Chief Financial Officer – What Constitutes Competency? ( III )

His job scope would include something along the following lines:

He must be fearless in challenging the norms, championing the rationale for changes in performance, defining financial benchmark and implementing systems to track performance against goals, supporting the development of corporate expansion strategies, mapping perspectives on market opportunities, evaluating skills and assets in place for pursuing opportunities and recommending programs to enhance skills to fill gaps, performing business and financial evaluation of specific proposals.

Using the Capital Asset Pricing Model ( CAPM ) , he should be able to identify the appilcable hurdle rate ( which is defined as the Weighted Average Cost of Capital or WACC ). Return on Equity ( ke ) is defined as the sum of the Risk-Free Rate and the Product of its Beta and Market Premium ie. ke = rf + b*(rm - rf) ).

In order to create value, he needs to assess whether the business model is capable of maintaining and or sustaining a competitive advantage period ( CAP ) during which the business model is able to generate superior Return on Invested Capital ( ROIC ) in Excess of its Cost of Capital or Return in Excess of Cost of Capital (RECC) .

Financial indicators should include Operating Margin ( i.e. Earning Before Interest and Tax ( EBIT ) over Sales ) and Asset Turnover Ratio( Sales over Invested Capital ). Enterprise Value ( EV) is the consequence of the value based management process that involves thinking strategically that will lead to the underpinning TODAY of the future cashflow that shall arise from the successful business execution of the said strategy. For a steady-state type of model, EV is equalled to EBIT(1-tax rate) over Hurdle Rate. With growth, EV can improve to EBIT(1-tax rate) over Hurdle Rate less Growth Rate. ( When growth rate exceeds the hurdle rate, this formulation has to be modified).

Next: He must also plan and execute majors initiatives required to implement strategies which shall include developing value creating optimal capital structure and dividend policy, designing and managing strategy for communicating the key elements of plans and performance to investors and all the financial community...