Category Archives: Investor and Lender Relations

17 Principles to Safeguard Assets and Ensure Organizational Effectiveness

One of my favorite aspects of being a financial professional is knowing that others on the management team and in my organization are relying on me. I am expected to handle key functions within the business, and if I do my job well I can contribute integrally to the organization’s success. This can provide a constant sense of urgency but also a rewarding feel of satisfaction and significance.

Among the not so glamorous yet important features of an organization’s structure are internal controls. Accountants are expected to implement sound measures to safeguard assets and reasonably ensure that management’s objectives are achieved toward effective operations, reliable financial reporting, and legal and regulatory compliance.

Even if this sounds boring, take consolation in the fact that your organization’s survival and success depends on it.

The Committee of Sponsoring Organizations (COSO) first released its Internal Control-Integrated Framework in 1992. This document defined internal control and provided accompanying standards. Over twenty years later the framework is still highly relevant.

In May of 2013 changes were made that kept the core intact and added, among other things, seventeen principles to help with implementation of the framework in light of changes over the years. A recent article in The CPA Journal discusses these seventeen principles as organized under the five categories of internal control within the COSO framework.

    • Control Environment

1) Commit to integrity and ethical values – this largely entails setting an effective “tone at the top.”

2) The independent Board of Directors should oversee internal control – among other things, objectively evaluate managers and ask appropriate questions.

3) Establish appropriate authority, responsibility, and reporting structures.

4) Attract, develop, and retain the right talent to achieve objectives.

5) Hold employees individually accountable for fulfilling organizational objectives.

    • Risk Assessment

6) Be able to identify and assess risks by having first formulated objectives with sufficient clarity.

7) Identify and analyze risks throughout the organization to determine how they should be managed – choose whether to accept, avoid, reduce, or share risks.

8) Consider potential fraud risks, including misappropriation of assets and alteration of records, that could deter the organization from achieving its objectives.

9) Be ready for changes, including within the external environment, business model, or leadership, that could impact the internal control system.

    • Control Activities

10) Mitigate risks to acceptable levels by choosing and implementing appropriate control activities.

11) Technology is a special category of importance for implementing control activities that help enable the organization to achieve management’s objectives.

12) Policies establish expectations and procedures put these policies into action in order to deploy control activities.

    • Information & Communication

13) Support internal control functions with relevant and timely information – capture data, transform it into information, and protect its availability and accessibility to appropriate parties.

14) Communicate internally regarding internal control objectives and responsibilities.

15) Communicate with appropriate external parties regarding internal control, carefully considering the timing, audience, and nature of the communication.

    • Monitoring Activities

16) Have ongoing evaluations to determine whether internal controls are working effectively.

17) Communicate internal control deficiencies to senior management and the board of directors so that they can timely take corrective action.

In short, internal controls help management set a proper tone, define organizational objectives, and run the business effectively. A leadership-oriented financial professional who wants to be indispensably valuable within an organization should study and understand how to effectively choose, implement, and monitor internal controls on an ongoing basis.

Be Fully Aware of Every Detail of Your Funding Agreements

I previously wrote about the importance of getting agreements in writing. From personal experiences and observations I have seen great detriments in relying on vague verbal assurances. Among other things, reducing an agreement to writing ensures commitment and helps clarify important details between the parties to the agreement.

Written financing agreements are particularly important because the financial function is a key enabler of business strategy and operations. When the organization’s existence is riding on the line, a controller or CFO cannot rely upon flimsy verbal promises from potential lenders or investors. Senior financial leaders must take charge in clarifying the exact nature and requirements of the funding agreements.

A recent CFO.com article details the importance of looking for quirks in financing agreements. Here are some takeaways:

  • Be prepared for stringent documentation requirements and financial covenants, especially if your business is a first-time borrower or has a checkered credit history.
  • Don’t assume that the math will be straightforward in calculating credit limits for asset-based borrowing. For example, lenders might discount certain categories of receivables such that the company is unable to borrow against them.
  • Banks can use their own judgment and criteria, seemingly without a tight quantitative basis, for excluding certain assets from the collateral base. This effectively reduces the amount of credit available for the borrower. Factor this in when making decisions about managing working capital and short-term cash flow.
  • Have an eagle eye for fees. Don’t base your borrowing decisions exclusively on the quoted interest rate while ignoring hidden expenses that drive the effective borrowing costs higher.
  • Be aware of initially odd requirements such as segregating inventory used as collateral from other inventory in a separate warehouse. Rather than having to worry about a padlocked warehouse and drawn-out, expensive litigation, banks want easy access to the security in case the borrower goes bankrupt. This places added complexity, requirements, and (likely) expenses on the borrower.

Communicate effectively to make sure all relevant details are negotiated and finalized in the lending agreement. Both the borrower and the lender need to be clear on making sure their economic interests are served by the agreement. Both sides have to exercise due diligence to ensure that they are getting a workable deal.

Poetry and Art for the CFO: Twelve Elements

Are you left or right brained? Analytical or emotional? A number cruncher or a poet?

Although it might run counter to our initial assumptions, CFOs are expected to go “beyond the numbers” and manage key aspects of the business as a whole. We have seen the importance of understanding technology and operations, among other factors not directly related to number crunching.

Very critical is the CFO’s role in dealing effectively with people and relationships. A CFO needs to be approachable. To become CFO material, a finance professional needs to develop habits of ambiguity tolerance, composure, empathy, energy, humility, and confidence.

On that note, the international accounting and finance firm Deloitte has published a poetic and artistic description of the CFO’s twelve elements, which encapsulates the expansive requirements and responsibilities of the CFO’s job:

“As CFOs grow in stature and importance, they keep coming back to the same issues that form their agenda. The elements of the CFO Agenda represent a powerful framework for one of the toughest jobs on earth. Year after year, quarter after quarter, they endure.”

Here are the twelve elements and my summation of the messages:

  • Truth – Be real. Know the true story and tell it.
  • Growth – Plant and water. Make choices and commitments to move plans forward.
  • Relationships – Work together. Manage relationships up and down, inside and out.
  • Decisions – Root your insights in numbers. Don’t manage solely based on your gut.
  • Capital – Manage business investments. Determine timing, amounts, and allocations.
  • Disruption – Be discerning as technologies, industries, and markets constantly change.
  • Crisis – Manage risks. Be ready to respond to various sorts of threats.
  • Infrastructure – Be an enabler. Invest in tech, talent, systems, and solutions.
  • Transactions – Research deals with the right criteria, calmly, thoroughly, and rationally.
  • Transitions – Change is constant. Build your skills and reputation in the midst of it.
  • The Street – Have give and take on forecasts. Be vigilant to represent the company well.
  • Me – Provide solutions. Navigate through complexity to make things happen.

Don’t take my word for it. Take a look at the presentation for yourself. Reflect on the messages. Do you agree or disagree with each of the elements and how they’re presented? How can you apply these insights in your work as you develop your career?

Whitepaper: Do I Need a CFO or a Controller?

What are the differences between the roles of the CFO and Controller? How does an organization determine whether to utilize the functions of a Controller or CFO (or both)? A white paper by The Brenner Group provides this summary: “The CFO and the Controller play very important, yet different roles within growing companies. The CFO typically serves as a strategic partner for the CEO and the Controller is more focused on day-to-day tactical accounting matters.”

The white paper gives the following descriptions for the role of the Controller:

  • Implement and/or create fundamental accounting policies and procedures
  • Manage day-to-day accounting and cash flow maintenance (including payroll processing, accounts receivable and collections, and accounts payable distributions)
  • Implement accounting software and establish chart of accounts
  • Update financial models and analyze budget to actual activity
  • Prepare financial management reports in a timely manner for use by the management team and the Board to run the business
  • Handle basic Human Resource tasks such as maintaining employee files, generating offer letters, researching benefit questions, processing 401K activities, etc.
  • Help recruit, build and manage the accounting and finance department
  • Manage annual audit preparation and process
  • Act as the historian with respect to accounting matters

On the other hand, the CFO’s role is distinct from that of the Controller:

  • Be intimately involved with the CEO and Board on strategic planning matters, effectively serving as the “right hand” to the CEO
  • Assure adequate capital or growth by assisting with financings, including preparation and presentation for Angel or Venture Investors
  • Manage cash flow and provide timely communications regarding the future cash projections and needs
  • Function as the “Vice President of all other”—i.e. any function not directly involved in designing, manufacturing, selling or supporting the product
  • Direct or implement accounting systems, policies and procedures
  • Facilitate the development of annual strategic operating plans
  • Create and implement forecasting tools to measure the business
  • Administer stock option issuance and tracking
  • Manage the human resources function, including obtaining and administering employee benefits
  • In cooperation with the CEO and the Board, locate and negotiate facilities and fixed asset acquisitions
  • Initiate and retain outside relationships with independent accounting, tax and legal advisors
  • Work with the sales department to establish pricing policies
  • Hire and staff the finance and accounting department
  • Oversee risk management, including adequate insurance coverage

Read the complete whitepaper: Do I Need a CFO or a Controller?

Categories for My Website

This is my CFO Career Development Plan website. I will post my career plan and chart my progress, and this site will be a tool in the process. For example, part of my career plan will involve reading books, and I can review them on this site to give valuable input for others from my learning.

Here are some of the categories I plan to cover on this site as I develop my career as a financial professional:

  • Risk Management
  • Tax and Regulatory Compliance
  • Human Resource Management and Supervision
  • Policy Making
  • Decision Making and Analysis
  • Forecasting and Budgeting
  • Professional Development
  • Strategy and “Big Picture” Focus
  • Investor and Lender Relations
  • Information Technology Tools
  • And More …