The Finance Gem 💎 Week #55: Finance Strategy for Every Manager

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Hello and welcome to a new issue of The Finance Gem.

Before we get started, here’s what’s new this week:

1. AI has taken the world by storm and Finance needs to learn how to make the most of it. Learn how to integrate AI in your finance work with the AI Finance Club.

2. My friend Nicolas Boucher together with Christian Martinez put together two essential video courses you should check out if you’re looking to accelerate your AI learning curve: Copilot for Finance and ChatGPT for Finance.

3. A condensed and strategic version of The Cash Flow Masterclass is now available for Executive Leaders and Portuguese Speakers for only $149 (as low as $75 with automatic location based discounts). Enroll today!

4. Upcoming complimentary webinar in partnership with Export Development Canada: Negotiating Payment Terms for Optimal Cash Flow

THIS WEEK’S STRATEGIC FINANCE INSIGHTS

Finance Strategy for Every Manager

1. What does a CFO actually do?

2. 10 Finance Skills you Need as a Manager

3. 100 Finance & Accounting Acronyms

4. Do you know how to connect your Financial Statements?

1. What does a CFO actually do?

What does a CFO actually do?

Hint: it's not financial reporting.

It's also not budgeting and forecasting.

And definitely not budget to actual variances.

Those are outcomes, essential outputs of a CFO office.

🎯 What a CFO actually does is drive business success alongside the CEO.

✓ Big picture thinking and long term planning.

✓ Analyzing data, identifying growth opportunities, and making strategic investments.

✓ Identifying risks and opportunities, and providing guidance on how to navigate them.

✓ Driving change that improves efficiency, profitability, and business processes.

✓ Keeping stakeholders informed and engaged with the company's financial strategy and performance.

✓ Ensuring that all departments understand how their actions impact the company's financial health.

🔹 A CFO in a small and medium sized company is likely also the OFO (Only Financial Officer).

🔷 A CFO in a large organization has an entire CFO Office helping them deliver on their 3 key areas of responsibility:

✓ Reporting and Compliance (Controllership)

✓ Treasury (Cash Flow Planning)

✓ Financial Planning and Analysis (Strategic Planning)

🎯 A CFO in every organization acts as an essential bridge between Finance and Operations that helps the company:

✓ Make informed decisions

✓ Allocate resources effectively

✓ Achieve strategic objectives

Here are The Top 10 Responsibilities of a CFO:

1️⃣ Attest to the accuracy of financial reports

2️⃣ Build/Scale/Lead the finance and accounting team

3️⃣ Develop and manage financial systems and policies

4️⃣ Ensure financial plans and budgets align with strategy

5️⃣ Oversee financial planning & analysis to drive growth

6️⃣ Enable/Drive Mergers and Acquisitions (M&A) activity

7️⃣ Plan, negotiate, secure, and manage business financing

8️⃣ Ensure compliance with applicable laws and regulations

9️⃣ Communicate with internal and external company stakeholders

🔟 Support the Board and CEO in setting and executing business strategy

And here are the Top 3 career skills for you if you're considering the CFO role:

1️⃣ Background in accounting or finance

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

🎯 You may not be required to have a CPA designation, but one would give you the breadth and depth of knowledge to make the job 10x 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 and working experience in financial technology

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

The Cash Flow Masterclass for Executive Leaders is now Live. This is the condensed version of my flagship Cash Flow Masterclass. Invest only 1.5 hours to focus on strategic decision making and watch yourself dramatically increase your leadership potential, impact and influence.

2. 10 Finance Skills you Need as a Manager

Do you need these all at once? No.

But if you're in leadership today, or aspire to be in a leadership role in the future, consider getting them.

1️⃣ Financial Statements Basics

🎯 Understanding the basic financial statements (income statement, balance sheet, and cash flow statement), how they are used and how they inter-relate

2️⃣ Financial Ratio Analysis

🎯 Understanding how to calculate common sized statements and critical ratios to track liquidity, profitability, solvency, coverage, returns and efficiency, interpret results and monitor over time

3️⃣ Budgeting and Forecasting

🎯 Creating and managing a budget, forecasting future financial performance, understanding key revenue and cost drivers, calculating and analyzing variances

4️⃣ Break-even and Cost-Volume-Profit Analysis

🎯 Understanding fixed and variable costs, contribution vs. gross margin, break-even quantity and revenue, target profit pricing, how changes in costs, volume, and price impact profitability

5️⃣ Capital Budgeting

🎯 Evaluating and selecting long-term investments, such as new equipment or facilities based on criteria that ensures the company's continued growth and profitability

6️⃣ Time Value of Money (TVM)

🎯 Understanding that money is more valuable in the present than the future due to the opportunity for investment returns and risks associated with future cash flows to help drive better business investment and financing decisions

7️⃣ Risk Management

🎯 Understanding, identifying and responding to financial risks such as credit risk, market risk, and liquidity risk, to impact business cash flows and profitability

8️⃣ Financing Decisions

🎯 Making informed decisions about business or asset financing options via debt and equity

9️⃣ Performance Management

🎯 Utilizing key performance metrics to evaluate business, investment, divisional or team member performance against organizational objectives

🔟 Cash Flow Management

🎯 Understanding the cash flow implications of key business decisions, calculating relevant cash flow KPIs and understanding the most important cash flow drivers.

3. 100 Finance & Accounting Acronyms

These are the Key Business Concepts you Need to Understand and Use.

To grow your knowledge and expand your skills.

What areas are covered?

1. Financial Statements & Reporting

2. Cash flow and working capital

3. Debt and Equity

4. Profitability and Returns

5. Asset Management

6. Costing Methods

7. Revenue Metrics

8. Securities

9. Others

Here’s a snapshot of the abbreviations that made the list:

1. A/R: Accounts Receivable - Money owed to a company by its customers

2. ABC: Activity Based Costing - Costing method that assigns costs based on activities

3. ABS: Asset-Backed Security - Financial security collateralized by a pool of assets

4. AFS: Available for Sale - Securities that are not classified as held for trading or held to maturity

….

28. DCF: Discounted Cash Flow - Valuation method used to estimate the value of an investment

29. DIO: Days Inventory Outstanding - Measure of average number of days a company holds inventory before selling it.

30. DPO: Days Payable Outstanding - The average the number of days it takes a company to pay supplier invoices

31. DR: Debt Ratio - Financial ratio indicating the proportion of a company's assets financed with debt

32. DSCR: Debt Service Coverage Ratio – Financial ratio that measures a company’s ability to meet all its principal and interest payment obligations

….

53. IRR: Internal Rate of Return - Discount rate making NPV of all cash flows from a project equal to zero

54. IS: Income Statement - Financial statement showing company's revenues and expenses during a particular period

55. JV: Joint Venture - Business arrangement in which two or more parties agree to pool their resources for accomplishing a specific task

56. LBO: Leveraged Buyout - Acquisition of a company using a significant amount of borrowed money

…

94. WACC: Weighted Average Cost of Capital - Average rate of return a company is expected to pay its investors

95. WC: Working Capital - Measure of a company's operational efficiency and short-term financial health

96. YOY: Year Over Year - Comparison of a statistic for one period to the same period the previous year

97. YTD: Year to Date - Period starting from the beginning of the current year up to the present time

Download a full resolution copy of the cheat sheet here.

WHAT WILL YOU DO WITH ALL YOUR NEWFOUND KNOWLEDGE?

5* Reviews for The Cash Flow Masterclass

~ Executive and Portuguese Versions now Available ~

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4. How to connect your Financial Statements

Did you know Your Financial Statements Talk to Each Other?

🎯 Here’s How to Connect the Three Main Financial Statements:

➡️The Balance Sheet uses information from the Income Statement for its reporting.

and

➡️The Income Statement uses the assets, liabilities, and equity from the Balance Sheet in its activity.

and

➡️ The Cash Flow Statement acts as a bridge between the Income Statement and Balance Sheet by showing the amount of cash that was generated in, and used by, the business.

🎯 Here’s how to integrate them in a dynamic model.

1️⃣ Net Income flows from the Income Statement to the Balance Sheet (through Retained Earnings) and to the Cash Flow Statement (through Operating Cash Flow).

2️⃣ Changes in Current Assets and Liabilities from the Balance Sheet are aggregated to calculate Changes in operating Assets and Liabilities in the Cash Flow Statement (Operating Cash Flow).

3️⃣ Depreciation Expense is added back into the Operating Cash Flow section of the Cash Flow Statement. In the Investing Cash Flow section, the Depreciation Expense is then deducted from the opening Fixed Assets balance and any changes in Fixed Assets are accounted for to calculate the net Investing Cash Flow.

4️⃣ The opening balance of Long Term Debt is deducted from the ending balance to calculate Financing Cash Flows.

The opening balance of Equity is also added to Net Income for the period and subtracted from the ending balance to finalize the calculation of Financing Cash Flows

5️⃣ The prior period’s closing cash balance plus the current period’s sum of cash flows from operations, investing, and financing becomes the closing cash balance for the period on the Balance Sheet.

📌Learn more with my 5* Cash Flow Masterclass and Cash Flow Masterclass for Executives - visit my website for details. 📌 

🎯 Remember:

☑️ To put together a Cash Flow Statement you only need 2 balance sheets and the income statement covering the period of time between the two balance sheets.

☑️ Use it to understand how cash moved in and out of the business during the period and draw critical insights on the business, its health and its risk profile

☑️ Positive cash flows aren’t always a positive indicators and negative cash flows aren’t always negative indicators.

Download a complimentary copy of my viral 10-in-1 Corporate Finance Cheat Sheet Lite.

To model 16 different interconnected dynamic reports, check out my 16-in-1 Corporate Finance Cheat Sheet Excel Model. Visit my website or click below.

Visit my digital store to check out my viral cheat sheets and checklists

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