The CFO as the CPO
The CFO has been labeled with many new monikers over the past decade – Chief Value Officer, Chief Future Officer, Chief Transformation Officer, Chief Fact Officer, Chief Innovation Officer and the list goes on.
Today, we are adding another one. The CPO. The Cash Protection Officer.
In our last edition of the Future of Finance Leadership newsletter, Cash is Still the CFO’s Best Friend, we shared some short-term concepts and tools to help you immediately optimize cash. We received some great feedback on the lessons in the newsletter. A few readers pointed out most of the newsletter dealt with improving short-term cash management… Crisis cash management is how some put it… rather than long term strategies to prevent a cash crisis.
The following are some concepts and tools to help you optimize cash over the long run and add Cash Protection Officer to your resume.
Capital Planning
Capital is the lifeblood of any business. Paying for talent, equipment, marketing, inventory and other critical activities all require cash. Having a plan for securing capital well before the need arises is a key responsibility of a CPO. Without a funding strategy you may miss out on fleeting opportunities. Worse yet, even profitable, growing businesses fail because they run out of cash.
Step one is to estimate your future capital needs. The obvious place to start this process is with the business plan. Your capital plan can only cover the period of your business plan. Building out a capital plan further than that is like erecting your office on sand, the foundation will never last.
Step two is conducting a current financial self-analysis to determine the type, tenor and structure of financing that suits the company best.
The third step is connecting steps one and two using a financial forecast model with a specific focus on the balance sheet and cash flow statement; cash generation, cash balances, leverage, liquidity, duration matching and other measures to help you assess the cash invested in and available to the business over your forecast period.
Capital planning is of strategic importance for CPOs. It provides actionable insights for effectively managing capital allocation decisions. By aligning financial resources with strategic objectives, assessing and mitigating risks, leveraging financial analysis techniques, and engaging stakeholders, CPOs can enhance organizational value and drive sustainable growth.
Read more about capital planning here,
CFO Success Series: Treasury Part 1- Capital Planning.
Debt Financing
Once you have a capital plan you need to make sure you enough cash to fund the plan. The two most common ways to fill this gap are through reductions in working capital and raising debt. Before seeking debt be sure to carefully analyze your working capital for potential improvements. These improvements can come from three sources, Customers, Vendors and the management of inventory
This was covered extensively in Cash is Still the CFO’s Best Friend. If you can’t recite the article, it’s worth refreshing yourself on it before taking the next step. A dollar of working capital saved is a dollar you can redeploy to more lucrative activities.
In fact, you can apply the Cash Velocity Calculator to your financial forecasts for potential working capital improvements that could help you avoid raising funds from outside parties.
Here is a link to the Cash Velocity Calculator.
You’re back. So, let’s assume you are comfortable with your investment in working capital but on the horizon your Capital Plan indicates your business will be consuming more funds in the future than it has available today. The natural next step is to turn to the debt markets. In this step, not doing your homework or making the wrong choice could leave you empty handed, burdened with unnecessary costs or shackled with the wrong capital structure for years to come.
Debt financing is a key arrow in the capital planning quiver of CFOs. Effectively managing debt drives success at many organizations. By employing sound financial principles, proactive risk management, and transparent communication, CFOs can navigate the complexities of debt financing and contribute to the financial health and resilience of their companies.
Read more details on how to approach to raising debt here,
CFO Success Series: Treasury Part 2 - Debt Financing
and here, Alternatives to Traditional Debt Funding Options
Sponsored
Data, Analytics and AI are rapidly being incorporated into CFO activities to derive better insights, improve accuracy and redeploy resources. In this video, Prashanth H Southekal, PhD, MBA, ICD.D , Tobias Zwingmann , Arun Marar, Ph.D. and Sanjeev Chib, CPA, CA , review their recently released report, 2024 Data, Analytics and AI Predictions and Prescriptions.
Watch the video here, 2024 Data, Analytics and AI Video, and obtain a copy of their research report here, 2024 Data, Analytics and AI Predictions and Prescriptions.
Equity Raise
If the business needs funds beyond what operations are generating, working capital improvements are recovering and the amount of debt that can be raised, the next alternative is normally to raise equity. While debt carries the promise of repayment, frequently with interest, equity provides an ownership stake in the company and the expectation of capital appreciation, as well the potential for dividend payments.
The broad types of equity include:
- Common Stock
- Preferred Stock
- Mezzanine Debt (a hybrid of Debt and Equity)
In summary, the article emphasizes the strategic importance of equity financing for CFOs and provides actionable insights for navigating equity issuance decisions effectively. By understanding equity financing options, optimizing the capital structure, conducting thorough valuation analysis, fostering investor relations, and ensuring regulatory compliance, CFOs can successfully raise equity capital to support the company’s growth objectives and enhance shareholder value.
CFOs must consider various factors when issuing equity, such as market conditions, investor demand, and valuation considerations. Different equity issuance strategies, including initial public offerings (IPOs), follow-on offerings, private placements, and equity crowdfunding, and their implications for shareholder dilution, regulatory compliance, and capital raising efficiency must also be considered.
Read more about the types of equity and the upsides and downsides to raising equity here,
CFO Success Series: Treasury Part 3 - Equity
Other Options
Operating Cash Flow: Above we discussed the capital planning process, leveraging working capital, raising debt and equity. It’s also important to stay focused on the most valuable cash generating activity in our business, growing cash from operations. This is all about effectively utilizing our resources to sell our products and services at the optimum price within the optimum cost structure. That sounds so simple. We know it isn’t.
A good place to start in optimizing these important variables is with an analysis using price, gross margin and units sold. Armed with this information sets up the perfect framework for the leadership team to have robust discussions on the value creation of specific products and services in your portfolio.
Here is a tool to help you in this analysis, Price, Gross Margin and Unit Variance Analysis
Selling Tangible Assets: We use the term ‘housekeeping’ to describe keeping our homes tidy. We need to introduce the term ‘businesskeeping’ to do the same for our business. It’s easy to let old, unused assets hang out in the ‘garage’ because we have more pressing things at hand. The hidden cost of this is buried in warehouse expenses, labor costs, more complexity and even costs like personal property taxes. Even when you can’t get a third party to pay for your ‘garage sale’ items (an indication of their value) disposing of them - getting them off your books and out of your custody - is a cost saving exercise.
Inventory and Fixed Assets are two common assets where better ‘businesskeeping’ may generate cash and will add to your bottom line over time in the form of reduced costs.
Selling Intangible Assets: Apply this concept to assets that may not be on your balance sheet but could have value to third parties. Some examples include; customer lists from discontinued product lines, patents no longer used in your business, data you are capturing in the normal course of business.
Prosper in your role as Cash Protection Officer!
Identify your path to CFO success by taking our CFO Readiness Assessmentᵀᴹ.
Become a Member today and get 30% off on-demand courses and tools!
For the most up to date and relevant accounting, finance, treasury and leadership headlines all in one place subscribe to The Balanced Digest.
Follow us on Linkedin!
