Five Areas of CFO Responsibility
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*Financial Management and Accounting Cycle *Risk Management and Internal Controls *Financial Reporting Compliance and Tax *Strategic Finance - Corporate Finance - FP&A - M&A *Operations and Performance |
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The responsibilities of the CFO are broad and deep and while there is often good help with the day-to-day activities, the CFO has last line oversight of the administrative operational functions for cash flow, recording, reporting, planning, performance measurement and risk management. All of these functions work toward continuing to create value for the company, plan ways to increase value, protect that value, and report value changes.
The most important function of the CFO might be risk management. All other responsibilities from reporting to planning to oversight of administrative operations are are used to assess and manage company profitability risk, aka business risk. It should be little surprise then to see that the very department is structured with a primary directive of risk management in mind, the segregation of duties.
At the highest level, the finance department is separated into two areas, coincidently also adhering to the prime directive of an internal control system, the segregation of duties.
At the highest level, the finance department is separated into two areas, coincidently also adhering to the prime directive of an internal control system, the segregation of duties.
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Controller
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Treasurer
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segregation of duties. The person responsible for recording transactions must be different from the individual responsible for custody of the asset or more detailed; no one person should initiate, approve, record, and reconcile a transaction, and never in the case for which they have custody of the asset, such as cash.
Depending on the size of the company, these position may or may not exists, but their functions do exist and are generally separated between at least two people. In smaller companies or start-ups, this can be difficult to implement, but as it is a necessary function to receive and disburse cash for a company to operate, it is just as important to ensure that there are checks and balances to these processes to ensure all activities can be traced back to an origin should the need arise.
All of the areas of responsibility are intertwined. If you were able to map out the activities and processes of the finance department as a framework, the areas of responsibility would be the layers of substance added . You may note that many items therefore cross into multiple areas, such as the Reconciliation process. The Reconciliation process acts as an internal control for risk management, a reporting integrity tool for reporting accurate data to stakeholders, and a financial management process aiding AR, AP, Inventory and Cash to ensure integrity in their data and internal reports for both their operations, but also to maintain a trusting relationship with suppliers and customers.
One would think that the emphasis on risk management would have it listed at the top, however, the finance department still must practice its financial management activities. Risk Management, with a set of nicely functioning controls, should be nested into the financial management activities.
All of the areas of responsibility are intertwined. If you were able to map out the activities and processes of the finance department as a framework, the areas of responsibility would be the layers of substance added . You may note that many items therefore cross into multiple areas, such as the Reconciliation process. The Reconciliation process acts as an internal control for risk management, a reporting integrity tool for reporting accurate data to stakeholders, and a financial management process aiding AR, AP, Inventory and Cash to ensure integrity in their data and internal reports for both their operations, but also to maintain a trusting relationship with suppliers and customers.
One would think that the emphasis on risk management would have it listed at the top, however, the finance department still must practice its financial management activities. Risk Management, with a set of nicely functioning controls, should be nested into the financial management activities.
Financial Management
Functional finance department operations and policies for every area that involves receiving or disbursement of capital.
Cycle Examples:
- Order to Cash : (AR), Credit Policies, Billing Policies, Collection Policies, Fulfillment and ASC606 Revenue Recognition
- Return to Credit : Credit Memos, Refunds, Returns
- Procure to Pay : (AP), PR policies, POs, Expense Reports, Supplier Invoices, Goods Receipts
- Record to Report : Accounting, Journal Entries, General Ledger, Subledgers, Financial Statements, Reconciliations, Budgets
Associated Examples:
- Cash and Working Capital Management
- Cash Conversion Cycle
- Operations Budgeting, Capital Budgeting
- Long Term and Short Term Financing Needs
- Capital Structure Considerations
- Reconciliation Frequencies
- Period Closes
Risk Management and Internal Controls
All publicly traded companies are required to implement a risk strategy using a risk framework or a company specific design of a risk framework. A common framework is the COSO (Committee of Sponsoring Organizations).
A risk management plan involves the adaptation and adherence to activities, internal controls, designed to prevent or detect fraud and issues of material concern in the day-to-day business processes that could impact company value; in addition to, identifying, quantifying, and planning for risks in the broader scope of insurable risks in the areas of Business, Finance, Strategy, and Hazards.
A risk management plan involves the adaptation and adherence to activities, internal controls, designed to prevent or detect fraud and issues of material concern in the day-to-day business processes that could impact company value; in addition to, identifying, quantifying, and planning for risks in the broader scope of insurable risks in the areas of Business, Finance, Strategy, and Hazards.
Management and Control Examples:
Risk Examples:
- COSO Risk Framework
- Risk Identification and Planning : Mitigation, Acceptance, Avoidance, Transference
- Legal and Regulatory Compliance
- Insurance Policies
- Accounting Ledger Reconciliations
- Segregation of Duties
- Internal Audit
- External Audit Preparation
Risk Examples:
- Business Risk : risks that may affect business operations such as a supplier of a key component suddenly going bankrupt
- Finance Risk : risks that affect the ability to finance operations such as interest rate changes
- Strategic Risk : risks that affect the strategic objectives such as a technological disruption
- Hazard Risk : risks that are out of the scope of the marketplace such as weather and accidents
Financial Reporting Compliance and Tax
Publicly traded companies are guided by GAAP (Generally Accepted Accounting Principles) financial reporting methods for accounting and report presentation.
These external reports are structured with the attempt to be unbiased to any industry and intended specifically for the users of the reports, stakeholders, creditors, interested parties. The GAAP reports are not income tax reports and income tax reporting is a separate reporting guided by the tax agency to which the report is sent. As these reports all fall under regulatory compliance and timing they are grouped as an administrative activity, ongoing.
These external reports are structured with the attempt to be unbiased to any industry and intended specifically for the users of the reports, stakeholders, creditors, interested parties. The GAAP reports are not income tax reports and income tax reporting is a separate reporting guided by the tax agency to which the report is sent. As these reports all fall under regulatory compliance and timing they are grouped as an administrative activity, ongoing.
Reporting and Tax Examples:
GAAP Statement Reporting
Franchise Tax
Sales and Use Taxes
GAAP Statement Reporting
- Income Statement
- Statement of Comprehensive Income
- Balance Sheet
- Statement of Changes in Owner's Equity
- Statement of Cash Flows
- Footnotes of Disclosures
- Audit Opinion
Franchise Tax
Sales and Use Taxes
Strategic Finance - FP&A - M&A
Financial analysis, modeling, visualizations and dashboards. Forecasting, budgeting and financing of strategy that may include capital investment and growth ventures requiring valuation modeling, due diligence and integration.
This is a significant area of finance requiring specific skillsets outside of the range of day-to-day accounting activities and knowledge. Skills in valuations methods, finance, economics, data science, statistics, operations research methods and case studies all become relevant. This is a misunderstood area that is often lacking in a real understanding of statistics and valuation methods and the area can and does suffer for it in many companies.
This is a significant area of finance requiring specific skillsets outside of the range of day-to-day accounting activities and knowledge. Skills in valuations methods, finance, economics, data science, statistics, operations research methods and case studies all become relevant. This is a misunderstood area that is often lacking in a real understanding of statistics and valuation methods and the area can and does suffer for it in many companies.
Topics of Focus and Useful Knowledge:
Topics for Model Construction and Analysis:
- Pricing Strategy
- Valuation Methods and Assumptions
- Cost of Capital, Discount Rates, Hurdle Rates
- Mergers & Acquisitions, Joint Ventures, Strategic Alliances
Topics for Model Construction and Analysis:
- Descriptive vs Diagnostic vs Predictive vs Prescriptive Analysis
- Financial Analysis Techniques such as Cost Behaviors
- Modeling Development from Scratch with Drivers
- Forecasting Methods such as Regression Analysis
- Budgeting Management and Processes
Operations and Performance
Oversight of administrative functions such as accounting, treasury, human resources, outsourced activities, and acquisitions, in addition to providing performance metrics and benchmarking to business operations may all fall under the purview of finance.
Many companies nest human resources within the finance framework. Planning and finance is not only concerned with headcount and labor costs, but also bonuses and bonus performance. As a budget priority, it should not be a surprise that human resources is closely associated with finance.
Because finance is intertwined with strategic planning and objectives, and since FP&A and data analysis already occurs in the finance department, it is not out-of-scope for this department to create performance metrics for business processes through out operations.
Many companies nest human resources within the finance framework. Planning and finance is not only concerned with headcount and labor costs, but also bonuses and bonus performance. As a budget priority, it should not be a surprise that human resources is closely associated with finance.
Because finance is intertwined with strategic planning and objectives, and since FP&A and data analysis already occurs in the finance department, it is not out-of-scope for this department to create performance metrics for business processes through out operations.
Metrics and Analysis Examples:
- Performance Measurement Methods such as the Balance Scorecard
- Resources and Capabilities Analysis
- Operational Constraints and Bottleneck Analysis.
- Critical Success Factors
- Key Performance Indicators
- Benchmarking Activities