net Change in Cash.

⚫ It indicates the total flow of cash that went in and out of the business during the period, calculated as the sum of the 3 sources of cash from a company’s cash flow statement:

⚫ Operating Cash Flow + Investing Cash Flow + Financing Cash Flow = Net Change in Cash

2️⃣ Depending on the accounting framework used, you may find some items in different places.

⚫ ****Interest paid and received is part of operating cash flows under US GAAP.

⚫ Under IFRS companies can chose whether interest received is part of operating or investing cash flow. A similar difference can exist for dividends paid between the two accounting frameworks.

3️⃣ Positive cash flow does not always indicate profitability.

⚫ A business can have positive operating cash flow but still be unprofitable.

⚫ If expenses consistently exceed revenues, operating cash flows will eventually catch up.

⚫ In the short term however, they could be positive if the company collects a large AR balance, or if it delays making a large supplier payment.

4️⃣ Negative operating cash flow does not mean that a business is in trouble.

⚫ A business may have negative operating cash flow due to a large investment in inventory assets ahead of a large sale.

⚫ Or due to a steep increase in receivable balances from a period of revenue hypergrowth.

⚫ As long as the company has provisioned offsetting financing cash flows, or sufficient cash balances to finance working capital requirements, the company should not run into a cash deficit.

5️⃣ A company can have positive net cash flow but still be in financial distress.

⚫ Operating losses can be temporarily covered with positive operating cash flows from the collection of a receivable or the cash inflow from a one-time asset sale.

⚫ Those temporary cash inflows however are not sustainable sources of financing for an operating deficit.

⚫ In the absence of suitable alternatives the company is likely to become financially distressed.

6️⃣ A lack of cash flow can dramatically limit revenue growth.

⚫A profitable business without the cash flow to invest in working capital assets, like accounts receivables and inventory, won’t grow nearly as fast as its better funded competitors.

7️⃣ A company can have positive cash flow but still be at risk of insolvency.

⚫ Growing levels of debt cannot be sustainably repaid with cash from a one-time asset sale, or cash available from delaying the payment of a supplier payment.

⚫ The company needs to generate sufficient earnings from the ongoing operation of the business to avoid seeing its debt to equity ratio increase and the risk of balance sheet insolvency.

⚫ The company also needs to generate sufficient operating cash flow to repay the debt obligations when due, to avoid the risk of cash flow insolvency.

8️⃣ A company's cash flow will be affected by external factors such as economic conditions, interest rates, and currency exchange rates.

⚫ Companies need to understand the key drivers impacting their cash flow and plan accordingly, using solutions like interest rate swaps or forward exchange rate hedges.

⚫ For example, exposure to exchange rate volatility could reduce the value of a collected receivable balance enough to effectively erase the Gross Margin earned by the company on that sale.

9️⃣ A company can generate positive cash flow but still have a poor credit rating.

⚫ A company’s cash flow may not show an immediate connection to its financial health and its track record of meeting obligations when they come.

⚫ A company with high levels of debt, high shareholder distributions, low profitability and frequent overdrafts during the year could have a weak credit rating despite being able to generate positive cash flow.

🔟 The quality of the cash flow is equally important to the amount of cash flow generated in a business.

⚫ A company’s sources and uses of cash in a cash flow statement reveal a lot about the quality of its cash flow.

⚫ Ideally, cash flow is mostly generated from operating activities, with moderate levels of financing activities, and appropriate use of cash for investments.

Here are 5 things you should know:

1. Porter’s 5 Forces is a simple framework useful to understand how competitive an industry space by analyzing 5 key areas:

⚫ The rivalry among existing competitors

⚫ The power of suppliers

⚫ The power of customers

⚫ Threat of substitutes

⚫ Threat of new entrants

2. A deep understanding of Porter's 5 Forces will help CFOs and FP&A mitigate the potential loss of business profits and loss of cash flows in favor of:

⚫ competitors who can earn better margins

⚫ suppliers who can charge higher prices

⚫ buyers who can get lower prices

⚫ substitutes who can effectively replace your product

⚫ new entrants who can undercut your sales volumes

3. Porter’s 5 Forces and PESTLE connect perfectly into SWOT.

Both Porter’s 5 Forces and PESTLE (Political, Economical, Social, Technological, Legal and Environmental) help translate an organization’s environment into:

⚫ external opportunities and threats

⚫ internal strengths and weaknesses

4. Managers can use Porter’s Five Forces to identify which trends and events to monitor in their external environment.

By continuously monitoring industry dynamics and assessing the relevant competitive forces, they can:

⚫ anticipate and plan ahead

⚫ adjust their financial strategy

⚫ actively manage business cash flows

5. Porter’s 5 Forces has been controversially expanded by Michael Porter in 1990 to include a 6th Force.

The latest addition is the threat of complements, which are products that are typically consumed or used together, such as burgers and buns or movies and popcorn.

Complementary products can have a substantially beneficial impact on profits and cash flow by:

⚫ acting as a barrier to entry for new competitors

⚫ reducing the threat of substitute products or services

⚫ increasing the bargaining power of customers

⚫ reducing the threat of new competitors

A big thanks to Mohamed ELRouby ACMA, CGMA, FPAC, MBA for teaming up with me and leading this project.

Effective strategy starts with a solid environmental assessment that leverages frameworks like Porter's 5 Forces, SWOT, PESTLE, and Value Chain Analysis.

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Thanks so much for reading. See you next week.