Friday, February 12, 2010

Analysis for decision-making

The most important contribution the CFO can make to an emerging growth company is providing the analytical framework for the management of the business-the “business model". The creation of this model involves a business analysis of past and future operations.

First required is a clear understanding of the business processes (design, development, production, sales, distribution, etc.) as well as an understanding of the nature of the business relationships with customers and suppliers. The CFO also must understand the business owner's goals, objectives and timetable. Finally, the CFO must have a good grasp of the economic environment and the near-term and longer-term outlook.

Historical operations must be evaluated, particularly to understand the prime drivers for revenue and expenses. Techniques used might include direct costing activity based costing.

The end result of this analysis should be an articulation of the enterprises’ “business model”. This model is a set of statements describe how the business creates and serves its customers. It also describes how the enterprise differentiates itself from the competition.

This understanding is then translated into a detailed, flexible income, cash flow, and balance sheet forecast. This "financial model" becomes the most valuable tool the company has for the evaluation of a variety of business decisions.

This model allows a continuous review of the company's pricing policies to assure that the pricing is value driven, reflecting all appropriate costs and consistent with the short-term and long-term goals of the company.

This model also permits evaluation of comparative data for competitive benchmark analysis of current and future performance. This information is compared to that developed through an evaluation of the industry competitors companies in similar industries as successful business enterprises in general area

Most importantly, using this analytical framework the CFO is able to provide the board and senior management with an evaluation of the financial impact of various strategic options. These include new facility decisions, new product line or business activities and acquisitions or divestitures. As a result of the insight gained by the CFO through this process, typically it is appropriate for the CFO to have principal responsibility for the structuring and negotiation of major transactions.

Next time we'll take a look at the CFO's responsibility for the efficient use of capital.

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