Understanding the cycle of finance will help you figure out who the key players in company’s financial structure are and where you fit into your company’s financial structure and should be able to answer these questions: What and where are you now? What is your next finance—and—accounting career in five years a head? You’ll also figure out what the key financial players in your company really do, so that you can assess youself how you’ve been doing so far. Let’s take a look at what your colleagues down the hall are up to each day.
The top financial manager of your company is the chief financial officer [CFO]. Sometimes referred to as the vice president of finance, he reports directly to the president or chief executive officer, or CEO, who in turn reports to the board of directors and its chairman.
Fact: There’s no rule that says a CFO must hold a master’s degree in business administration (MBA), but most do. In fact, some MBA programs including the prestigious Wharton School at the University of Pennsylvania are actually geared toward training CFO seven more so than CEOs.
Technically, CFOs are equal in status to the vice president of manufacturing, vice president of engineering, and vice president of human resources. That’s if you refer to a “traditional corporate organizational chart“.
In reality [the today’s real business world], CFOs are a company’s second most important figure, just behind the CEO. That’s by virtue of the fact that they, like CEOs, have a true corporate-wide perspective. After all, CFOs oversee a company’s finances and there isn’t a single department in a firm that isn’t affected by finances.
In recent years, the role of the CFO has greatly expanded. Fortune magazine recently observed:
In the past, CFOs were as narrow as the columns in a ledger. They counted the beans and raised the bread, issuing annual reports and crunching numbers on investments proposed by somebody else. Today, the great ones are superb general managers who on top of strong financial and deal-making skills often boast a grasp of operations or a keen sense of strategy. Instead of simply measuring value, today’s CFOs create it.
It’s not surprising, then, why so many of today’s CEOs have emerged from the ranks of CFOs. Stephen Bollenbach and Doug Ivester are just two prominent examples. Before becoming CEO of Hilton Hotels, Bollenbach was CFO at Marriott in the early 1990s. There, he was credited with planning and managing the company’s split into two publicly traded units Host Marriott, a hotel management firm; and Marriott International, which owns the real estate. Bollenbach then moved on to become CFO at the Walt Disney Co., where he helped engineer the Mouse’s acquisition of Capital Cities/ABC before taking the top job at Hilton.
Doug Ivester was Coca-Cola’s CFO in the mid 1980s when he came up with the idea of spinning off the company’s debt-ridden and sluggish bottling division, Coca-Cola Enterprises. The move got the division’s debt off of Coke’s books and helped Ivester land Coke’s top job.
Fact: In some small companies, the CFO also serves as treasurer of the company.
Who is In the Teams?
Beneath the CFO, your company’s financial players are divided into two teams. For easier understanding, let’s call them “the measurers” and “the managers”.
While “the measurers” are focused on assessing and planning, “the managers” deal with planning and execution.
When you think about it, it makes sense that both the measurers and managers share the planning function. For instance: a tax accountant (clearly a measurer) not only assesses the tax liability of his company; he also helps plan how that company can minimize taxes in the future. On the flip side, an inventory supervisor (clearly a manager) not only creates a game plan to control the flow of goods into and out of a warehouse, but she/he helps execute that plan.
The measurers are led by the company’s controller and are in charge of assessing performance; accounting for assets, liabilities and costs; and planning. Team members include: accountants, tax accountants, internal auditors, cost accountants [who provide managers with information pertaining to expenses related to various business activities], and budget officers.
Who’s On the Measurers’ Team?
- Tax Accountants
- Budget Officers
- Internal Auditors
- Cost Accountants
The managers are led by the company’s treasurer and are in charge of overseeing assets and financial planning. This team includes: credit managers, inventory managers, and capital budget officers [since they oversee planning for large tangible projects].
Who’s On the Managers’ Team?
- Credit Managers
- Inventory Managers
- Plant Managers
- Capital Budgeting Staff
- Budget Officers
- Sales Staff
Next, let’s take a look what those two team’s ladders [Controller and Treasurer] really do.
Fact: In some companies, the controller is called the comptroller.
The controller is the chief accountant for the company. His specific duties include:
- Selecting the firm’s accounting methods. Like any language, accounting has some foibles one is that it allows companies to record transactions in different ways. As you might expect, companies tend to select those accounting methods that best suit their interests. That means they gravitate to those methods that make their assets, sales, and earnings seem larger while making their liabilities, expenses, and tax obligations seem smaller. It is the controller’s job to determine which methods of accounting serve the best interests of the firm while remaining within the boundaries of acceptable practices.
- Internal monitoring and auditing. Once a particular accounting method is selected, the controller is in charge of enforcing that method consistently throughout the company.
- Financial accounting. Financial accounting refers to the periodic assessment of a company’s “big picture.” It involves gathering financial data used to compile a company’s balance sheet, income statement, and cash flow statement. This is generally done monthly, though banks and other financial services firms may do it daily. The controller is also in charge of compiling this information. The process of gathering anf reporting this information is called “Financial Accounting”.
- Managerial accounting. To make day-to-day decisions on how to manage cash, credit, inventories, liabilities and expenses, companies often need to see the “little picture,” too. In addition to information found on the balance sheet, income statement, and cash flow statement, they need to know how specific assets and divisions are performing on a perpetual basis. The process of gathering and reporting this information is called “managerial accounting”. That’s because this information suits the purposes of managers. A typical managerial accounting report, for instance, for a grocery store chain might show how many cans of soda are being sold by stores in a particular region each day. The controller is also in charge of compiling this information.
- Taxes. Finally, the controller is responsible for making sure that all tax returns and payments are made on time. He also advises the CEO and CFO on tax planning and strategy.
The treasurer’s job is to raise, spend, invest, and manage the company’s assets. For instance, the treasurer oversees how the company:
- Obtains financing. All companies, regardless of their size, require financing at some point. The treasurer determines the capital needs of the company in the short, intermediate, and long term. She then decides what the most appropriate form of that financing should be, based on how much money the company needs and how much time it needs it for. If the most appropriate form of financing is debt, then the treasurer will help select the lender through which the company will obtain that financing and will negotiate the terms. If the most appropriate form of financing is equity, then the treasurer will assist the CFO to find investors for a private placement or investment banks for a public offering.
- Manages cash. Cash is a company’s most precious asset. So, the treasurer is responsible for making sure that there’s enough cash in the company’s accounts at all times to meet the firm’s obligations, such as payroll and taxes. That means the treasurer must ensure that bills are being collected as soon as possible and that debts are being paid on time. But there’s more to it than that. The treasurer must also ensure that any excess cash is being invested properly.
- Manages credit. A company’s credit policies often have a direct impact on its sales. For instance, a loose credit policy in which a company extends credit to a large number of customers tends to boost sales by giving even those consumers who don’t have cash the ability to purchase their merchandise. Unfortunately, loose credit policies lead to late payments and even defaults. On the flip side, companies with tight credit policies meaning that they extend lines of credit only to their most credit-worthy customers forgo additional sales for the comfort of knowing that their debtors will pay their money back on time. The treasurer’s job is to balance the desires of sales managers, who seek loose credit, with those of credit managers, who prefer tight policies.
- Manages inventories. A company that overstocks its inventory runs the risk of illiquidity by tying up its cash for long periods of time. There are, in addition, added costs associated with holding excess inventory such as handling costs and insurance costs to guard against theft or damage. Plus, a company that under-stocks its inventories runs the risk of losing out on sales, by failing to provide what customers want. Based on the company’s need for liquidity and profitability, the treasurer must help formulate an inventory plan.
I hope you have just got a clear clue about who is the key players in company’s financial structure and are able to figure what and where you are now, what and where you are going to be in five years a head 🙂
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