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The New CFO Financial Leadership Manual The New CFO Financial Leadership Manual Third Edition STEVEN M. BRAGG JohnWiley&Sons,Inc. Copyright#2011byJohnWiley&Sons,Inc.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinany formorbyanymeans,electronic,mechanical,photocopying,recording,scanning,orotherwise, exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyrightAct,without eitherthepriorwrittenpermissionofthePublisher,orauthorizationthroughpaymentofthe appropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers, MA01923,(978)750-8400,fax(978)646-8600,orontheWebatwww.copyright.com. RequeststothePublisherforpermissionshouldbeaddressedtothePermissionsDepartment, JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030,(201)748-6011,fax(201) 748-6008,oronlineathttp://www.wiley.com/go/permissions. 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Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsin printmaynotbeavailableinelectronicbooks.FormoreinformationaboutWileyproducts,visit ourWebsiteatwww.wiley.com. LibraryofCongressCataloging-in-PublicationData: Bragg,StevenM. ThenewCFOfinancialleadershipmanual/StevenM.Bragg.—3rded. p.cm.– (Wileycorporatef&a;556) Includesindex. ISBN978-0-470-88256-6(hardback);978-0-470-91839-5(ebk);978-0-470-91840-1 (ebk);978-0-470-91838-8(ebk) 1. Chieffinancialofficers—Handbooks,manuals,etc. 2. Corporations—Finance— Management—Handbooks,manuals,etc. I. Title. II. Title:CFOfinancialleadershipmanual. HG4027.35.B732010 658.15–dc22 2010021352 PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 Contents Preface xiii PARTONE:OVERVIEW Chapter1:CFO’sPlaceintheCorporation 3 FirstDaysinthePosition 3 SpecificCFOResponsibilities 4 OverviewoftheChangeManagementProcess 8 DifferencesbetweentheControllerandCFOPositions 9 RelationshipoftheControllertotheCFO 12 OtherDirectReports:TheTreasurer 13 OtherDirectReports:TheInvestorRelationsOfficer 13 Summary 14 Chapter2:FinancialStrategy 15 Cash 15 Investments 17 WorkingCapital 19 Inventory:InventoryReductionDecision 21 FixedAssets:LeaseversusBuyDecisions 23 Payables 23 Debt 26 Equity 28 Products:ProductEliminationDecisions 32 FixedExpenses:StepCostingDecisions 35 PayrollExpenses:TemporaryLaborversus PermanentStaffingDecisions 36 Entities:DivestitureDecisions 38 Systems:WhentoUseThroughputCosting 39 High-Volume,Low-PriceSaleDecisionsUsingThroughputCosting 43 CapitalBudgetingDecisionsUsingThroughputCosting 44 MakeversusBuyDecisionsUsingThroughputCosting 46 Summary 47 Chapter3:TaxStrategy 48 AccumulatedEarningsTax 49 CashMethodofAccounting 50 v vi & Contents InventoryValuation 51 MergersandAcquisitions 51 NetOperatingLossCarryforwards 52 Nexus 53 ProjectCosting 54 SCorporation 55 SalesandUseTaxes 56 TransferPricing 57 UnemploymentTaxes 59 Summary 60 Chapter4:InformationTechnologyStrategy 61 ReasonsforDevisinganInformationTechnologyStrategy 61 DevelopingtheInformationTechnologyStrategy 62 TechnicalStrategies 65 SpecificApplications 67 Summary 70 PARTTWO:ACCOUNTING Chapter5:PerformanceMeasurementSystems 73 CreatingaPerformanceMeasurementSystem 73 AssetUtilizationMeasurements 74 OperatingPerformanceMeasurements 79 CashFlowMeasurements 82 LiquidityMeasurements 85 SolvencyMeasurements 90 ReturnonInvestmentMeasurements 91 MarketPerformanceMeasurements 97 Summary 99 Chapter6:ControlSystems 100 NeedforControlSystems 100 TypesofFraud 101 KeyControls 103 WhentoEliminateControls 118 Summary 119 Chapter7:AuditFunction 121 CompositionoftheAuditCommittee 121 RoleoftheAuditCommittee 122 PurposeoftheExternalAuditors 124 DealingwithExternalAuditors 125 ImpactoftheSarbanes-OxleyActonthe AuditFunction 126 Contents & vii RoleoftheInternalAuditFunction 128 ManagingtheInternalAuditFunction 131 Summary 133 PARTTHREE:FINANCIALANALYSIS Chapter8:CostofCapital 137 Components 137 CalculatingtheCostofDebt 138 CalculatingtheCostofEquity 140 CalculatingtheWeightedCostofCapital 142 IncrementalCostofCapital 144 UsingtheCostofCapitalinSpecialSituations 146 ModifyingtheCostofCapitaltoEnhanceShareholderValue 148 StrategizingCostofCapitalReductions 151 Summary 152 Chapter9:CapitalBudgeting 153 HurdleRate 153 PaybackPeriod 154 NetPresentValue 156 InternalRateofReturn 158 Throughput-BasedCapitalBudgeting 161 ProblemswiththeCapitalBudgetApprovalProcess 162 CashFlowModelingIssues 164 FundingDecisionsforResearchandDevelopmentProjects 165 CapitalInvestmentProposalForm 167 Post-CompletionProjectAnalysis 170 Summary 172 Chapter10:OtherFinancialAnalysisTopics 173 RiskAnalysis 173 CapacityUtilization 177 BreakevenAnalysis 183 BusinessCycleForecasting 188 Summary 194 PARTFOUR:FUNDING Chapter11:CashManagementandConsolidation 197 CashForecastingModel 197 InformationSourcesfortheCashForecast 201 MeasuringCashForecastAccuracy 201 CashForecastingAutomation 202 CashConcentrationOverview 204 PhysicalSweeping 204 viii & Contents NotionalPooling 206 ComparisonofAccountSweepingandNotionalPooling 207 CashManagementControls 208 Summary 212 Chapter12:InvestingExcessFunds 213 InvestmentCriteria 213 InvestmentRestrictions 214 InvestmentOptions 214 InvestmentStrategies 216 Summary 219 Chapter13:ObtainingDebtFinancing 220 ManagementofFinancingIssues 220 BankRelations 221 AccountsPayablePaymentDelay 222 AccountsReceivableCollectionAcceleration 223 CreditCards 224 EmployeeTrade-Offs 224 Factoring 224 FieldWarehouseFinancing 225 FloorPlanning 226 InventoryReduction 226 Lease 227 LineofCredit 228 Loans 228 MerchantCardAdvances 234 PreferredStock 234 SaleandLeaseback 235 Summary 235 Chapter14:ObtainingEquityFinancing 238 TypesofStock 238 PrivatePlacementofStock 239 LayoutoftheOfferingMemorandum 240 EstablishingaValuationfortheOfferingMemorandum 252 SwappingStockforExpenses 253 SwappingStockforCash 254 StockWarrants 254 StockSubscriptions 255 PrivateInvestmentinPublicEquity 255 BuyingBackShares 256 Rule144 257 Rule10b5-1 258 Summary 261 Contents & ix PARTFIVE:PUBLICLYHELDCOMPANY Chapter15:InitialPublicOffering 265 ReasonstoGoPublic 265 ReasonsNottoGoPublic 266 CostofanIPO 268 PreparingfortheIPO 269 FindinganUnderwriter 271 RegisteringforandCompletingtheIPO 274 AlternativesforSellingSecurities 277 TradingonanExchange 279 AmericanStockExchange 280 OverviewoftheNASDAQ 282 NewYorkStockExchange 283 ComparingtheStockExchanges 285 Over-the-CounterStocks 287 Summary 287 Chapter16:ReportstotheSecurities andExchangeCommission 288 Overview 288 Form8-K 289 Form10-QandForm10-K 294 FormS-1 297 FormS-3 299 FormS-8 300 ShelfRegistration 300 DeclaringaRegistrationStatementEffective 301 ReportingInsiderSecuritiesOwnershipandTrading 302 EDGARFilingSystem 306 FedwirePayments 308 Summary 310 Chapter17:InvestmentCommunity 311 Introduction 311 Analyst’sPerspective 311 FindingtheRightAnalyst 313 SellSide:Analysts 314 NegativeAnalystReport 316 SellSide:Brokers 316 SellSide:InvestmentBankers 318 SellSide:InvestorRelationsSpecialists 318 BuySide:TypesofInvestors 319 BuySide:InstitutionalInvestors 319 BuySide:IndividualInvestors 321 BuySide:PresentationstoInvestors 323 Summary 323 x & Contents Chapter18:TakingaCompanyPrivate 325 GoingPrivateTransaction 325 Rule13e-3 325 FillingOutSchedule13E-3 326 300-ShareholderLimit 329 Form15 330 Summary 330 PARTSIX:MANAGEMENT Chapter19:RiskManagement—GeneralConcepts 333 RiskManagementPolicies 334 RiskManagementPlanning 335 ManagerofRiskManagement 337 RiskManagementProcedures 338 TypesofInsuranceCompanies 341 EvaluatingtheHealthofanInsuranceCarrier 343 ClaimsAdministration 344 InsuranceFiles 345 AnnualRiskManagementReport 346 Summary 347 Chapter20:RiskManagement:ForeignExchange 348 ForeignExchangeQuoteTerminology 348 NatureofForeignExchangeRisk 349 DataCollectionforForeignExchangeRiskManagement 350 ForeignExchangeHedgingStrategies 351 AccepttheRisk 352 InsistonHomeCurrencyPayment 352 CurrencySurcharges 353 GetPaidonTime 353 ForeignCurrencyLoans 353 SourcingChanges 353 ForeignCurrencyAccounts 354 Unilateral,Bilateral,andMultilateral NettingArrangements 354 ForwardExchangeContracts 355 CurrencyFutures 357 CurrencyOptions 358 CurrencySwaps 360 ProxyHedging 362 Summary 362 Chapter21:OutsourcingtheAccountingandFinanceFunctions 363 AdvantagesandDisadvantagesofOutsourcing 363 ContractualIssues 368 Contents & xi TransitionIssues 370 ControllingSupplierPerformance 372 MeasuringOutsourcedActivities 373 ManagingSuppliers 379 DroppingSuppliers 379 Summary 381 Chapter22:MergersandAcquisitions 382 EvaluatingAcquisitionTargets 382 ComplexityAnalysis 400 EvaluateAcquisitionTargetswithAlliances 401 ValuinganAcquisitionTarget 402 AlternativeValuationMethods 402 ControlPremium 406 SynergyGains 406 DiscountedCashFlow(DCF)Model 407 ConstructingCashFlowScenarios 409 CashFlowAdjustingFactors 410 Earnout 412 QualitativeFactors 413 WhichValuationMethodIsBest? 414 MethodofPayment 415 TypesofAcquisitions 416 TaxImplicationsofanAcquisition 416 AssetAcquisition 418 Type‘‘A’’Reorganization 419 Type‘‘B’’Reorganization 420 Type‘‘C’’Reorganization 421 Type‘‘D’’Reorganization 422 TriangularMerger 423 ReverseTriangularMerger 423 TermsoftheAcquisitionAgreement 424 WhentoUseanInvestmentBanker 424 Summary 425 PARTSEVEN:OTHERTOPICS Chapter23:EmployeeCompensation 429 DeferredCompensation 429 LifeInsurance 431 StockAppreciationRights 432 StockOptions 432 RestrictedStockUnits 435 BonusSlidingScale 435 CutBenefitCostswithaCaptiveInsuranceCompany 436 Summary 436

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The comprehensive guide for CFOs who need an overview of leadership basics from strategies to management improvement tips Filled with pragmatic insights and proactive strategies, The New CFO Financial Leadership Manual, Third Edition is destined to become your essential desktop companion. This thoro