1 – Control of Cash Flow
Following the trail to cash flow within the company is one of the most vital activities of the CFO. In the world of business, it is usually said that ‘Cash is King’, since most of the serious problems of a company arise by the lack of cash, which does not mean that the company is not profitable. It could even be the opposite case that a very profitable and growing company may run out of cash.
The reason is easy as the financial accounting does not respond adequately to this requirement and the control of the treasury does not, since the cash generated by the business is often ‘hidden’ in a variety of operations of the invoices of customers receivable, payments made suppliers by, receipts received, investments, divestitures, variation of payment and payment periods, etc. That is, there is a wide variety of reasons why treasury oversight does not reflect the cash generated, let alone how it has been generated or where it has gone.
Any serious financier knows that this control is vital to the day to day business and avoid very unpleasant surprises. That is why it is fundamental to carry out a rigorous control of the cash flow of the company.
2 – Analyze New Investments
When a company wants to undertake a new investment, several basic questions should be asked such as the following;
Am I able to take on this investment?
How will I finance it?
What return will we get?
What will happen if the investment does not go according to plan?
The launch of new investments, opening new branches, buying new machinery, expanding the factory, etc. are critical decisions that affect the balance of the company in a very significant way. They can make it grow but can also give it many headaches and even lead to ruin.
To properly analyze a new investment, the CFO will use financial techniques such as discounting cash flows, calculating the NPV and/or IRR of the investment project which are basic to know if the project is worth it. However, it must be borne in mind that the cash flow discount of these analysis is usually based on ‘forecasting’ sales and profit margins, which may or may not materialize.
Therefore, undertaking new investments is a critical task that requires the elaboration of different scenarios, so that the ability of the company to ‘digest’ the investment in the event of failure of the forecasts can be evaluated, without risking its own survival.
This is one of the most valuable functions that a good CFO can bring in the long term, and at the same time, one of the biggest mistakes that many managers make to undertake new investments that cannot be digested in the event of an unfavorable economic scenario.