Financial Controllers operate in a global environment where flexibility is the watchword. There has been widespread recognition of the need for finance to develop from being a scorekeeper to a business partner. Many organisations have changed their finance function as a result. Non-financial objectives such as risk, IT ROI, quality, reliability, lead times and customer satisfaction have gained in importance. Much more attention needs to be paid to the external environment, particularly the business’ competitive advantage, applying a wider strategic perspective

1. The Effective Financial Controller -
Managing Financial Functions and
Improvement Opportunities
Dr. Batool alrfooh

2. Introductions
The Controller’s Position
Financial management careers offer solid job security,
strong salary potential and plenty of room for
advancement. In the accounting field, these senior finance
professionals lead accounting departments and help shape
financial strategy at organizations of all sizes.

3. What Does a Controller Do?
• Key responsibilities of a controller typically include:
• Managing the financial reporting process: The controller
oversees the preparation of financial statements, such
as income statements, balance sheets, and cash flow
statements, ensuring that they are accurate, complete,
and in compliance with Generally Accepted Accounting
Principles (GAAP) or International Financial Reporting
Standards (IFRS).
• Implementing and maintaining internal controls: The
controller is responsible for establishing and maintaining
a robust system of internal controls to safeguard the
company’s assets, prevent fraud, and ensure the
reliability of financial reporting.

4. What Does a Controller Do?
• Budgeting and forecasting: The controller participates in
the budgeting process, working with other departments
to develop and analyze budgets, monitor financial
performance, and identify variances.
• Tax compliance and planning: The controller ensures
that the company meets all tax filing and reporting
requirements, while also working on tax planning
strategies to minimize tax liabilities and optimize the
company’s financial position.
• Managing the accounting team: The controller typically
supervises the accounting staff, providing guidance,
training, and support to ensure that accounting activities
are performed accurately and efficiently.

5. What Does a Controller Do?
• Financial analysis and decision support: The controller
provides financial analysis and insights to support
management decision-making, helping to evaluate the
financial implications of various business initiatives and
strategies.
• Audit coordination: The controller serves as the primary
liaison with external auditors, facilitating the annual audit
process and ensuring that audit requirements are met.

6. The controller’s role in
management
• A controller has two apparently contradictory
responsibilities: (1) the management service
responsibility of ensuring that specialist knowledge and
expertise get proper consideration when business
decisions and actions are taken, and (2) the custodial
and monitoring responsibility of ensuring the accuracy of
financial reporting and the integrity of internal control.
The apparent contradiction is that the first responsibility
requires active involvement in management while the
second calls for a sense of independence from affiliated
management.

7. The controller’s role in
management
• Sathe stresses that "strong" controllers overcome this
dilemma by developing certain interpersonal skills. Such
"strong" controllers thus have access to sensitive
information and deliberations in progress--an access that
permits them to take before-the-fact actions that stop ill-
conceived, ill-advised, or illegal decisions before they are
taken. A controller who is not actively involved in
decision making is not privy to such information and can
exert only after-the-fact or reactive control. However, the
costs of operating with a strong controller must be
weighed against the potential benefits and compared
with the benefits of alternate approaches.

8. The controller’s role in
management
• Sathe stresses that "strong" controllers overcome this
dilemma by developing certain interpersonal skills. Such
"strong" controllers thus have access to sensitive
information and deliberations in progress--an access that
permits them to take before-the-fact actions that stop ill-
conceived, ill-advised, or illegal decisions before they are
taken. A controller who is not actively involved in
decision making is not privy to such information and can
exert only after-the-fact or reactive control. However, the
costs of operating with a strong controller must be
weighed against the potential benefits and compared
with the benefits of alternate approaches.

9. WORKING CAPITAL MANAGEMENT

10. Understanding Working Capital
Management
• The primary purpose of working capital management is
to enable the company to maintain sufficient cash flow to
meet its short-term operating costs and short-term debt
obligations. A company's working capital is made up of
its current assets minus its current liabilities.
• Current assets include anything that can be easily
converted into cash within 12 months. These are the
company's highly liquid assets. Some current assets
include cash, accounts receivable, inventory, and short-
term investments. Current liabilities are any obligations
due within the following 12 months. These include
accruals for operating expenses and current portions of
long-term debt payments.

11. Understanding Working Capital
Management
• The primary purpose of working capital management is
to enable the company to maintain sufficient cash flow to
meet its short-term operating costs and short-term debt
obligations. A company's working capital is made up of
its current assets minus its current liabilities.
• Current assets include anything that can be easily
converted into cash within 12 months. These are the
company's highly liquid assets. Some current assets
include cash, accounts receivable, inventory, and short-
term investments. Current liabilities are any obligations
due within the following 12 months. These include
accruals for operating expenses and current portions of
long-term debt payments.

12. Main Components of Working
Capital Management
• Cash
The core of working capital management is tracking cash
and cash needs. This involves managing the company's
cash flow by forecasting needs, monitoring cash balances,
and optimizing cash inflows and outflows to ensure that the
company has enough cash to meet its obligations. Because
cash is always considered a current asset, all accounts
should be considered. However, companies should be
mindful of restricted or time-bound deposits.

13. Main Components of Working
Capital Management
• Receivables
To manage capital, companies must be mindful of their
receives. This is especially important in the short-term as
they wait for credit sales to be completed. This involves
managing the company's credit policies, monitoring
customer payments, and improving collection practices. At
the end of the day, having completed a sale does not
matter if the company is unable to collect payment on the
sale.

14. Main Components of Working
Capital Management
• Payables
Payables in one aspect of working capital management
that companies can take advantage of that they often have
greater control over. While other aspects of working capital
management may be out of the company's hands (i.e.
selling goods or collecting receivables), companies often
have a say in how they pay suppliers, what the credit terms
are, and when cash outlays are made.

15. Main Components of Working
Capital Management
• Inventory
Companies primary consider inventory during working
capital management as it may be most risky aspect of
managing capital. When inventory is sold, a company must
go to the market and rely on consumer preferences to
convert inventory to cash. If this cannot be completed in a
timely manner, the company may be forced to have short-
term resource stuck in an illiquid position. Alternatively, the
company may be able to quickly sell the inventory but only
with a steep price discount.

16. Current Assets & Current Liabilities
are collectively known as
WORKING CAPITAL
Components of Working Capital
Accounts Receivable:
arise because of companies do not usually expect
customers to pay for their purchases immediately.
These unpaid bills are a valuable asset that companies
expect to be able to turn into cash in the near future.
TRADE CREDIT : Unpaid bills from sales to other companies.
CONSUMER CREDIT : Sales of goods to the final customers.
Cash & Marketable Securities:
Cash: Dollar Bills & Bank Deposits.
DEMAND DEPOSITS: Money in checking accounts that the firm can pay out immediately.
TIME DEPOSITS: Money in saving accounts that the firm can pay out only with a delay.
Marketable Securities: Commercial Paper & Tresury Bills

17. Components of Working Capital
Accounts Payable: Unpaid Bills
Outstanding payments due to other companies
One firm’s credit is another firm’s debit
NET WORKING CAPITAL
CURRENT ASSETS – CURRENT LIABILITIES
Generally called as
WORKING CAPITAL

18. CASH CONVERSION CYCLE =
(Inventory Period + Receivables Period) – Accounts Payable Period
CASH CONVERSION CYCLE
CASH
FINISHED
GOODS
RECEIVABLES INVENTORY

19. CASH CONVERSION CYCLE =
(Inventory Period + Receivables Period) – Accounts Payable Period
CASH CONVERSION CYCLE :
Period between firm’s payment for materials and collection on its sales
Inventory Period = Average Inventory / [Cost of Goods Sold / 365]
Receivables Period = Average Accounts Receivables / [Sales / 365]
Payable Period = Average Payable / [Sales / 365]

20. Working Capital Trade-off
Carrying Costs:
Costs of maintaining Current Assets; including opportinity cost of capital.
Investment in CASH & RECEIVABLES may cause an interest loss and
Investment in INVENTORY has opportinity cost of capital; storage & insurance costs
Shortage Costs:
Costs incurred from shortages in Current Assets
Shortage in CASH may incur unnecassary transaction costs of selling marketable securities and
Shortage in RECEIVABLES may cause to lose customers because of credit sales’ restrictions
Shortage in INVENTORY may have shut down production & unable to to fill orders promptly
Carrying Costs encourage firm to hold current assets to a MINIMUM
Shortage Costs encourage firm to hold current assets to a MAXIMUM
It’s an art to find the LEVEL of CURRENT ASSETS
that minimizes the sum of
Carrying Costs & Shortage Costs

21. Links between
LONG-TERM & SHORT-TERM fınancıng
Short-Term financing
Time
Long -Term financing
Seasonal
component of
required assets
Total
Capital
Requirement
STRATEGIES:
1. Matching Maturities: Long-Lived assets with long-term debt & Current Assets with short-term debt
2. Permanent Working Capital Requirements: A positive amount of WORKING CAPITAL
3. The Comforts of Surplus Cash:The firm is always a short-term lender (Relaxed Strategy)
Firm’s Total Capital Requirement: The Cost of Assets

22. TRACING CHANGES IN CASH & NWC
Cash Budgeting:
Forecasting future sources and uses of cash
Alerts for future cash needs & provides a standart
Three Common Steps to preparing Cash Budget
1. Forecast the sources of cash
3. Calculate whether the firm is facing a
cash shortage or plus
2. Forecast the uses of cash

23. DETAILS:
The Steps of Calculating Sources of Cash
1. Receivables at the start of period
2. Forecast Sales
3. Forecast Collections
• Sales in current period (%?)
• Sales in last period (%?)
TOTAL COLLECTIONS
4. Receivables at the end of period
5. Other sources of cash (Dispose of land, machine, stock)
Ending Accounts Receivable = Beginning Acc. Rec. + Sales - Collections

24. DETAILS:
The Steps of Calculating Uses of Cash
1. Payments for Accounts Payable
2. Labor, Administrative and Other Expenses
(Regular Business Expenses)
3. Capital Expenditures (Pay for long-lived assets)
4. Taxes, Interest and Dividend Payments
Prepare SOURCES & USES CASH LIST each period
Determine Short-Term Financing Requirements

25. DYNAMIC MATTRESS'S FINANCING PLAN
1. Quarter 2. Quarter 3. Quarter 4. Quarter TOTAL
Cash Inputs 86,5 80,3 121,0 128,0 415,8
Cash Outputs 131,5 95,3 95,0 93,0 414,8
Cash Balance 45,0 15,0 26,0 35,0 1,0
Marketable Securities 5,0 5,0
Bank Loan 2% 40,0 8,6 31,4 40,0
Interest Payment 0,8 1,6 0,6 3,0
Stretch 5% 15,8 15,8 0
Cash Balance 45,0 15,0 26,0 32,0 2,0
Additions to Cash
Balance 3,0 3,0

26. QUESTIONS:
1. Cash or Marketable Securities enough or expand?
2. Does plan cahnge Current & Quick Ratios?
3. Hidden costs to stretching payables?
4. Does plan leave DYNAMIC in good financial shape for 2005?
5. What about log-term financing and capital expenditures?
6. Can the firm’s operating and investment plans be adjusted to
make the short-term financing problem easier?
SHORT-TERM FINANCING PLANS MUST BE DEVELOPED BY
TRIAL & ERROR !...

27. SOURCES OF SHORT-TERM FINANCING
Bank Loans:
Line of Credit: Aggrement by a bank that a company may borrow at
any time up to an established limit.
Revolving Credit Aggrement: If the firm wants to be sure it will able
to borrow; it can enter a RCA. ( RCA usually last for a few years and formally commit the
bank to an aggreed limit. A committment fee is required on any unused amount.)
Term Loans: Conditional Credit (Loans are paid when the goods are sold)
Syndicate Credit: Banks combined to provide cash
Commercial Paper:
Short-Term unsecured notes issued by firms

28. SOURCES OF SHORT-TERM FINANCING
Secured Loans:
Accounts Receivables Financing
1. Some companies solve their financing problem by borrowing on
the strength of their current assets!...
When a loan is secured by receivables, the firm assigns the receivables
to the bank.
The risk of default on the receivables is therefore borne by the firm
2. Others solve it by selling their current assets!...
An alternative procedure is to sell the receivables at a discount
to a financial institution known as FACTOR and let it collect the
money.
Once the firm has sold receivables, the factor bears all the
responsibility for collecting on the accounts!...
Inventory Financing
Bank also lend on the security of inventory; but they are choosy
about the inventory they will accept!...

29. THE COST OF BANK LOANS
Simple Interest
1. Simple Interest: The interest rate on bank loans frequently is
quoated on APR
2. Discount Interest : The interest rate on bank is often calculated on a
discount basis.
3. Interest with Compensating Balances: Occasionally, bank loans
require the firm to maintain some amount on balance at the bank,
which is called as Compensating Balance.
The reason is that borrower must pay interest on full amount borrowed
but has access only part of the funds.
In each case; the face value of the interest has to be
converted to effective interest rate in order to learn the actual
burden on the loan.