CFO/Corporate Finance


By CPE Link instructor Mary S. Schaeffer

The accounts payable policy and procedures manual is more than a static document with little value. Truth be told many organizations either don’t have one or have one that hasn’t been updated in years. This is a real shame. For if the right approach is taken towards the accounts payable policy and procedures manual, it can have many uses and can help ensure best practices are used throughout the accounts payable organization.

Many problems that arise from the accounts payable process occur because there is a lack of uniformity among processors in the way they handle invoices. If the exact same process is not used by every single processor, duplicate payments and other errors are likely to creep in. The only way to ensure that the same processes are used across the board is to have them written down with detailed instructions on how each task is to be accomplished.

This is the primary goal of the accounts payable policy and procedures manual. For it to be a true guide, it must be reviewed and updated on a very regular basis. Otherwise, it will quickly be come out of date and not serve the goal it is intended. What’s more, a detailed manual can serve as a reference guide to your processors. So, when they come across an issue that does not come up every day, they won’t have to guess on the right way to handle the problem. They can simply pull out the policy and procedures manual and verify.

A good policy and procedures manual can also serve as a training guide for new employees. Each one should be given a copy when they are hired and the manual should be referenced throughout the training process.

A few managers think it is a good idea to keep the manual short. This is a terrible idea because without a detailed manual, errors will creep in. You just can’t have too much detail in the manual. Sometimes a manager will think, “oh, we don’t have to put that in. Everyone knows the right way to do the task at hand.” Unfortunately not everyone thinks the same way and this is a sure fire way to guarantee that errors will creep in.

When it comes to accounts payable policies and procedures, there is no room for creativity. This is one time when everyone has to perform tasks exactly like their colleagues. Should someone come up with a better way, they should bring their suggestion to the supervisor. If the approach is better, everyone can start using the new approach and there will be no concern for variances. Unfortunately, sometimes what looks like a good process improvement for the accounts payable department, is something that is not good for another unit within the organization. Thus, it is imperative that the employee share the new idea with the manager who can evaluate the idea and if it is workable, adjust procedures for everyone as well as updating the department’s policy and procedures manual.

This article is an excerpt from Mary S. Schaeffer’s An Effective Accounts Payable Policy & Procedures Manual.

Last week we went over the Advantages of Budgeting, yet we did not discuss the number of serious disadvantages. This week’s article gives an overview of the general issues, while the following sections address the particular problems associated with capital budgeting, as well as the use of budgets within a command and control management system.

  • Inaccuracy. A budget is based on a set of assumptions that are generally not too far distant from the operating conditions under which it was formulated. If the business environment changes to any significant degree, then the company’s revenues or cost structure may change so radically that actual results will rapidly depart from the expectations delineated in the budget. This condition is a particular problem when there is a sudden economic downturn, since the budget authorizes a certain level of spending that is no longer supportable under a suddenly reduced revenue level. Unless management acts quickly to override the budget, managers will continue to spend under their original budgetary authorizations, thereby rupturing any possibility of earning a profit. Other conditions that can also cause results to vary suddenly from budgeted expectations include changes in interest rates, currency exchange rates, and commodity prices. 
  • Rigid decision making. The budgeting process only focuses the attention of the management team on strategy during the budget formulation period near the end of the fiscal year. For the rest of the year, there is no procedural commitment to revisit strategy. Thus, if there is a fundamental shift in the market just after a budget has been completed, there is no system in place to formally review the situation and make changes, thereby placing a company at a considerable disadvantage to its more nimble competitors.
  • Time required. It can be very time-consuming to create a budget, especially in a poorly-organized environment where many iterations of the budget may be required. The time involved is lower if there is a well-designed budgeting procedure in place, employees are accustomed to the process, and the company uses budgeting software. The work required can be more extensive if business conditions are constantly changing, which calls for repeated iterations of the budget model.
  • Gaming the system. An experienced manager may attempt to introduce budgetary slack, which involves deliberately reducing revenue estimates and increasing expense estimates, so that he can easily achieve favorable variances against the budget. This can be a serious problem, and requires considerable oversight to spot and eliminate.
  • Blame for outcomes. If a department does not achieve its budgeted results, the department man ager may blame any other departments that provide services to it for not having adequately supported his department.
  • Expense allocations. The budget may prescribe that certain amounts of overhead costs be allocated to various departments, and the managers of those departments may take issue with the allocation methods used. This is a particular problem when departments are not allowed to substitute services provided from within the company for lower-cost services that are available else where.
  • Use it or lose it. If a department is allowed a certain amount of expenditures and it does not appear that the department will spend all of  the funds during the budget period, the department manager may authorize excessive expenditures at the last minute, on the grounds that his budget manager may authorize excessive expenditures at the last minute, on the grounds that his budget tends to make managers believe that they are entitled to a certain amount of funding each year, irrespective of their actual need for the funds.
  • Only considers financial outcomes. The nature of the budget is numeric, so it tends to focus management attention on the quantitative aspects of a business; this usually means an intent focus on improving or maintaining profitability. In reality, customers do not care about the profits of a business – they will only buy from the company as long as they are receiving good service and well-constructed products at a fair price. Unfortunately, it is quite difficult to build these concepts into a budget, since they are qualitative in nature. Thus, the budgeting concept does not necessarily support the needs of customers.

The discussion of budgeting has cast serious doubts on the need for a detailed and rigorously-enforced budgeting system, especially one that integrates the budget model with bonus plans. Nonetheless, the decision to install a budget is up to the reader. In Budgeting: The Comprehensive Guide, Steven Bragg shows how to create a budget, whether there are variations on the traditional budgeting concept that may work better, and how to operate without any budget at all. The discussion also covers capital budgeting, flexible budgeting, zero-base budgeting, and all of the procedures, controls, and reports needed for a functioning budget system.

 

A budget is a document that forecasts the financial results and financial position of a business for one or more future periods. At a minimum, a budget contains an estimated income statement that describes anticipated financial results. A more complex budget also contains an estimated balance sheet, which contains the entity’s anticipated assets, liabilities, and equity positions at various points in time in the future.

A prime use of the budget is to serve as a performance baseline for the measurement of actual results. Budgets may also be linked to bonus plans in order to direct the activities of various company employees. A budget may also be used for both tax planning and treasury planning. Despite these valid uses, there are also a number of problems with budgeting that have given rise to a movement dedicated to the elimination of budgets.

The Advantages of Budgeting
Budgeting has been with us a long time, and is used by nearly every large company. They would not do so if there were not some perceived advantages to budgeting. These advantages include:

  • Planning orientation. The process of creating a budget takes management away from its short-term, day-to-day management of a business and forces it to think longer-term. This is the chief goal of budgeting, even if management does not succeed in meeting its goals as outlined in the budget – at least it is thinking about the company’s competitive and financial position and how to improve it.
  • Model scenarios. If a company is faced with a number of possible paths down which it can travel, you can create a set of budgets, each based on different scenarios, to estimate the financial results of each strategic direction.
  • Profitability review. It is easy to lose sight of where a company is making most of its money, during the scramble of day-to-day management. A properly structured budget points out which aspects of a business generate cash and which ones use it, which forces management to consider whether it should drop some parts of the business or expand in others. However, this advantage only applies to a budget sufficiently detailed to describe profits at the product, product line, or business unit level.
  • Assumptions review. The budgeting process forces management to think about why the company is in business, as well as its key assumptions about its business environment. A periodic re-evaluation of these issues may result in altered assumptions, which may in turn alter the way in which management decides to operate the business.
  • Performance evaluations. Senior management can tie bonuses or other incentives to how employees perform in comparison to the budget. The accounting department then creates budget versus actual reports to give employees feedback regarding how they are progressing toward their goals. This approach is most common with financial goals, though operational goals (such as reducing the scrap rate) can also be added. We will address a countervailing argument in the Command and Control System section later in this chapter.
  • Predict cash flows. Companies that are growing rapidly, have seasonal sales, or which have irregular sales patterns have a difficult time estimating how much cash they are likely to require in the near term, which results in periodic cash-related crises. A budget is useful for predicting cash flows in the short term, but yields increasingly unreliable results further into the future.
  • Cash allocation. There is only a limited amount of cash available to invest in fixed assets and working capital, and the budgeting process forces management to decide which assets are most worth investing in.
  • Cost reduction analysis. A company that has a strong system in place for continual cost reduction can use a budget to designate cost reduction targets that it wishes to pursue.
  • Shareholder communications. Large investors may want a benchmark against which they can measure the company’s progress. Even if a company chooses not to lend much credence to its own budget, it may still be valuable to construct a conservative budget to share with investors. The same argument holds true for lenders, who may want to see a budget versus actual results comparison from time to time.

These advantages may appear to be persuasive ones, and indeed have been sufficient for most companies to implement budgeting processes. However, there are also serious problems with budgets.

This article is an excerpt from Steven Bragg’s Budgeting: The Comprehensive Guide. To learn about budgeting, visit his course or join us for next week’s blog The Disadvantages of Budgeting.

As an accountant would you say that you are analytic, organized, and  precise? How about detailed, factual and accurate? Accountants hold a set of certain characteristics (Whether it be from professional training or personality) that could potentially be carried into a Controller position, but only if they can break out of the “number cruncher” mindset… which is not easy to do.

Corporate Controllers

So what is the Controller position? The Controller is more than just a bean counter or a number cruncher; the controller is the analyzer, interpreter and disseminator of financial information to all interested parties. Functioning mostly in planning, accounting, and reporting, controllers are often the budgeting lead, company historian, and number translator for non-number people… all at the same time. The Controller position is a big role in every company— which means that it is a position that can not be perfectly customized to fit your liking.  There will be occasions when accuracy is sacrificed for timeliness, and “big picture” thinking is considered to be more efficient than detail oriented thinking.

The Controller position is more than just supervising the accounting and financial departments. Controllers must also work with and advise company leaders by providing the financial information needed to develop successful strategies,  meaning that the Controller needs to be able to communicate accounting and finance principals to non-accounting professionals. Being responsible for everyone’s transactions and bills requires the controller to not only be well read in other departments, but also be able to build relationships in order to effectively communicate with them.

Qualifications and Capabilities
Before stepping up to such a large and diverse position, make sure that you have the necessary prerequisites required to become a successful controller.

  • Education: Managerial and financial accounting, regulatory compliance, business analysis tools, communication and leadership, and Federal, state and local taxes.
  • Personal: Dynamic/Likable, Analytic/Problem Solver, Supportive/Positive, Credible/Reliable
  • Credibility: Knowledge, Judgement, Objectivity, Candor and Integrity
  • Technical: Accounting, Analysis Tools, Regulatory Laws, Accounting and Financial Systems

DISC Personality Assessment and Leadership Styles
In order to ensure the well being of the company, it is important that the controller has both the educational background and the ability to mediate conversation between different personalities and backgrounds. Success stories come from those who not only know themselves, but know how to read and react to other people and personalities. This intuitive ability allows them to assess situations and act in a way that is best for the group.

The  DISC tool is based off of four personality traits: Dominance, Influence, Submission, and Compliance. In most cultures, 50% of group personalities fall into the Submission category, while the rest were evenly distributed between the other three quadrants. People with Dominant and Influencing traits tend to be extroverted, assertive, and move towards change, while those with a Compliant and Stable personality tend to be more introverted, passive, and gravitate towards stability. On the other axis of the quadrant lies the task-oriented (Dominant and Compliant) and the people-oriented (Influencer and Stabilizer). So which of these quadrants makes a successful controller? The answer lies in your ability as a leader to exercise each of these four traits in the necessary situation. When the situation calls for you to make a decision or take the lead, will you as the Controller have the discernment to decide which quadrant to act upon? In the meantime, take a look at the DISC quadrant to identify your most prominent trait set and recognize your blind spots.

Think you have what it takes to be a Corporate Controller? If you understand the general character of the position and feel that you may be a good fit, join Miles Hutchinson on February 28 as he talks about the specific functions of a Corporate Controller.

About 80% of the 1.8 million accountants in the U.S. work in businesses other than public accounting firms. So if you’re an accounting professional working–or planning to work–in industry, you’re in the same boat with about 1.44 million other accountants, and need to differentiate yourself from your peers.

The Certified Management Accountant (CMA) designation is a great way to demonstrate competence in critical skills in demand today: planning and budgeting, financial analysis, and managerial decision making.

About 30,000 people have taken and passed the CMA exam since it was established in 1972 by the Institute of Management Accountants(IMA). The number of people taking the exam has been trending up in recent years as hiring managers are looking for people skilled in the key areas covered in the CMA exam – and are willing to pay them. On average, CMAs earn $22,000 more per year than their non-certified peers. If you have your sights set on moving up the corporate ladder, the CMA designation is a definite competitive advantage.

A few years ago, the IMA made some changes to the exam, reducing it from four parts to two parts. Don’t be fooled, though. The shorter exam is very challenging and hard to pass. For 2011, the IMA reported a Part I pass rate of 53% in the Americas, 51% in Europe, and 42% in Asia-Pacific. Given the difficulty of the CMA exam, taking an exam prep course has become an essential step for those making the attempt.

If you are ready to add CMA to your accomplishments, but feel finding the time to study on your may prove to be a challenge, then a guided online review course could be your solution. An instructor-led course can make the difference between passing and failing. Tom Coghlan, CMA, MBA, has been teaching CMA review courses for over 10 years, and these comments are typical of those he has received from participants.

“I’ve purchased self study CMA exam prep materials in the past and found that I just never got around to taking the exam. I enrolled in CPE University’s online CMA review course in the fall of 2011 and passed Part 1 the first time! The combination of live and rebroadcast webcasts made it easy for me to keep up, and between classes the “Problem of the Week” and the test prep software helped to reinforce what I had learned. Most of all, the instructors promptly responded to my e-mailed questions, right up to the day I took the exam.” (Theresa Lennon, Nevada).

“I just wanted to let you know that I PASSED Part 2!!!! I sincerely appreciate all of your help, flexibility & support in helping me achieve my goal of becoming a CMA. You provided great support,motivation, and acted as a mentor for me in passing the exam. I felt your class sessions were very informative and focused on the key areas needed to pass the exam.” (Carmine Tedesco, Massachusetts)

Given the difficulty of the CMA exam, the few people who attempt it, and the significant impact that the credential has on lifetime earnings, the CMA designation could be well worth your investment.

Good luck!

Good leaders are usually made, not born. Sure, there’s the bred-in-the-bone verve, the judgment that’s often instilled at an early age, the outgoing and fearless personality.

But according to a recent survey of finance professionals, a leader’s most highly-regarded traits are carefully cultivated. He or she is a visionary. Principled. Caring. Motivated. Credible and inspiring.

For many professionals, the ultimate expression of leadership is the office of the chief financial officer, and they plan for that role in their future. What’s the biggest difference? (Other than the paycheck, of course.) Well, whereas the CFO is responsible for the “big picture” and is outward-focused, the Controller is more inward and historically focused, says Russ Palmer, longtime CEO and dean of Wharton School of Business.

The CFO is a strategic business partner who helps raise capital and manages the care and feeding of internal and external stakeholders. A great CFO also has what Palmer calls the “Likeability Factor.”

The two jobs have a lot of overlap, of course. Both incorporate the same general fields of study: managerial and financial accounting, federal, state and local taxes, regulatory compliance.

But also expected from the CFO are deep analytical skills, a dynamic presence and optimistic spirit. So how do you learn to be a motivator? To develop open and effective lines of communication both inside and outside the company? To know instinctively what your company needs?

According to CPE Link instructor, Miles Hutchinson, CPA, the CFO’s role in modern business management is moving away from simply providing information to management and towards acting as a key consultant and decision maker in an organization.

Are you ready to take on this role?