GROWTH AND PROFITABILITYOptimizing the Finance Function for Small and Emerging Businesses phần 1 potx

GROWTH AND PROFITABILITY Optimizing the Finance Function for Small and Emerging BusinessesMichael C.. Growth and profitability : optimizing the finance function for small and emerging bu

GROWTH AND PROFITABILITYOptimizing the Finance Function for Small and Emerging Businesses

To a loving family

(Mom, Dad, Pam, Lorraine, and Christine)

and a God that is love

GROWTH AND PROFITABILITY Optimizing the Finance Function for Small and Emerging Businesses

Michael C Donegan

John Wiley & Sons, Inc.

This book is printed on acid-free paper

Copyright © 2002 by John Wiley and Sons, Inc All rights reserved

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

Published simultaneously in Canada

No part of this publication may be reproduced, stored in a retrieval system ortransmitted in any form or by any means, electronic, mechanical, photocopying,recording, scanning or otherwise, except as permitted under Sections 107 or 108

of the 1976 United States Copyright Act, without either the prior written sion of the Publisher, or authorization through payment of the appropriate per-copyfee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923,(978) 750-8400, fax (978) 750-4470 Requests to the Publisher for permission should

permis-be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street,Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, e-mail: permcoordinator@wiley.com

This publication is designed to provide accurate and authoritative information inregard to the subject matter covered It is sold with the understanding that the pub-lisher is not engaged in rendering legal, accounting, or other professional services

If legal advice or other expert assistance is required, the services of a competentprofessional person should be sought

Wiley also publishes its books in a variety of electronic formats Some content thatappears in print may not be available in electronic books

Library of Congress Cataloging-in-Publication Data

Donegan, Michael C

Growth and profitability : optimizing the finance function for small

and emerging businesses / Michael C Donegan

p cm

ISBN 0-471-21216-4 (CLOTH : alk paper)

1 Small business—Finance 2 Financial statements I Title

HG4027.7 D66 2002

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

Liquidity No company can successfully operate without it Access to cash, whenit’s needed, becomes so important that all other considerations are secondary Therecent bankruptcies of industry giants Enron and Kmart and the severe liquiditystruggles at Lucent Technologies are sobering reminders of the need to maintain

healthy cash flow at all times One might ask: if the “sophisticated” giants can fall

on their collective faces, then what hope does the small or emerging business owner have?

The answer lies in having a solid plan Actually, the plan is less important than the act of continuously planning The road to business success is full of unexpected

twists and turns, and ongoing planning allows for the necessary adjustments thatmake the journey worthwhile Additionally, planning by its very nature commitsthe owner/executive to the visualization and preparation needed for the future—anecessity when put in a financial context

But how should companies do it? This book lays the foundation for a solid

start As Michael Donegan deftly points out, no entrepreneur starts with a finance

function, or a plan for strategically building that function Yet, every transaction inwhich the entrepreneur engages is ultimately measured by dollars and cents withthe medium of measure born from the finance function—data Ignoring or mini-mizing this function is certain to lead to trouble

Although most owner/executives have an exclusive sales and operations cus, sooner or later an appreciation for the strategic necessity of the finance func-tion is recognized as a key ingredient to success Missing revenue or profitabilitytargets can happen multiple times but companies will only run out of cash once.Don’t let it happen to your business

fo-Thomas F Donahue

Corporate Finance Consultant

Former Corporate Treasurer—Sensormatic Electronics

Corporation and Citibank Universal Card Services Corp

July, 2002

Because writing a book is no easy task, I am truly indebted to Heidi Oneacre forher diligence and persistence in editing this work Her ability to deliver criticismbalanced with careful measures of sensitivity and encouragement was invaluableand greatly appreciated Additionally, I would like to thank Tim Oneacre for hishospitality and keen insight into the English language

Special thanks go to Chris Muccio, with whom much of the material for thisbook was developed I would also like to thank Mike Fredericks for being a wor-thy partner in the trenches and a continuing source of technical knowledge rivaled

by none A thank-you goes out to Jean Nelson for giving me the opportunity to cel Finally, I’d like to thank Michael Sincere for providing direction when it wasmost needed

Information is the life-blood of decision making While companies are willing todedicate resources to advertising, marketing, and sales initiatives, they are often-times reluctant to devote the same to garnering accurate and timely financial in-formation to make business decisions Very few executives and business ownerswill deny the value of building and maintaining reliable mechanisms for handlingthe financial data needs of the organization However, actions often fall short ofthis intention It is not unusual to see the proliferation of annotated informationsystems and inadequate processes throughout the business community Whether it

is the potentially ambiguous value proposition or the sheer complexity involvedwith creating a reliable finance function, many organizations unintentionally dis-count the need for a strong one or, worse, relegate it to the status of a necessaryevil Understanding why this happens is second only to recognizing the telltalesigns that it is happening in the first place Can the organization translate its busi-ness to financial statements quickly and accurately? Can the reporting process rap-idly reflect changes in the business organization? A more overt hint may come inthe unwillingness to dedicate budget dollars to the finance area on an ongoing ba-sis While marketing, sales, or other key operations people can dictate major poli-cies and resource commitments, can the finance area do the same? Companies, es-pecially in their early years, will live and die with the success of marketing andsales efforts However, their capacity to translate financial data from the businessenvironment into knowledge will either bolster marketing and sales efforts ornegate them altogether Ensuring the long-term stability of information flow andthe decision support system requires alignment of priorities in thought and action

I have witnessed many times this juxtaposition in thought and actions Theminimization of the accounting and finance aspect of the business is rarely inten-tional, but rather a function of ignorance, misinformation, or misguided businessculture Many executives and business owners are simply not equipped with an ad-equate perspective of the finance function or the value it provides Additionally,they may not be committed to cultivating this aspect of their business Executives

reared on the operations side often are led to believe that this area is overhead and

must be strictly controlled from a fiscal standpoint The extreme return on ment (ROI) business culture that prevails has fueled this misconception Havingspoken on the topic of strategizing the finance function to large and small groups,

invest-I receive all sorts of feedback, most of which deals with the fact that there simply

is not a definitive base of knowledge that addresses the finance function in its tirety Many finance and nonfinance people want to address this aspect of theirbusiness but find very little accessible guidance Because easy-to-understand lit-erature is lacking, many companies resort to engaging high-priced consultantsand/or hiring expensive finance executives to develop comprehensive financestrategies Much of the dialog I have with finance professionals comes about as aresult of a marked breakdown in the finance area that is manifesting itself in someharmful way Comments are often preceded by “Had I known ” or “If someonehad only told me.” Throughout my career, I have designed, implemented, andmaintained finance applications on a global scale and discovered firsthand thestaggering lack of accessible knowledge on the overall topic of defining the fi-nance function The frustration I experienced in following through with my objec-tives in this realm was the chief motivator for this book.

en-This book was almost titled Guerrilla Accounting, the premise being that it

does not take considerable depth and breadth of knowledge to lay the groundworkfor a sophisticated finance function The objective of this text is to address the gen-eral lack of knowledge and misinformation related to the finance area while creat-ing the mind-set to establish a finance-friendly culture Although no reader willcome away with all the answers to all the issues related to the finance function, it

is my hope that many will achieve that first breakthrough—realizing the need for

a finance function The small and emerging business owner must recognize theneed for developing a culture in business that values a solid finance/accountingfunction A culture of awareness will breed the development of good fundamentalsrelated to a strong data flow dynamic The danger is waiting until the need for one

is great Much like runners who reach for the water bottle when thirst is alreadyupon them, waiting until a critical juncture in the business’s life cycle to begin de-veloping a solid finance/accounting organization may be too late Laying thegroundwork early and developing sound fundamentals and awareness is much likehydrating oneself before a race The challenge is overcoming the subtle and some-times long-term ROIs Although ROIs are critical, establishing a mind-set ofgrowth and progressivity in the finance area will preempt the awkward recurringrationalization of expenditures for seemingly unproven and expensive financeprojects

My intention in pulling these thoughts together is to provide readers a tive starting point in dealing with this often confusing and complex area of theirbusiness The central focus of the book is the methodology for gathering all theconsiderations that factor into developing the finance/accounting area of a busi-ness Because certain considerations are more fundamental to overall finance func-tion development than others, these areas of focus are arranged in a pyramidlikestructure with the more fundamental business considerations appearing at the bot-tom of the pyramid and the more finance specific considerations arranged at the

defini-viii PREFACE

top The small and emerging business owner, who may be short on time, money,and know-how, can benefit greatly from referencing this model It will provide aknowledge base from which a relevant finance function can be developed andmaintained The model itself is universal and applies to all businesses, large andsmall, and can be utilized by business executives/owners regardless of their knowl-edge level in the finance/accounting area The essence of this multilevel approach

to strategizing the finance function is to provide insight on what needs to be doneand when The model itself provides guidance in the initial setup and design of afinance function as well as its evolution and adaptation as the business grows Theconsiderations arranged in this pyramid form will allow the owner/executive tomake well-informed, relevant decisions related to employing systems technology,designing processes, hiring professionals, and developing financial analysis tools.The small and emerging business owner will face many challenges in the earlyyears of the business This focus on the living, breathing data-flow dynamic willpreclude unnecessary attention on accounting issues related to properly employinggenerally accepted accounting principles (GAAP) This book concentrates on de-veloping concepts, imparting knowledge, and developing actionable strategies.The object is to convey and develop a perspective and approach to addressingoverall developmental finance and accounting matters and spur action as it relates

to developing a suitable finance function Developing a methodology for proaching this area as opposed to defining particular solutions will serve the smalland emerging business owner well as the business evolves and data needs change.The best way to use this book is to identify and make note of similarities be-tween your business circumstances and those highlighted in the examples dis-cussed Recognizing circumstances that prevail with your business peers and/orcompetition is also recommended Understanding what is being done wrong is asimportant as recognizing what is being done right Then use this as a reference introubleshooting or anticipating issues that may put your organization at a disad-vantage Particular areas of reference will be the chapters dealing with the multi-level approach (Chapter 4), processes (Chapter 6), information systems (Chapter7), and writing the strategy document (Chapter 9) There are no right answers orpremier solutions for the informational needs of a business; however, developingthe discipline to corral the issues and questions that must be addressed is impera-tive Developing and maintaining a sound finance function is an iterative processand will take time and patience While trial and error may be a necessary compo-nent of development, this book will help clarify what needs to be done and when

ap-Be patient and open-minded as your finance function evolves Change is able; in fact, it will be critical in the finance area if the finance function is to re-main relevant and value-added for the organization

unavoid-The key to success in this area is an open mind and a willingness to embracenew and innovative ideas in systems and process design We are living in exciting

times where technology is developing at what seems to be warp speed Achievingsuccess will mean matching up well-defined needs with carefully crafted solutions.More important, success in this area will be manifested by a thriving business.Evolving data needs will mean the business is growing It is critical that an aware-ness of the finance function be maintained as the business matures I wish you well

in developing your new business or growing your existing one

Chapter 1 DOING BUSINESS IN TODAY’S

ENVIRONMENT 1

Objective 1What Is the Perception of Finance and Accounting? 2

Traditional Perception of the Finance Function 32

Chapter 3 WHY STRATEGIZE? 45

Initiatives Shaping the Finance Organization 53

Tier 4 Considerations: Optimizing the Balance Sheet 95Tier 5 Considerations: Optimizing Profit and Loss 98

Linking Data Customer Needs to Finance Strategy 124

Evaluating Current Processes and

Integrating Data Flow Process with the Business 147Development with the Rest of Infrastructure 157

Chapter 7 INVESTIGATING

INFORMATION SYSTEMS 163

Information Systems Considerations

xii CONTENTS