Is Your CFO Giving You These Reports
A CFO is someone responsible for all the money-related matters whether it is historical or forecasts. The responsibilities do not end by just increasing profit but extend to spotting financial weaknesses and planning for future financial needs. There are some reports such as Balance Sheets, Statement of Profit & Loss and Cash Flow Statements that must be prepared every year for financial reporting purposes. But, there are specific reports that are not mandatory to prepare as per statutory requirements though they are important to know the present and future performance of the company.
So, here are the reports that every CFO must give to the management of the company. These reports can be modified and tweaked a little according to the sector in which your company operates.
- Cash Flow Projections
A Company’s survival is dependent more on its cash flow rather than its profit. Of course, Profit is necessary but this profit can be achieved when you will have the money to fund your initial investment and support the day-to-day workings of fulfilling a project. If your company gets a long-term project, you can charge your client on a percentage completion basis or in advance to fund the initial project costs. So, after considering all such cash flow decisions, a CFO must give a Cash Flow Projection Report which shows the expected future net cash flows. The period for which this report is to be prepared depends on the nature of the business. If the cash flows are highly volatile, then, this report should show quarterly or half-yearly projections. If the cash flows are more stable, then, a yearly cash flow projection will suffice.
These projections should depict positive cash flows. If not, the company should consider finding alternative means to bring funds into the company. This could include methods such as bill discounting, advance payment, lesser credit period to customers, etc.
- Business Forecast Report
The future belongs to those who prepare for it. So, forecasting your future sales and evaluating your potential customers helps to increase your chances of getting more business. Since this report is just an evaluation of potential clients and no actual client is landed by the company, the sales should be multiplied by the expected probability of winning a particular client. This is a more prudent approach as it gives a realistic view of the projections made. Once your company knows the probability of landing its potential clients, it would be easy to gather the resources and invest them in the right time and place.
Being aware of the future cash flows also allows your company to manage working capital better and align its cash flows towards the future capital requirements. The time period of this report will depend on the concentration of the potential customers, nature of the projects, duration of the project, etc. If the duration of the project is short or if there are multiple small clients, your CFO should prepare quarterly projections. If there are fewer large clients or if the projects your company will be getting are for the long term, then half-yearly or annual projections would suffice.
- Risk Management Report
The business environment has become quite dynamic in the past decade and is expected to be more dynamic in the coming years. So, the job of the CFO is not just restricted to numbers but is expanded to the horizons of business risks that a company faces. A Pro CFO is well aware of the structural and technological changes that are happening in the industry in which his company operates. Your CFO should constantly report on the risks that possess a threat to the sales and profit of your company. This would help the Department heads plan themselves better for the future and mitigate the risks.
This could include the following risks that a CFO can report:
- Pricing risks that a company may face due to the availability of cheap substitutes for the product or the industry-wide reduction of selling prices. Timely identification of this risk will help the managers to take measures for cost reduction and to improve the quality of the product.
- Scarcity of raw materials that the company could face. There are many macro and microeconomic factors that can hit the production line of the company which could ultimately impact sales.
- A gradual technology shift in the industry. Early identification of this risk would provide time and capital for the company to join the technological wave so that its products would not become obsolete in the future.
These were some general points. Likewise, this report can be more specific according to the nature of the business. This report would ensure better allocation of financial resources of the company.
- Working Capital Requirements
Working capital is the funds that are required to carry out day-to-day business operations. The three pillars of working capital are Accounts Receivables, Inventory, and Accounts Payables. Healthy working capital can be achieved by managing these pillars efficiently. Your CFO must give this Working Capital Report to identify any cash shortages faced by the company in the past or any that it may face in the future. Apart from debt collections, payments to creditors, and inventory conversion into sales, this report should also consider the bank overdraft limits, the future capital expenditure, credit facilities available, trade credit, etc.
If a considerable amount of costs goes towards the storage of inventory, the company can adopt the Just-in-time system and use forecasting techniques to manage inventory. This Report could be prepared weekly or monthly to identify any cash shortages beforehand. It will also identify operational processes that are a burden on the company’s cash management that needs to be restructured.
- Variance Analysis Report
As the business environment has become dynamic, there are many economic factors and climate factors that hit the top and bottom line of the company indirectly. This makes it important to do a routine analysis of variance in the expected performance of the company. It not only measures the financial performance but also managerial performance. Here, the variance refers to the difference between expected results and budgeted results. A CFO should give this report to help achieve a company’s target better. The variance between the actual and budgeted results can be due to two kinds of variance: Planning and Operational.
Sometimes, the business conditions change between the preparation of a budget and its actual execution. An industry-wide increase in the price of raw materials should not be considered a failure on the part of managers. At the same time, a manager should not be lauded for an industry-wide increase in demand due to economic factors. Therefore, whenever, there is such change that is beyond the control of managers, the original budgets should be revised. This difference is shown by Planning variance. This is of least importance in assessing the performance of the company rather it provides more insights about future budgeting.
Operational variance is the difference between this revised budget and the actual results achieved. This variance highlights the discrepancies from the side of management and tells which area needs improvement. This variance analysis report can be prepared for sales, costs, profits, the quantity of raw material used, the output generated, etc. The time period of this report depends on the nature of the business. A comparative variance analysis of the previous period will provide a clearer picture of the affairs of the company.
- Trend Analysis Report
Make the trend your friend! Without realizing it, every functioning of a human being turns into a pattern in some time. Well, the company is run by people and the clients are people. So, there is bound to be a trend both within the organization and outside the organization. A Trend Report talks more about the past but it provides useful insights into the future. A yearly sales trend report provides an insight into where the company is heading. This trend line shall be depicted in a graphical representation. Similarly, trend lines could be prepared for profits and costs. This would help determine particular months that usually have high sales and months that have low sales. The Company can maintain its inventory accordingly. Study the pattern that the trend follows. This could help you identify discrepancies, accounting errors, new business opportunities, unprofitable products, etc.
So, these were some crucial reports that a CFO must give. These reports can be tweaked and customized according to the nature and size of the business. Finances are something that makes or breaks a company. Identifying whether the money is being used in the right place and at the right time solves half of the issues of any company.
