Financial Management E-Book

Jack Alexander

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch
• Veröffentlichungsjahr: 2024

Seitenzahl: 890

Beschreibung

A comprehensive and insightful approach enabling finance mangers to contribute to business performance and valuation In Financial Management: Partner in Driving Performance and Value, experienced financial executive and consultant Jack Alexander delivers a fresh, new take on improving performance and creating shareholder value for CFOs, controllers, C-suite executives, and FP&A professionals. In the book, you'll learn about best practices in operational and strategic planning, forecasting, enterprise performance management, business valuation, capital investment, mergers and acquisitions, developing finance talent, supporting growth, and more. Frameworks for dealing with the pace of change and level of uncertainty in today's environment are also provided, including scenario planning, business agility and monitoring external forces. The book provides actionable insights and practical tools for finance professionals to contribute as trusted advisors and business partners. The author offers free access to financial models in Microsoft Excel and PowerPoint templates on the accompanying website, as well as: * Expanded and enhanced content from the author's widely read previous works * Models, illustrations, examples, and dashboards * Anecdotes and stories drawn from the author's 45-year-long career in financial leadership Perfect for CFOs, controllers, financial executives, financial planning and analysis professionals, and accounting managers, Financial Management is also the ideal desk reference for treasurers, strategic planners, Certified Public Accountants, and equity research analysts. It's an essential and timely resource for financial leaders everywhere.

Leseprobe

ADDITIONAL PRAISE

“Alexander brings five decades of experience in the field of finance to create a how-to book for finance leaders guiding their companies through the complex inner workings of information asymmetries in the global macroeconomy.”

—Dennis Edwards Ph.D., Professor of Economics,Past Chair of Finance and Economics Department,Coastal Carolina University

“Jack Alexander has unraveled the complex and sometimes mysterious ways of the finance world in a comprehensive yet clear, concise, and readable format. He illustrates how these topics work in the real world, and deals with the challenges presented by the new economy and business landscape. This is clearly a ‘must read’ and a reference book for any person who wants a seat at the proverbial table.”

—Warren Davis, Vice President, Human Resources, WTI Inc.

FINANCIAL MANAGEMENT

PARTNER IN DRIVING PERFORMANCE AND VALUE

Jack Alexander

Copyright © 2024 by Jack Alexander. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data is Available:

ISBN 9781394228362 (Cloth)ISBN 9781394228492 (ePDF)ISBN 9781394228379 (ePUB)

Cover Design: WileyCover Image: © yuanyuan yan/Getty ImagesAuthor photo: Courtesy of the author

To my family:My wife Suzanne, for five decades of love, support, and friendship.My parents Marian and Jack, who are at peace with the Father.My sons Rob and Tom, and their wives Courtney and Felicity.My sisters Karen and Carol, and their families.And especially to my granddaughters Emmy and Lienna, who bring indescribable joy and happiness to our lives!

Preface

WHY THIS BOOK?

In the late 1970s, as I was starting my career, I came across an article that identified the traits a chief executive officer was looking for in a chief financial officer (CFO). Since I had already set my sights on becoming a CFO, I jotted down the key takeaways from the article, something that I developed a habit of doing over my career and continue to this time. Unfortunately, I did not note the article, publication, or CEO to give them credit here or to recognize the soundness of the points articulated in the article. Figure P.1 is a copy of my notes that I have retained to this day:

FIGURE P.1Top Gun CFOs.

My initial reaction to the article was a realization that the CEOs did not include many of the traditional functions in accounting and finance, including control and external reporting (my role in public accounting at the time of the article), transaction processing, tax, treasury, and many others. Over time I recognized that CEOs and boards take these functions for granted…unless there are weaknesses or issues! Finance executives must execute well on the blocking and tackling and provide the service and advice appreciated by CEOs.

Each of the recommendations has proven to be true in my experience and form the foundation of being a “Partner in Driving Performance and Value.” Of course, this assumes that financial controls and reporting are also well executed. CFOs and finance teams must be able to develop, evaluate, and assist in achieving planned and forecast results. The succinct phrase “dispassionate, hard-headed analysis” made a deep and lasting impression. Financial leadership must be impartial and objective. Finance teams must be prepared to identify and expose both problems and opportunities, often in a hard-headed way. CFOs and their teams must strike a balance between focusing on the cost model and directly and indirectly contributing to growth. Kinship refers to developing a trusted advisor and partner relationship with the CEO and other operating executives. And of course, finance must be viewed as a member of the team, supporting and executing to achieve the organization's objectives.

This article led me to focus on activities that contribute to the firm's success as a “Partner in Driving Performance and Value.” Throughout my 45-year career, I have found that these value-added finance activities that contribute to performance improvements and value creation are the most important roles the finance team plays. I became a student of financial analysis early in my career and can directly attribute attaining my goal of becoming a CFO in large measure to a strong focus and emphasis on FP&A, decision support, and other value-added activities throughout my career.

I define value added finance activities very broadly, as evidenced by the scope of this book. These draw on several academic areas, including managerial accounting, financial accounting, finance, operations and process management as well as new disciplines in analytics, data visualization, and artificial intelligence. Today, the finance team is called on to lead the development of plans and projections, evaluate trends and variances, evaluate complex investment decisions, value and increase the value of the enterprise and acquisition candidates, among many others.

The title of this work is Financial Management: Partner in Driving Performance and Value. The term financial management recognizes that many “value-add activities” occur in other areas outside the typical FP&A function. This book will emphasize that finance should be a partner with other executives in achieving organizational goals. Finally, finance can and should play a key role in driving overall performance of the organization and maximizing shareholder value.

Even with the broad scope and increasing importance of financial management, there are very few resources available to senior financial managers, analysts, and FP&A departments. The objective of this book is an effort to address that void by providing a comprehensive and practical guide to FP&A and other key finance contributions.

USING THIS BOOK

The book can be utilized in one of three ways. First, a cover-to-cover read for those deeply involved (or aspiring to participate) in all facets of financial leadership. Second, many readers may peruse the entire book and then focus on specific areas of current interest. Finally, my hope is that the book will be retained for use as a future reference.

This book is organized into seven parts:

Fundamentals and Key Partner Capabilities

Financial Leadership in the 21st Century

Enterprise Performance Management

Business Projections and Plans

Planning and Analysis for Critical Business and Value Drivers

Valuation and Capital Investment Decisions

Summary and Supplemental Information

Part I: Fundamentals and Key Partner Capabilities

Part I includes a review of fundamentals of finance and key analytical tools. It also covers important FP&A capabilities, including developing models, building analytical capability, and presenting and communicating financial information.

Part II: Financial Leadership in the 21st Century

In Part II, several areas in which finance can provide leadership across the organization, including value creation, strategic planning, supporting growth, human capital management, and technology utilization, are presented. The management challenge, including finance, has intensified in recent years, especially owing to the impact of the Covid-19 pandemic and aftermath. This section includes frameworks to deal with the level of uncertainty and pace of change we are experiencing in business, including monitoring external forces, scenario management, and enterprise adaptability.

Part III: Enterprise Performance Management

Part III includes an introduction to enterprise performance management and best practices in developing key performance indicators and dashboards. It also provides guidance on institutionalizing performance management, that is, integrating it with other management processes. Additional topics include the measurement of innovation, agility, and human capital as well as applying performance measurement to external forces, including benchmarking and competitive analysis.

Part IV: Business Projections and Plans

Part IV covers best practices in developing projections and plans. Topics include budgets, operating plans, rolling forecasts, business outlooks, and long-term projections. Special attention is given to techniques to deal with the uncertainty and rapid change that exists in the 21st century.

Part V: Planning and Analysis for Critical Business and Value Drivers

This section covers techniques for planning, analyzing, and improving on key performance drivers: revenue growth and margins, operating effectiveness, capital management, and the cost of capital.

Part VI: Valuation and Capital Investment Decisions

Part VI addresses business valuation, value drivers, and analysis of mergers and acquisitions. In addition, the evaluation of capital investments is covered, from basic concepts through advanced topics, including dealing with risk and uncertainty.

Part VII: Summary and Supplemental Information

Part VII summarizes key points from throughout the book and provides suggestions on improving our ability to contribute as a “Partner in Driving Performance and Value.”

WEBSITE

A number of illustrative analyses, performance dashboards, and models used in the book are available on the website. These items are identified in the book with a . The dashboards, spreadsheets, and analysis are intended as working examples and starting points for the reader's use. An important theme of this book is to underscore the importance of selecting the appropriate measures and dashboards. It is very important to carefully select the measures that are most appropriate for each circumstance. Accordingly, most of the dashboards and models will have to be tailored to fit the specific needs of the user.

The spreadsheets contain the data used in the examples provided in the book. In all cases, the input fields are highlighted in blue. The reader can save these files under a different name and use them to begin developing dashboards and analysis for their specific needs. Using the models on the website requires Microsoft Excel software and an intermediate skill level in the use of that software. Additional information on the use of the website can be found in Appendix A: What's on the Website.

GLOSSARY

A glossary of commonly used financial, value, and performance management terms is included at the back of the book.

—Jack Alexander

1Partner in Driving Performance and Value

“Try not to become a person of success but rather a person of value.”

—Albert Einstein

Financial management, financial planning and analysis (FP&A), and other financial business partners (FBPs) play important roles in the overall success of any enterprise. In this chapter, we will introduce the critical value-add activities that contribute to becoming a “Partner in Driving Performance and Value,” and we will preview the contents of the remainder of this book.

WHAT IS A FINANCIAL BUSINESS PARTNER?

I define an FBP as those individuals or teams that support the business in achieving goals for performance, and ultimately, value creation. In this text, I have chosen the label FBP rather than FP&A. FP&A is somewhat limiting and the role of FP&A varies from organization to organization. Much of what we define as a FBP occurs outside FP&A, for example, merger and acquisition (M&A) support, Capital Investment evaluation, financing, and so on.

Finance wears many hats in most organizations. These include varied responsibilities such as transaction processing, statutory compliance, financial control, and financial reporting. While these areas represent important functions and activities, they are not considered value-add activities by most nonfinancial senior executives (until they break!). This book will focus on the value-add finance roles we describe as the FBP. However, finance cannot function at this level unless the core elements of reporting and financial control are effective. If vendors and employees are not paid, or if financial reports are not timely and reliable, then finance must address these to shore up the foundation, enabling contributions at the higher FBP level. This can be conceptualized as a pyramid as illustrated in Figure 1.1, similar to Maslow's hierarchy of human needs.

FIGURE 1.1Business partner pyramid.

Under the leadership of the CFO, business partner roles may exist across the finance organization as shown in Figure 1.2. Shaded areas represent those areas considered value-add within finance, with the potential to drive performance improvements and create shareholder value.

Chief Financial Officer

FP&A

Control

Treasury

Investor Relations

Tax

Other

Monthly Reporting

Monthly Reporting

Capital Structure

Investor Communication

Tax Planning

M&A support

Performance Analysis

Financial Reporting

Cost of Capital

Investor Presentations

Tax Compliance

Real Estate

Financial Plans and Projections

Compliance

Cash Planning & Optimization

Information Technology

Decision Support

Internal Control

Investment Evaluation

Strategic Planning

Scenario Management

Financial Data

Cash Management

Value Creation

Other

FIGURE 1.2Chief Financial Officer responsibilities.

FINANCIAL ANALYSIS AND ENTERPRISE PERFORMANCE MANAGEMENT (EPM)

A major area that adds value across the organization is financial analysis and enterprise performance management. Figure 1.3 presents the instrument panel in the cockpit of the space shuttle, which represents a great illustration of key objectives of EPM. At a glance, the pilot can get a highly visual report on the shuttle's altitude, on its attitude, and on every major system in the aircraft. The radar in an airplane allows the pilot to spot and identify potential external threats long before visual contact. At first, the panel appears very complex, but you can bet the pilot knows where every needle and dial should be and the importance of any changes! Pilots compare this information with the feel of the plane, visual observation, experience, and intuition to make adjustments in real time, as indicated, to operate the craft to safely execute the flight plan or mission.

FIGURE 1.3Space shuttle cockpit instrument panel.

Photo used with permission of NASA.

In a nutshell, one of the fundamental roles of finance is the development and delivery of information to run a business and achieve an organization's goals, just as the instrument panel assists the pilots of an aircraft to execute their mission.

Key Features from Cockpit Instrument Panel

Real-Time and Predictive Insights.

High Visual Impact.

Focus on the Important Measures.

Provides Insight into External Factors and Environment.

Combine with Observation, Experience, and Intuition.

Our definition and application of the FBP is very broad and inclusive. It includes all activities that assess, plan, improve, and monitor critical business activities and initiatives. EPM is a critical aspect of the management processes of the enterprise. Performance management is closely aligned with, and overlaps FP&A in many respects. Key characteristics of effective EPM include:

Achieving an organization's goals and objectives, including strategic and operational initiatives, forecasts, and planned results.

Projecting and modeling future financial performance.

Monitoring performance on key value and business drivers.

Increasing visibility into critical areas of business performance, allowing managers to assign and enforce accountability for performance.

Providing an effective framework, allowing managers and employees to understand how their activities relate to operating and financial performance, and ultimately, the value of the company.

Providing early detection of unfavorable events and trends, such as manufacturing problems, supply chain disruptions, competitive threats, and product performance issues.

Delivering critical information to managers and executives in effective displays or presentation formats that aid in identifying trends, problems, opportunities, and so on.

Integrating into other management practices in the overall system of management processes that we will call the performance management framework (PMF).

Identifying, monitoring, and mitigating risks.

Providing information to managers to run the business.

Supporting growth.

Identifying and managing risks and uncertainty.

Scenario analysis and planning.

Monitoring progress on critical projects and programs.

FP&A and EPM must be integrated into other management processes as shown in Figure 1.4. Analysts and others involved in EPM must play an active role in the management of the organization. They are not reporters or historians; they should help shape the outcome of the enterprises’ efforts.

Understanding How Decisions Are Made

Since a substantial part of finance's value-add contribution involves developing and providing information and analysis to managers, partners should develop an understanding of how the human mind receives and processes information as part of evaluating options and making decisions. The analyst bears a responsibility to develop and present findings in an objective manner that reduces bias and the tendency to reach less than optimum decisions.

FIGURE 1.4EPM integration with other management processes.

A primary theme throughout this book is the need to present and communicate business information effectively. This subject is the focus of Chapter 5, “Presenting and Communicating Financial Information.”

Preview of the Book

The book has been written to address key areas of financial management from a practical point of view. While theory and technical aspects are included throughout the book, I have tried to incorporate real business applications from my 45-year career in business accounting and finance. Some readers will explore the entire text, while others may dive into a specific topic of particular interest at the time. Where appropriate, I have included cross-references to other parts of the book that cover related material to assist the reader.

Most of the illustrations are Excel-based since nearly all analysts have access to Excel, and it facilitates illustrating key concepts.

The book contains seven parts:

Part I

: Fundamentals and Key Partner Capabilities

Part II

: Financial Leadership in the 21st Century

Part III

: Enterprise Performance Management (EPM)

Part IV

: Business Projections and Plans

Part V

: Planning and Analysis for Critical Business and Value Drivers

Part VI

: Valuation and Capital Investment Decisions

Part VII

: Summary

Part I: Fundamentals and Key Partner Capabilities Part I builds a foundation for effective planning, analysis, and performance management. It includes a comprehensive review of financial statement analysis and presents analytical tools that can enhance the effectiveness of FP&A. For many finance professionals, Chapter 2 is primarily a review so a quick perusal of this material may be appropriate. This material serves as a foundation for many concepts presented in later chapters.

In order to complement technical subject areas in the book, we cover best practices in developing financial models and in developing analytical capability and other skills to add value as a business partner. Finally, we address a significant weakness in many finance organizations: presenting and communicating business information.

Part I contains these chapters:

2: The Fundamentals of Finance and Financial Statement Analysis

3: Skills, Knowledge, and Attributes for Financial Business Partners

4: Developing Predictive and Analytical Models

5: Presenting and Communicating Financial Information

Part II: Financial Leadership in the 21st Century In Part II, we present several areas in which finance can provide leadership across the organization, including value creation, strategic planning, supporting growth, human capital management, and technology utilization. This part also includes frameworks to deal with the level of uncertainty and pace of change we are experiencing in business, including monitoring external forces, scenario management, and enterprise adaptability.

Part II contains these chapters:

 6: Essential Ingredients for Value Creation: Growth and ROIC

 7: Managing Human Capital and Building a High-Performance Finance Team

 8: Strategic Analysis and Planning

 9: The Role of Finance in Supporting Growth

10: The External View: Markets, Competitors, and Economic and Geo-political Forces

11: Course Corrections: Business Transformations and Restructurings

12: Leveraging and Promoting Technology Investments

13: Scenario Analysis, Planning, and Management

14: Adaptability: Innovation Agility and Resilience

Part III: Enterprise Performance Management (EPM) In Part III, we focus on subject matters traditionally associated with performance management. After introducing keys to effective EPM, we present the best practices in selecting key performance indicators (KPI) and creating dashboards. In order to fully achieve the benefits of EPM, it needs to be integrated with other key management processes. We introduce a challenge to business leaders to focus on what's important, not just what is easy to measure. Since performance management should also look outside the enterprise, benchmarking and competitive analysis are also presented in this section.

Part III contains these chapters:

15: Enterprise Performance Management and Execution

16: Dashboards and Key Performance Indicators

17: Institutionalizing Performance Management

18: Benchmarking Performance

Part IV: Business Projections and Plans In Part IV, we cover best practices and techniques for planning, projecting, and forecasting future performance. In addition to traditional budgeting and operational planning, the implementation of rolling forecasts or business outlooks are also presented. Finally, we cover the unique challenges in projecting performance over an extended time horizon.

Part IV contains these chapters:

19: Business Projections and Plans—Introduction and Best Practices

20: Budgets, Operating Plans, and Forecasts

21: Long-Term Projections

Part V: Planning and Analysis for Critical Business and Value Drivers This part presents best practices and illustrations for planning, measurement, analysis, and improvement of key business and value drivers.

Part V contains these chapters:

22: Revenue and Gross Margins

23: Operating Effectiveness—Costs and Expenses

24: Capital Management and Cash Flow—Working Capital

25: Capital Management and Cash Flow—Long-Term Capital Assets

26: Risk and the Cost of Capital

27: Capital Structure and Financial Leverage

Part VI: Valuation and Capital Investment Decisions Part VI presents analysis and evaluation of critical business decisions, including capital investment decisions, techniques for valuing a business and analyzing value drivers. This part concludes with techniques to value a business, and the planning, analysis, and evaluation of mergers and acquisitions (M&A).

Part VI contains these chapters:

28: Capital Investment Decisions—Introduction and Key Concepts

29: Capital Investment Decisions—Advanced Topics

30: Business Valuation and Value Drivers

31: Analysis of Mergers and Acquisitions

Part VII: Summary and Supplemental Information

32: Summary and Where To from Here?

Supplemental information is also provided, including a glossary, an index, an appendix listing all models and illustrations, and information on the website available to purchasers of this book.

SUMMARY

Financial management and business partners have the potential to add tremendous value to the enterprise beyond simply closing the books and paying the bills. Combining elements of classic FP&A with EPM can unleash significant analytical horsepower that can assist the organization in executing its mission and achieving its objectives.

Before embarking on an initiative to improve the performance of FBPs, practitioners should develop a context based on the company's strategy and objectives, performance, and critical initiatives. This will ensure that the focus of our efforts is directed to critical areas in the organization. Material found in Chapter 3, “Skills, Knowledge, and Attributes for Financial Business Partners” and Chapter 7, “Managing Human Capital and Building a High-Performance Finance Team” will be helpful to this cause.

Part OneFundamentals and Key Partner Capabilities

2The Fundamentals of Finance and Financial Statement Analysis

The traditional and most fundamental aspect of financial management and analysis is the ability to understand and evaluate financial statements and financial performance. This chapter will present a brief introduction (or refresher) to financial statements and financial ratios. Many finance professionals will use these financial ratios as overall measures of a company's performance or as overall measures of performance on a particular driver of value.

BASICS OF ACCOUNTING AND FINANCIAL STATEMENTS

The three primary financial statements are the Income Statement, the Balance Sheet, and the Statement of Cash Flows. We need all three statements to properly understand and evaluate financial performance. However, the financial statements provide only limited insight into a company's performance and must be combined with key financial ratios, and ultimately, an understanding of the company's market, competitive position, and strategy before evaluating a company's current performance and value. A significant limitation of financial statements is that they present historical results, that is, the past. Other measures and mechanisms must be utilized to see what is happening in the present and to predict and manage future outcomes.

Financial statements are based on generally accepted accounting principles (GAAP). A key objective of financial statements prepared under GAAP is to match revenues and expenses. Two significant conventions arise from this objective: the accrual method of accounting and depreciation. These two conventions are significant in our intended use of financial statements for economic evaluation and business valuation purposes since they result in differences between accounting income and cash flow.

Accrual Accounting

Financial statements record income when earned and expenses when incurred. For example, the accrual basis of accounting will record sales when the terms of the contract are fulfilled, usually prior to collection of cash. Similarly, expenses are recorded when service is performed rather than when paid.

Depreciation GAAP requires that expenditures for such things as property, plant, and equipment with useful lives longer than a year be recorded as assets and depreciated over the expected useful life of the asset. As a result, when a firm spends cash to purchase equipment, it records it as an asset on the Balance Sheet and depreciates (expenses) the cost of that asset each year on the Income Statement.

Income Statement (aka Profit and Loss) The Income Statement, or what is frequently referred to as the Profit and Loss (P&L) statement, is a summary of all income and expense transactions completed during the period (year, quarter, etc.). Typical captions and math logic for a basic Income Statement include these examples:

Sales

+$1,000

Cost of Goods Sold

–500

Gross Margin

Operating Expenses

– 200

Operating Income

Income Tax Expense

– 100

Net Income

Many different measures, terms, and acronyms are used in practice to describe various elements of the P&L. Table 2.1 illustrates how some of these common measures are determined as well as how they relate to one another.

Following are definitions of key terms used in Table 2.1.

Net Income:

Residual of income over expense, sometimes referred to as profit after tax (PAT).

TABLE 2.1Comparison of common P&L measures.

Abbreviation

P&L

EBIT

EBIAT

EBITDA

EP/EVA

Sales

$100,000

$100,000

$100,000

$100,000

$100,000

Cost of Sales

COGS

50,000

50,000

50,000

50,000

50,000

Gross Margin

GM

50,000

50,000

50,000

50,000

50,000

% of Sales

50.0%

50.0%

50.0%

50.0%

50.0%

R&D

5,000

5,000

5,000

5,000

5,000

SG&A

SG&A

15,000

15,000

15,000

15,000

15,000

Depreciation & Amortization (D&A)

10,000

10,000

10,000

–

10,000

Operating Profit

OP

20,000

20,000

20,000

30,000

20,000

% of Sales

20.0%

20.0%

20.0%

30.0%

20.0%

Interest Expense

3,000

Profit before Tax

PBT

17,000

Income Tax

35.0%

5,950

7,000

7,000

Net Income

PAT

11,050

%

11.1%

Earnings before Interest and Taxes

EBIT

20,000

Earnings before Interest

after

Taxes

EBIAT

13,000

13,000

Earnings before Interest, Taxes, D&A

EBITDA

30,000

Capital Charge

10,000