Search

The CXO Group: Finance & Treasury 101

Updated: Jan 5, 2019

No matter what a business’ strategic goals and business lifecycle, there are certain common financial drivers all businesses should embrace.

Peter F. Drucker is known as the father of modern management principles. Drucker is known for many noteworthy quotes including:


“Only three things happen naturally in organizations: friction, confusion, and under-performance. Everything else requires leadership.”


“What’s measured improves.”


Leading a company requires an executive to both influence and motivate not only themselves, but a whole myriad of diverse individuals within an organization, toward a set of shared corporate goals. That is why creating the right improvement measurements is a critical responsibility of leaders, thereby ensuring many individuals become one company with (hopefully) a laser focused view of what success looks like not only today but into the future as well. Identifying the right strategic measurements are oftentimes complicated by determining an entity’s present business life cycle stage. The business life cycle is the progression of a business through phases over time, and is most commonly divided into five stages: start-up, growth/survival, expansion, maturity, and decline. However, no matter what a business’ strategic goals and business lifecycle, there are certain common financial drivers all businesses should embrace.

Because finance and treasury go hand-in-hand we are going to focus on both topics together. Treasury management services is the process of overseeing the financial assets and holdings of a business. The primary goal of treasury management is to protect the entity's asset principal, optimize their company's liquidity, debt structure, make sound financial investments for the future with any excess cash flow, reduce or enter into hedges against its financial risks and maintain necessary banking (other) relationships. Whereas financial management is the process of acquiring capital from public markets, and private investors and/or venture capital sources.


There a six key areas any business in any business cycle must focus to be prosperous.


1. Cash Flow Management

2. Track & Monitor ALL Spending

3. Plan Fixed Asset Purchases

4. Optimal Debt Management

5. Pay People First

6. Establish Financial Goals and Review Actual Performance

Companies that allocate resources (both internal and external) to the main roles of a CFO grow stronger.

Cash Flow Management. Cash flow management is the process of planning a company's schedule for paying bills and estimating when income is likely to be received. Cash flow management helps a company avoid damaging its relationship with creditors by not paying bills on time and being forced into bankruptcy. To properly manage an entity’s cash flow requires a detailed capture and analysis of all the entity’s cash inflows and outflows from all sources. In addition to capturing the historical nature of cash flow, the expected short-term and long-term future spend must also be planned and appropriately mapped out. This is a perpetual cycle that must be continued on a daily, weekly, monthly, quarterly and annual cycle. Areas of concentration include working capital (current year operations), fixed asset purchases (current and future year infrastructure) and short (Owners Contributions, Commercial Paper Program, Line of credits, and short-term bank loans) and long-term (Equity infusion, Bonds, etc.) financing needs and options. Working capital is current assets minus current liabilities. It is crucial a company maintain a strong positive working capital position. Failure to do so can put an entity in jeopardy of not being able to meet its short-term expenditure obligations. However, this must be balanced against the need to properly plan and fund capital expenditure necessary to maintain and or expand the entities market position and future growth. Therefore oftentimes cash management can be consider as much an art as a science.


Track & Monitor ALL Spending: Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a "zero base," and every function within an organization is analyzed for its needs and costs. Budgeting at this level enables a business to better monitor spending and track anomalies before they become significant variances. Further, budgeting at a detailed category level allows leaders to create more effective policy approaches to managing certain categories of expenses such as travel or larger purchases requiring a manager’s approval prior to purchase. Although all businesses should have an effective tracking and monitoring of ALL spending process in place, depending on the amount of purchases it is recommended a review should be completed at least monthly.

Plan Fixed Asset Purchases: Fixed asset purchases can be the largest individual purchases a business makes on an annual basis and may have a direct impact on the profitability of a company. Further, once purchased they are more difficult to convert to cash, and may have various accounting and tax rules attached such as whether they can be expensed in the year of purchase. Therefore, it is important to properly plan for fixed asset purchases including any necessary contingencies, warranties and ongoing maintenance costs; as well as review with accounting and tax professionals to ensure optimal consideration is given to the timing of these purchases.


Manage Optimal Debt Ratio: Debt is neither good nor bad, but rather an often-necessary component of any thriving, growing or long-term existing entity. There is no hidden vault containing a secret number that says what the ideal amount of debt an entity should carry. The ideal number is different for each entity and depends on the overall capital structure, current obligation, and future capital needs. However, there are guiding principles based on individual industry standards, ratios, and best practices. Under normal circumstances, the rule of thumb CXO subscribe to is to only issue debt when the return on debt after factoring in the cost of debt equals or exceed your entities required return on investment. This is only a rule of thumb and should be tailored for each situation and entity. However, if your business has debt and hasn’t had a comprehensive financial health assessment in the last 12 to 24 months it is recommended a business consider this as an initial step.


Pay People First: There are many best practices that discuss the importance of an entrepreneur paying themselves first for a myriad of reasons, however I would prefer to take a slightly different perspective. A business’ success is based on its’ people. Therefore, consider having a competitive total compensation package in place for all your employees and/or a plan to develop one. Even if a business is presently NOT cash positive having a strong compensation strategy in place will ensure leadership can effectively plan for reasonable AND competitive compensation packages, which includes equitable performance management plans based on the business’ overall strategic targets.


Establish Financial Goals and Review Actual Performance: When establishing financial goals it’s important to embrace a combination of short and long-term objectives and always keep an organization’s overall financial strategic objectives in mind when determining priorities and actual performance. There are 4 general categories of financial ratios including profitability, debt, liquidity, and performance ratios. Within each category there can be numerous individual ratios. Although, they are all significant it is important to confirm which ratios matter the most to the overall business’ strategic goals and financial health. Each financial goal established should have a short-term attainable portion (within a year) and a long-term target (2 to 5 years). Optimally, all goals should be reviewed at least monthly for 1) monthly and year-to-date performance, 2) performance against target, 3) risks, 4) attainability and 5) proposed adjustments where inevitable.

" About half of the senior finance teams’ time is spent on transaction processing. During an average work week, highly paid finance professionals are spending the equivalent of Monday through lunchtime on Wednesday making sure bills are paid, customers receive accurate invoices, general work gets done and fixed assets get accounted for, etcetera, etcetera, etcetera."

Whatever the size of a business and stage of business lifecycle it is important to either have a competitive internal finance function that aligns with an organization’s strategic growth plans or identify trusted external partners to support your business’ financial health. Additionally, regardless of company size about half of the senior finance teams’ time is spent on transaction processing. During an average work week, highly paid finance professionals are spending the equivalent of Monday through lunchtime on Wednesday making sure bills are paid, customers receive accurate invoices, general work gets done and fixed assets get accounted for, etcetera, etcetera, etcetera.1 Nevertheless, companies that allocate resources (both internal and external) to the main roles of a CFO grow stronger.2 Have you had a business financial health assessment recently? If not contact The CXO Group at info@thecxogroup.com for further details because #togetherwesucceed.


1 CFO Staff (2017, December 4). Top CFO Priorities for 2018: Taking Aim. CFO Magazine. Retrieved from http://ww2.cfo.com/strategy/2017/12/top-cfo-priorities-2018-taking-aim.

2 Driscoll, May (2015, December 4). Metric of the Month: How Finance People Spend Their Time. CFO.com. Retrieved from http://ww2.cfo.com/budgeting/2015/12/metric-month-finance-people-spend-time.

Together We Succeed

12620 Beach Boulevard,

Suite 3 #120,

Jacksonville, FL, 32246

  • LinkedIn - White Circle

© 2019 The CXO Group, Designed by CreateWebStudios.com