Exec's Program #9: Financial Management

THE EXECUTIVE’S PROGRAM SESSION 9 INTRO TO FINANCE FOR EXECUTIVES

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PURPOSE AND LEARNING OBJECTIVES Purpose: To learn about finance and why top executives love and work with their CFOs Learning Objectives: To learn…

• Why your CFO is so important • How to work with your CFO / accountant • How to not be intimidated (but excited!) by accounting and finance

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KEY OBJECTIVES (FOR THE SESSIONS) You learn…

• That you cannot abdicate finance • To not be intimidated by accounting and finance • To understand the basics of accounting • To understand your financial statements • To learn the tools and vocab of finance

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AGENDA 1. Recap and Orienteering 2. Why you should love your CFO 3. What a good CFO / CEO relationship looks like 4. How a good CFO / CEO manages their finances 5. Accounting for Execs 6. Finance for Execs 7. Summary, reflection and assignment

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SECTION 1 ORIENTEERING

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E-MYTH REMINDER “Systems bring freedom…”

“Carefully crafted systems allow your business to operate and produce consistent, predictable results without being dependent on you.”

“This applies to finance, marketing, sales, and it absolutely applies to how you manage and lead your people.”

- E-Myth 6

THE 5 HABITS Mindset Mindset

Practice Practice

Your Your morning morning routine routine

Learn Learn   do do   teach teach

Feedback Feedback

Focus Focus

Coaching Coaching

Your Your plan. plan.

Time Time Management Management Your Your calendar calendar

Discipline = Freedom

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THE PLANNING & EXECUTION SYSTEM 20 years Guiding Statement Vision, Mission, Strategy, Values, Business model, Operating model Used during onboarding, input to the strategic plan, to read in the morning to get you energized

5 years

Annual

Quarterly

Monthly

Weekly

Daily

Strategic Plan Annual Management Plan & Budget Quarterly Board Report, OKRs

Annual Planning Meeting All Hands Meeting

Co m

mu nica

tion s

Quarterly Board Meetings

Monthly Mgt. Reports

&R e po rtin

g

The Weekly Legend

Monthly Mgt. Meetings

Daily Calendar The Monday Legend & Friday WIR Team Meetings

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WHAT WE ARE BUILDING

Plan A Planning System

Execute

Gender Balance Organizational Structure For organizing

Position Agreement For unit managers

Strategic Plan

Standard Operating Procedure For functions

Role and Purpose (why) AMP - OKRs

Battle Rhythms For accountability Meetings

Steps Accountable for

Quarterly - OKRs

Reporting / Targets Person Accountable

List of Responsibilities Monthly - KRs

P.O.A. People Responsible

Standards (KPIs) Weekly - Legend

Standards at each Step

Daily - Calendar

KPIs

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ORGANIZED KPIS FOR YOUR COMPANY NOTE: NOTE: KPIs are are inin your your PAs PAs KPIs and SOPs. SOPs. and

CEO KPIs

Admin

Finance

KPIs

Sale & Marketing Operations

BU

KPIs

BU

KPIs

KPIs

Targets for for your your KPIs KPIs Targets are set set inin your yourAMP AMP are and Budget Budget and

KPIs

BU

KPIs

BU

KPIs

Division

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THE REPORTING PROCESS Select KPI / Improve

Report & Make Decisions

Baseline / Set Target

Breakdown Breakdownyour yourGoals/Objectives Goals/Objectivesinto into Metrics Metrics •• For Foreach eachBIG BIGprocess, process,you youhave haveaa BIG BIGresult. result.This ThisBIG BIGresult resultshould should be bemeasurable measurable(a(aSMART SMART Objective) Objective) •• Each EachBIG BIGprocess processhas hasSMALLER SMALLER activities activitiesthat thathappen happenquicker quicker (hourly, (hourly,daily, daily,weekly). weekly).

Analyze

Execute & Collect Data

•• These TheseSMALLER SMALLERactivities activitiesshould should be bemeasured measuredto totell tellyou yousooner, sooner,ifif the theBIG BIGobjective objectiveisison ontrack. track.

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SELECTING KPIS Balance the KPIs you have at 4 stages

#

Inputs

#

Activities

#

Outputs

#

Results

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ORIENTEERING: STEP-BY-STEP Session Topics

What I would expect you to do…

The Habits

Have a morning routine! Use your calendar.

Strategic Planning

Write down your 5-year plan.

Set 3 “I Musts” each week and map them to your calendar.

Start with your Guiding Statements, and KISS and use it (Coffee Stains) to set your annual plans.

The AMP

Write down you AMP. Look to the Left!

Strategic plan is the input. Use the AMP to set quarterly and monthly OKRs. Chop up your goals into bite-size work that ultimately becomes weekly projects and I Musts.

Governance

Have a diverse group with authority (ideally a board) to give you feedback and holds you accountable to your plans.

Ask for their feedback! Follow your own rules – set the example. Everyone is watching you.

Intro to Execution

Build your binder! “I should write that down.” Write SOPs. They are the treasure. Plan + Organized Team + PAs + SOPs + Battle Rhythm = Results!

Management Teams

Have an org chart and use it to organize your company.

Meeting

Run great meetings! Use them to drive execution.

Write PAs for those connected to you (your management team).

Use meetings to drive execute. Have P, O and A for every meeting.

Reporting

Start measuring 5-10 KPIs for your company. Weekly or monthly. As you measure it, you will see improvements.

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ASSIGNMENT 1.

Use your calendar: Set your three I Musts for the week and map all your time to your calendar. Set one of the I Musts to work ON the business.

2.

The ON the business I Musts: Take three hours to meet with your managers and 1) select 2-3 KPIs for each of their units; 2) Ask them to baseline the KPI for Feb and set a target for March; and complete the Reporting Method table.

Ensure your manager understands the entire table. 3) Schedule the April management meeting for the week of April 8. Invite management. Provide them with the P,O and A. Have them be prepared to present the reporting table.

Check-in with your managers to help them prepare the week of March 25.

3.

Submit your Reporting Method table for one unit via email to gain acceptance into the next class.

Proprietary and Confidential to RENEW LLC

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SECTION 2 WHY YOU SHOULD LOVE YOUR CFO

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Because you are the CFO! OK the co-CFO. But think like a CFO!

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96% of companies fail…

Because they run out of cash.

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SECTION 3 WHAT A GOOD CFO / CEO RELATIONSHIP LOOKS LIKE

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Trust & Respect

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WHAT BAD LOOKS LIKE

Don’t Know Your Numbers

Know Your Numbers

Abdicated

Delegated

Reviewed Yearly

Reviewed Monthly

Errors and Late

Timely and Accurate

Not using a Budget

Using a Budget

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SECTION 4 HOW A GOOD CEO / CFO MANAGES THEIR FINANCES

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THE STEPS 1.

Step 1: Tighten accounting

2.

Step 2: Have a plan (budget & 13 WCF)

3.

Step 3: Collect monthly financials

4.

Step 4: Analyze your financial statements

5.

Step 5: Drive your finance battle rhythm

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STEP 1: TIGHTEN ACCOUNTING 1. Hire a good (disciplined!) accountant.

–

Is very discipline

–

Has high integrity

–

Knows Peachtree or QuickBooks and IFRS

–

Can tell you “no”

2. Do a “health check.”

–

Prepare and read your financial manual

–

Clean-up your accounting system

–

Review and improve your financial controls

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STEP 2: HAVE A PLAN 20 years Guiding Statement Vision, Mission, Strategy, Values, Business model, Operating model Used during onboarding, input to the strategic plan, to read in the morning to get you energized

5 years

Annual

Quarterly

Monthly

Weekly

Daily

Strategic Plan Annual Management Plan & Budget Quarterly Board Report, OKRs

Annual Planning Meeting All Hands Meeting

Co m

mu nica

tion s

Quarterly Board Meetings

Monthly Mgt. Reports

&R e po rtin

g

The Weekly Legend

Monthly Mgt. Meetings

Daily Calendar The Monday Legend & Friday WIR Team Meetings

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STEP 2: HAVE A PLAN 5-year Plan Financial Model • •

• • •

Owner: CEO and Board What: Shows the financial performance for 5 years.

Used for valuation.

Why: Need to know if we need to raise capital.

Example Uses: Capital budgeting and valuation.

Looks like: IS, BS and CF in years

Annual Plan Annual Budget • •

• •

•

Owner: CEO, CFO What: Shows the target financials performance for the year.

Why: Need to have a financial plan to mirror the AMP. Example Use: How profitable will we be if we pursue these initiatives?

Looks like: IS, BS and CF in months. 12 columns.

Quarterly Plan 13-week CF forecast • • • • •

Owner: CFO, Controller What: Shows cash flow needs by week Why: Bills are paid on a weekly basis Example Use: Do we need to delay any payments?

Looks like: Cash Start. Cash In. Cash Out. Cash End. End is the start for the next week. Each week updated and extended. 13 columns.

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STEP 3: COLLECT MONTHLY FINANCIAL 1.

Demand that your finance team closes the books by the 10th of EVERY month. This forces discipline, catches errors and may save a lot in taxes.

2.

Have your team email you the financial statements on the 10th and financial report on the 15th.

Discipline = Freedom

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STEP 4: REVIEW YOUR FINANCIALS Weekly – 30 min 13-WCF 1. Open your 13 Week CF and make sure is has been updated.

2. Look out to see if cash gets tight in the weeks to come (or negative).

3. Meet with your finance manager / team to adjust payments or collect faster.

Monthly – 1 to 3 hours on Financial Statement Analysis

1. Pull financials into Excel.

2. With Excel calculate your key metrics (next session).

3. Compare last month and last year. Any big changes? Why? 4. Compare to your budget (TvA).

Any big variance? Why? 5. Prepare questions and meet your team.

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STEP 5: DRIVE YOUR BATTLE RHYTHM 1.

Set the finance meeting for the 15th. Don’t accept excuses to delay.

2.

Ask your finance team to prepare slides. Send these around 24 hours before. Will have TvA, common size analysis, ratios and margins table, risks and recommendations.

3.

Hold a 1-3 hr. monthly finance meeting on the 15 th. Purpose is to review the financial performance. Outcomes are an understanding of how the company did (TvA), decisions to address risks or pursue opportunities, and adjusted forecasts. Agenda 1) TvA and Variance Analysis, 2) Margin Analysis, 3) Ratio Analysis, 4) Forecast 5) Risks and Recommendations, 6) Decision & Next Steps

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STEP 5: YOUR FINANCE BATTLE RHYTHM 1.

Annual Budget Planning Meeting: Set the company targets (AMP). Build the budget with the CFO.

2.

Quarterly Board Meeting: Show budget Targets vs. Actuals. Show key ratios, cash position and 13-week forecast.

3.

Monthly Finance Meeting: Budget Targets vs. Actuals. Review ratios (and 13-week CF). Ask “why” 7 times. Make decisions – changes in management, approach, etc. You need to hit those targets!

4.

Weekly 13-Week Cash Flow Meeting: Review the end cash position with the forecast. Any difference? Problem is there is.

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SECTION 5 ACCOUNTING FOR EXECS THE ACCOUNTING SYSTEM

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THE ACCOUNTING CYCLE More frequent is a financial control You want this info

8. Close Your Books

1. Identify Transactions

2. Record Journal Entries

7. Financial Statements

The Accounting Cycle 6. Adjusted Trial Balance

You should understand this process

3. Post Ledger Entries

5. Adjusted Entries

4.

Unadjusted Trial Balance

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ACCOUNTING BASICS

• Based on when they occur

Journal

General Ledger • Based on accounts (chart of accounts) • Double entry

• Checks double-entry • Does it balance?

Financial Accounts • The financial statements

Trial Balance

Source: https://keydifferences.com/difference-between-journal-and-ledger.html 32

iew ACCOUNTING v Re

BASICS:VOCAB

BASIS FOR COMPARISON

JOURNAL

LEDGER

Meaning

The book in which all the transactions are recorded, as and when they arise is known as the Journal.

The book which enables you to transfer all the transactions into separate accounts is known as the Ledger.

Record

Chronological record

Analytical record

Process

The process of recording transactions into the Journal is known as Journalizing.

The process of transferring entries from the Journal to ledger is known as Posting.

How are transactions recorded?

Sequentially

Account-wise

Narration

Must

Not necessary.

Balancing

Need not to be balanced.

Must be balanced.

Source: Accounting Coach

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GENERAL LEDGER Money out

Money in

DEBIT

CREDIT

Asset

Liabilities

Expenses

Gains

Losses

Income

Dividends

Revenue Equity

Source: Investopedia

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THE FINANCIAL STATEMENTS BASICS • The 5 Elements: – Assets: What you use – Liabilities: What you owe – Owner’s Equity: What you own – Revenues: What you take in – Expenses: What you pay out

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THE ACCOUNTING EQUATION Assets = Liabilities + Owner’s Equity Assets = Liabilities + Contributed Capital + Beginning Retained Earnings + Revenue - Expenses - Dividends

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SECTION 6 FINANCE FOR EXECS THE STATEMENTS

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THE FINANCIAL STATEMENTS BASICS • The 3 Financial Statements: – Balance Sheet: What do you have, owe and own? How strong is your company? Are you getting stronger?

– Income Statement: How did your company use its assets? Are you profitable? Are you performing better?

– Statement of Cash Flows: Where is cash coming from and going to? Are you getting healthier?

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BALANCE SHEET • What is tells you: How strong is the company? How wealthy are the shareholders?

• Layout: Assets = Liabilities + Owner’s Equity. From liquid to non-liquid: From short to long term.

• What to look at: – Does it balance?

– Near term strength - Liquidity: Current Assets/Current Liabilities (CL), Cash/CL (want these to be big) – Long term strength - Leverage: Debt/Equity, Debt/Assets (small is less risk)

• Other Uses: – Most basic valuation of the company = Book value (Owner Equity) – Your net worth!

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Proprietary and Confidential to Renew LLC Source: Accounting Coach

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What gender smart KPIs could you check here?

Pay equity

Policies

KPIs

Proprietary and Confidential to Renew LLC Source: Accounting Coach

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ANALYZING PAY EQUITY • Pay Equity is a key feature of gender smart companies  Pay equity KPIs are key • Investors increasingly pay attention to pay equity  SEAF GES as a tool • Regulation around pay equity is getting stronger  Recent UK regulation is serving as an international example o Gender pay gap reporting is mandatory; accounting systems of companies must be upgraded with a gender lens

 Great guidance on KPIs/measurement

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ANALYZING PAY EQUITY Recap: SEAF Gender Equality Scorecard

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ANALYZING PAY EQUITY Practical guidance for insightful analysis:

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ANALYZING PAY EQUITY Practical guidance for insightful analysis:

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ANALYZING PAY EQUITY Practical guidance for insightful analysis: Is there gender imbalance in your hiring?

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ANALYZING PAY EQUITY Practical guidance for insightful analysis:

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ANALYZING PAY EQUITY Practical guidance for insightful analysis:

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INCOME STATEMENT • What it tells you: How is the management team performing? How profitable is the company?

• Layout: Revenue – Expenses = Profit. Top to bottom: Sales, COGS, SG&A, Profit (the bottom line) • What to look at: – Targets vs Actual Performance. And why?. Don’t want more than 10% variance.

– Margins: GPM (Gross Profit/Sales), OPM (Operating Profit/Sales), NPM (Net Profit / Sales). Want these to be “fat”.

– Trends or Growth (%) = MoM and YoY.

• Other Uses: – Quick valuation: EBITDA x ____ = rough value

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Proprietary and Confidential to Renew LLC Source: Accounting Coach

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What gender smart KPIs could you check here?

Policies

KPIs

Lawsuits can be gender related: e.g. pay discrimination, sexual harrassment, etc.

Proprietary and Confidential to Renew LLC Source: Accounting Coach

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CASE STUDY: CLOUDCFO CloudCFO is an innovative Filipino SME providing bespoke accounting, bookkeeping and tax compliance services through the utilization and enablement of cloud and smart technology.

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CASE STUDY: CLOUDCFO •

Women are underrepresented in CFO roles in the local market.

•

The company undertakes strategic efforts to target women-led SMEs as customers.

•

No major pay discrimination across different employee categories with a compensation ratio of the women to men being at least 90%

•

Now establishing employee surveys with disaggregated data to further improve pay equity and other non-monetary compensation

Example KPIs: •

Share of women-led companies as customers

•

Share of sales to gender smart companies

•

Customer satisfaction data of women-led companies

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CASE STUDY: DESTA Challenge:

•

Tracking gender disaggregated KPIs was key to detect the problem.

•

•

Gender smart business solutions turned out to be critical for the company’s success.

•

Had the company detected the problem sooner (or carried out a gender smart market study beforehand) and taken gender smart action, it might have avoided the costly relocation.

Desta is a textiles company which had a high turnover of female employees.

•

Women make up a significant share of their workforce, so this is a business critical issue.

•

Ultimately, they needed to relocate to another city because of turnover.

•

Effective action taken based on gender-smart data-driven insights

•

Gender smart policies and practices have proven the business case

•

Regular monitoring of gender smart KPIs help the company stay on track and steer towards its targets.

Action: •

When the company opened in the new city, it started to implement programs to help reduce turnover - which has a huge impact on efficiency.

•

The company set up a clinic, built a canteen, provided day care for children.

•

 Strong business case: Quick return on investment + stronger financial performance of the company

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STATEMENT OF CASH FLOW • What it tells you: How healthy is the company? Does the company have cash? Where is it coming from?

• Layout: Cash Start + Cash In – Cash Out = Cash End. Also, CFO + CFI + CFF = FCF • What to look at: – CFO = are you making cash from operations? Want this positive and growing.

– CFI = are you making investments or liquidating assets?

– CFF = are you getting or paying money? Where is it coming from?

• Other uses: – How strategic your CFO is. If net incomes is high but cash is low you are likely not collecting or you are paying supplier too fast.

– Is there something fishy going on at the company?

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Proprietary and Confidential to Renew LLC Source: Accounting Coach

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INTRO TO FINANCIAL ANALYSIS • Uses your three financial statements and your budget • Uses Excel. Peachtree / QuickBooks can do it. Most often the data is pulled into Excel • Calculates ratio and percentages • Presents graphs and tables • For making decisions

NE XT

SE SS

IO N

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SECTION 5 BREAKOUT

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BREAKOUT DISCUSSION 1.

What is your experience with your current CFO/finance manager/accountant? (i.e. How many hours per week do you interact with the finance team?)

2.

What are your daily pain points/problems related to finance and accounting?

3.

Based on what you learned, what can you be doing?

4.

What are the questions you have as we move into Finance for Executives?

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SECTION 6 SUMMARY & ASSIGNMENT

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SUMMARY • Don’t abdicate finance. Think of yourself as the Co-CFO. • Hire a good accountant, finance manager or CFO. Someone you trust that is disciplined and skilled.

• Read and understand your finance manual - the SOPs for the finance department.

• Have a financial plan: The annual budget and a 13-week CF. • Close your books every month. Ask for the financial statements.

• Hold a monthly finance meeting - one of your two monthly battle rhythms.

• Read your financial statements - BS, IS, CF - and see what they sell you.

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HOMEWORK ASSIGNMENT 1. Use your calendar: Set your three I Musts for the week and map all your time to your calendar. Set one of the I Musts to work ON the business.

2. Schedule 3 hours: For your ON the business “I Musts,”1) collect your financial statements from your accountant. Read them. Write down three things that see. 2) Ask for the financial manual and read it. If you do not have one, spend another 3 hours to sit with your finance manager, and begin writing it together. 3) Tell your finance manager you want them to close their books on the 10th.

3. Send me your most recent financial statements and three observations and bring them to the next class to gain access to the next course.

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FEEDBACK FORM

Proprietary and Confidential to RENEW LLC

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Thank you! www.renewstrategies.com

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