Lawrence Blake Group International CFO Shiva Prasad shares his advice to C-suite executives looking to better oversee an agency's finances.
Whether you’re the CEO of a multinational corporation or an upstart company with 5 employees, every CEO has one challenge in common: how to monitor finances. A CEO’s role entails more than simply the finances and the profitability of the company. The CEO is responsible for everything ranging from developing and enhancing the core competency of a business model to ensuring that the entire business model runs as it is intended while continually looking for growth opportunities. Nearly every CEO dreams of taking his/her company public and becoming a public company would dictate, as per the Sarbanes-Oxley Act (SOX), that CEOs certify the accuracy of all financial statements. In the modern business world, if you intend to be a successful CEO, it is vital that you learn how to get the big picture of finances and ensure accuracy in financial statements. The following tips will help provide an idea of a good approach to understanding finances.
Centralized vs. Decentralized
A corporation of any size has to choose between centralizing its structure with all the power going to the C-level management or decentralizing, where there is a greater balance of power. There is a time and a place for both approaches; however, the vast majority of corporations are likely to benefit from decentralizing. A CEO would have a better opportunity to gather financial details from individual departments through multiple managers rather than have to rely solely on what the CFO presents to the CEO. Most centralized structures dictate that the only financial results a CEO sees come from the financial statements prepared by the CFO. In a decentralized structure, the CEO can gather financial information prepared from senior level management of various departments. While this could be a little more work, it certainly saves a lot of headache. This applies to small companies as well. You may choose to have one employee monitor all the expenses and report to you or you may simply choose to elect a manager for every three employees and have each manager prepare expense reports.
When to use the cost center approach and when to avoid it
The cost center approach is very commonly used by larger companies. The cost center approach dictates that a department is allocated a certain amount of financial resources for the year and the department can proceed to use the financial resources as deemed fit by the management of that department. While the cost center approach eases the financial management burden of analyzing unitary costs, it creates inefficiencies in spending and returns. CEOs may benefit from using the cost center approach on non-core departments and focusing on a more analytical and involved, albeit tedious, unit-cost approach on core departments to maximize financial efficiency.
Auditing – Internal & External
Perhaps the most important tool for a CEO to ensure financial accuracy in prepared statements is to resort to the tried and true auditing method. Financial auditing is a legally mandated process for public companies with the SOX dictating that external auditors must be independent of a company. While running through both internal and external auditors could be a tad expensive for most small companies, it would be highly beneficial to do both or at least to run through internal auditing. Financial auditing ensures that financial statements prepared by a CFO or the financial department are consistent with the findings of an auditor. The larger a company gets, the more relevant and more important auditing is.
At the end of the day, a CEO must strive to ensure that not only are financial statements accurate but also that the company is financially efficient. While setting up all departments as cost centers may surely be an easy approach, it isn’t one that enables efficiency in processes. As such, an understanding of the three aforementioned concepts can provide a general idea of how to approach finances for a CEO.