E3: Introduction to Finance

This episode comes with a flavor of Finance 101 for beginners, and we have the best guest to give that introduction. Dr. Mohamed ELRouby ACMA, CGMA, FPAC, CSCA, DBA, OKRP is a sessional finance leader and a well-known Finance active that promotes the value creation of Finance and the important role of Finance business partners in business.

We have started the episode with the myth and truth about Finance, which is essential to highlight before introducing the Finance function.

1-   Cutting budget vs ROI partnering:

Finance wrong perception that they always cut the budget and use every opportunity to be slim on the budget to maximize profit regarding the business understanding or need. However, Mohamed shared how Finance can partner on how to spend the money more rationally, ensuring ROI, and we're gearing resources in the right direction, asking the right questions to align investment with company strategy.

2-   Numbers Only vs What is behind number:

Another point has been shared that Finance only focuses since most of their work on numbers, so they got obsessed with only numbers, which is again not true and the role of Finance to understand what is behind the number, the business story behind numbers, commercial drivers and business logic that generates these numbers.

3-   Process and System oriented vs business oriented:

The last point is that Finance is obsessed with processes and systems and doesn't belong to business; however, it should be business oriented, which is critical for the company's value creation and protection.

Non-Finance professionals need to understand who is doing what in Finance and who they should approach for different financial support required to grow the business.

Finance planning and Analysis ( FP&A) or commercial Finance:

This function is about constructing the financial planning of the company. They manage all business cases, pricing decisions, profitability analysis, and future decisions impacting company growth and profit. They constantly seek to learn from the past and reflect that in plans.

Accounting and controlling: 

The integral sub-function within Finance is responsible for accounting, controlling and compliance with local regulations. They have a role to play in internal controls and policies. They also record every single transaction within the company. They partner with the rest of the Finance team and external auditors and investors to clarify the financial statements. They partner with vendors and suppliers in terms of payments and processes. Also, they deep dive into past transitions and support the business with historical analysis.

Treasury:

They manage the company's cash. They protect and invest company money through different banks or financial institutions. They partner with a new project, investment merger and acquisition to financing the company's growth projects.

Tax:

The tax team ensure that the company's different transitions comply with local tax authorities. Also, they get involved in any future project that has tax impact to ensure they give clearance as per local regulations. They also partner with official tax representatives whenever they deal with the company. 

Internal audit and control :

They check the health of the process and controls across the company to save the company assets and resources. They introduce preventive controls and examine past challenges of controls to keep the company resources safe. 

Dr. Mohamed ELRouby ACMA, CGMA, FPAC, CSCA, DBA, OKRP shared that a great concept about Finance business partners is a mindset that is not linked to seniority or entry-level within Finance. Suppose you are keen to support business, turn data into insights, and have the curiosity to understand business and what is behind numbers. In that case, you're a true finance business partner, but if you act like a policeman. Some people label the CFOs as CFNOs as CFOs keep saying Nos to all requests, and partners are avoiding dealing with them.

"Finance business partner is not a title; It's a mindset, "said Dr. Mohamed ELRouby ACMA, CGMA, FPAC, CSCA, DBA, OKRP

The journey moved to the basic finance terminologies that non-Finance professionals need to be aware of:

Year to Date "YTD":

This terminology represents the company performance from the beginning of the year until the end of the current month; when we say YTD July, it means the performance from the beginning of the year until the end of July. 

Month-to-date "MTD"

It represents our performance from the begging of the month till today. So if we're on the 25th of March, MTD is our performance from the beginning to the 25th of the month. 

Year to go, "YTG."

It represents our performance from this month till year-end. 

Full Year "FY"

Simply YTD + YTG = FY, which represents what we have achieved as actuals plus what we forecast till year-end 

Topline: is the sales line or net sales line in the P&L, which means our sales performance and revenue performance 

Bottom line: this means net profit or net income in the P&L as it's one of the last few lines in the P&L, so it's called the bottom line.

Capex and Opex:

Opex is our operating expense, all we need to spend in the short term to run our business's operation and achieve our top lines, such as salaries, travel expenses, stationery, utility bills, rent, and marketing material. It's always short-term spending. 

Capex: Capital expenditure means that we invest money to get long-term benefits such as a machine as we will not use it for one or two years so we will get that machine for long-term benefits such as five or ten years. Machine, furniture, company cars, building, computers, land

Accounts receivables (AR)

When we sell our products and service to vendors, and until we collect our money per the payment terms, we put that money under the AR account, which means the expected cash collection we will collect from our customers.

Accounts payable (AP)

Represents what we owe to other customers, meaning when we receive a good or service from customers, and we have to pay in exchange for that service, so till we pay them, we put that amount due under AP. 

Dr. Mohamed ELRouby ACMA, CGMA, FPAC, CSCA, DBA, OKRP raised an important KPI for measuring the efficiency of AR and AP. For AR Finance, use DSO (Days Sales Outstanding). DSO is necessary for the Finance and commercial team since it directly impacts commercial operations and customer relationships. For example, when we say 70 days, DSO means it took the company 70 days to collect the company money from customers. The lower the days, the more efficient the cash collection process; the higher the days, the less efficient the collection process. Each market has its average based on each market's economics.

Another KPI for AP is DPO (Days Payable outstanding). It means that we have an average of 70 days, for example, to pay out suppliers for goods and service purchases. 

Both DSO and DPO have a significant impact on the cash flow of any organization and overall business operations.

The last KPI, which is significantly related to DIO ( Days inventory outstanding ), reflects our inventory's optimum level. The higher inventory ( DIO), the higher the ideal cash is frozen in the shape of stocks, which is unhealthy for the business; however, the lower DIO, the risk we might be out of stocks, which will lead to losing sales opportunities. 

"We need to have optimum inventory level which not to have excess inventory to reserve company cash investments or low level of inventory to avoid out of stock challenges ", said Mohamed

Please find below teaser for the Episode and full episode links will be shared in comments.