Monthly Archives: November 2014

The CFO’s Revised Job Description

How the CFO’s position is evolving and why IT must be his or her responsibility

Tradition dictates that a CFO is someone tasked with managing all finance and accounting functions.  I remember not too long ago that one often had to be a Certified Public Accountant to be considered for the job.  That has all changed in the last 15 or so years.

The CFO position, which still stands for “Chief Financial Officer” (although I have heard references to “Chief Future Officer” and a couple more I can’t remember) has a different scope and meaning these days.

A while ago I wrote a blog article titled “CFO’s Big Picture”  about how the CFO can leverage available data and technology to help the management team steer the organization on its planned course, minimizing costly mistakes that frequently occur due to lack of data, bad data, or often ill-timed data.

I recently read an article on TechTarget, titled  “Should the CFO sit at the top of the IT Reporting Structure?” authored by Rob Livingstone of Rob Livingstone Advisory.  In this article, the author explores why IT departments in many organizations still report to finance and not directly to the CFO.  His conclusion is that in organizations where IT systems and technology are critical to the daily operation of the business and are pervasive throughout the company, IT reporting to finance may no longer be appropriate.

My observation is that Information Technology is rapidly becoming the backbone of nearly every organization, regardless of industry, company size, company culture, or geographic location.  I don’t know of many business transactions, marketing activities, sales operations, manufacturing, or inventory and product fulfillment that do not involve IT.   In fact, turn the IT infrastructure off and you will paralyze even the smallest company.

Since Information Technology can be innovative (when allowed by management and properly managed) and is crucial to the success of any organization, it is upper management that must be directly responsible for this function and the CFO is the position it must report to, and in my opinion not just in companies where IT is pervasive.

Areas such as Planning and Budgeting, Business Performance Management / Business Intelligence, Enterprise Resource Planning, Manufacturing Automation, Advanced Planning and Scheduling, Supply Chain Management, Human Resources and several others are now 100% dependent on Information Technology.

It is the CFO who should, through vision and a close partnership with the CEO, define the IT policy and drive the organization to excellence through embracing the right technologies and solutions to closely match the organization’s needs.

Internal Controls and Your Budget

Why having internal control over the budget process does not automatically mean it is done correctly.

I just finished my portion of work in a recurring, annual audit and certification of internal control over financial reporting in a large, publically held manufacturing company.  This is an engagement designed to assist management in their assessment of design and effectiveness of various internal controls over financial reporting, mandated by the Sarbanes-Oxley Act of 2002 for most publically traded companies.

Among the many functions in accounting, finance and operations, this company had a small set of controls surrounding the area of budgeting and forecasting.  Although these controls do not directly affect financial statements, evidence of their performance is an indication of effective finance policies, attention to detail and management’s commitment to execute its entity level controls.  The annual budget internal controls usually are concerned with the existence of an annual plan, its review and approval by management and the review and approval of changes to the budget throughout the process.

One of the activities I am always involved in when testing controls over the annual budget includes reviewing the budget itself.  As is common with very large organizations, this company’s budget consisted of a compilation of many worksheets prepared and submitted by regional divisions and operating units, and entry into the corporate finance management software.

To my surprise, the first time I worked on this engagement, there was no budget of the corporation’s balance sheet.  There was only an income statement, by region, by operating division and by business unit and product line.  When I asked one of the finance managers why they were not budgeting the balance sheet his response was: “we never do that”.  Since I knew the real reason from experiencing the same phenomenon in other organizations I accepted his response.

Anyone who works in the administration of large enterprise financial management software knows how difficult and costly it is to properly implement and maintain the software across a large organization.  Creating a model that will project a complete and accurate balance sheet is not a trivial task.

In fact, unless the planning software incorporates (by design) transaction based forecasting technology, the forecasting of a balance sheet with all of its accounts across the budget period is going to be a rough approximation of these account balances.  I have already explained this concept in earlier blog posts such as: “Those Debits and Credits”.

This manufacturing company passed its internal audit of the budget process controls.  There was evidence of the existence of an annual budget, evidence of review and approval of this budget, and evidence of review and approval of changes to the budget and its periodic re-forecasts.

While there were no compliance issues, I kept asking myself whether this organization could really obtain complete benefits from their existing budget process, without budgeting the balance sheet.  My conclusion was that without the proper tools and employing a lot of hard work and constant review and troubleshooting, this company, like many other similar organizations, will simply continue to ignore this important component of the budget and will dismiss it as “unimportant” or something that traditionally has never been done.

I couldn’t help but remind myself how a software application titled Budget Maestro, published by Centage Corporation, delivers the benefits finance and corporate managements truly need.  This software automatically, completely and accurately forecasts the balance sheet (and its derived statement of cash flows) without any user-supplied formulas, macros or links.

In contrast to the manufacturing company example above, companies that use an application like Budget Maestro, whether or not they employ a formal set of internal controls over the process, benefit from an accurate set of forecasted financial statements and other business intelligence, gaining better insight into the future financial health of their organizations.

While Budget Maestro may not directly fit into very large and complex organizations like the one described here, it is well suited for small and medium size or even mid-market companies that understand that the budget process and its companion analysis process  should be used for their intended purpose.

I only hope that as time goes by, many more organizations will come to the realization that just having good control over the budget process is not enough in getting the true benefits from it.

Cash comes first

How forecasting cash should not be a difficult chore with the right technology

I recently came across an article in Accounting Today titled:  “Art of Accounting: Start with the Cash”, authored by Edward Mendlowitz, CPA, a partner at WithumSmith+Brown, PC, CPAs.

In this article the author tells a story of an audit he once performed with an assistant where the author decided to perform the cash accounts audit by himself, a task usually delegated to junior accountants and regarded more of a “chore” than “serious” audit work.

As the author of this article points out, cash is one of the most important accounts on a company’s balance sheet and is at the top of the chart of accounts and the first line on the balance sheet, being the most liquid asset.  By auditing cash first and with its many in and out transactions, one can learn a great deal about the business under audit.

I can personally relate to this story as I have seen on more than one occasion how cash accounts were given to entry level or junior accountants, especially in larger accounting firms.  The reason was usually:  “They need to start somewhere”, and “doing a lot of grunt work in auditing cash accounts is a good place to start”, something senior auditors may regard as “unimportant” or perhaps a “chore better left to junior accountants”.

There is sometimes a similar mentality when it comes to cash planning and budgeting or forecasting the company’s cash flow.  The focus is often on the P&L (Income Statement) and achieving a desirable net income.  Cash and other balance sheet accounts are often not part of the budget preparation process.

To make things worse, those who decide to plan and budget their cash quickly realize that cash is very difficult to forecast.  Unlike its actual counterpart, though tedious to review or audit because of the numerous transactions flowing through this account, forecasting cash account balances with any degree of accuracy and completeness is not feasible using common planning methods and tools (e.g., spreadsheets or other purpose designed software tools that behave like spreadsheets).

In order to be able to successfully forecast cash we need to use a completely different approach.  We need to have the beginning cash balance (taken from the closing cash account balance in the accounting or ERP system) and consider all cash transactions resulting from all forecasted activities in our plan or budget.  What this means is that every item we forecast (sales, inventory costs, operating expenses, personnel expenses, buying and selling of fixed assets, borrowing activities and repayments, etc.) must be considered in order to arrive at a forecasted balance for each of the budget periods in our plan.

This cannot realistically be accomplished using a spreadsheet or even specific budgeting and forecasting software applications that use a “spreadsheet” like approach (with formulas, functions, data links, etc.).

Thankfully, there is a radically different way to do this, which is why I always recommend taking a serious and close look at Budget Maestro by Centage Corporation .  This is because the application uses the above-mentioned approach of transaction based forecasting.  To me, this software is a clear innovator and quite possibly a game changer.

Using this software, cash, always the company’s lifeline, can be forecasted with a greater degree of confidence, way in advance of cash crunches or other crises, allowing corrective measures and important decisions to be made when there is still time to rationally make them.

As the author of the above referenced article says, cash audit work should be left to senior personnel because of its great importance.  Using our Budget Maestro software example, forecasting of cash (and all other balance sheet accounts) should only be done by purpose build software, specifically designed to do that.

An added bonus, among many other things, is the fact that forecasting cash does not involve any grunt work.   With Budget Maestro, these tasks are performed quickly, automatically, completely and accurately.