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Q3 2016 CFO Studio Magazine- Business & Money

As Seen in CFO Studio Magazine Q3 2016 Issue

Malware and Ransomware Update

Mobile devices, in this country at least, have been relatively safe from malware attacks because most apps are downloaded from Google Play or Apple’s App Store, which run security checks on approved apps. But security experts warn that 2016 might be the year malware attacks begin to plague mobile phones and tablets.

The IT news source eWeek reported that infection rates on mobile devices could start to grow if a technique known as overlays, allowing the theft of login information in real time, pays off for criminals. In an overlay attack, the criminal overlays user interface elements on top of an application, tricking the mobile device’s user into entering information that the attacker then steals. An IBM security researcher told eWeek, “a lot of people in the underground are buying it,” presumably meaning the tools to effect an overlay.

To date, though, most reported malware attacks on mobile platforms mirror successful attacks on PCs.

More worrisome to enterprises than the theft of login information is ransomware, which encrypts the data on the hard drive and holds hostage the company owning the computer system until payment is made. If you do pay, you might be funding unsavory activities, potentially incurring liability for your company down the road.

Downsides of Trusting Robotics

The finance industry is rapidly automating information retrieval and analysis. A New York Times Magazine article, “Stocks & Bots,” profiled one company, Kensho, that created software to automate analysis of the Bureau of Labor Statistics’ monthly jobs report, providing information that investors want immediately about two to five days faster than they’d had it before from their in-house analysts. It was a boring job, but someone had to do it, and now it’s the work of robots.

Meanwhile, researchers at Georgia Tech have discovered that people will put their lives in the hands of a robot who commands attention, even if it leads them where their memories and instincts tell the humans they shouldn’t go.

In the study, 30 volunteers followed a bot into a conference room to take a survey about robotics. When an alarm went off and smoke filled the hallway, 26 subjects followed the robot, which led them away from where they’d entered the building.

If we are to benefit from inventions that use bots — from Google cars to robotic surgery to financial software — people have to trust the artificial intelligence. But too much trust is foolish, and all too human, it seems.

Multitaskers, Take Heart

Researchers have proved that jumping from task to task is not only harmful to productivity, it actually alters your physiology, reducing brain density in areas that control empathy and emotions. Today’s workplace, however, provides incessant, occasionally relevant, and sometimes important stimuli (email, social media alerts, colleagues asking for input), making multitasking seem necessary, and monotasking an increasingly archaic practice.

A concept called “deep work” may be the way to rebuild the damaged brain. In a book released in January, Deep Work: Rules for Focused Success in a Distracted World, computer science professor Cal Newport writes that cultivating a focus that lets you concentrate on a cognitively demanding task and ignore all distractions will produce massive benefits. Those benefits might accrue to the individual, to your organization, or even to humanity, as some of his examples suggest (e.g., Carl Jung, who did his deep thinking in a tower in the woods).

The amount of time spent on the work and “the intensity of your focus,” are factors in deep work, Newport told Fast Company. The key: isolation from devices.

The primary tool you’ll need is isolation from devices. But realize this: Your brain is happy multitasking (MRIs of multitaskers’ brains show the release of dopamine). So you’ll have to make an effort to train yourself to do deep work.

Architects of Decision-making

As Seen in CFO Studio Magazine Q1/Q2 2016 Issue

Architects of Decision-making

Daniel Kahneman, winner of the Nobel Prize in Economics, coined two terms to describe decision-making methodology. System 1 is quick, instinctive, and often emotionally based. System 2 is slow, logical, and methodical. Although today’s C-suite executives are often pressured by workload and time constraints to adopt the System 1 approach, it is the deliberate, analytical System 2 method that prevents snap judgments and poor decision-making.

John Beshears and Francesca Gino of Harvard Business Review use the term Decision Architect to describe the C-suite executive’s role in decision-making. Using the System 2 approach requires cognitive effort, but the results are a strong foundation for sound decision-making. The three main steps to System 2 include:

(1) Define the Problem. Determine exactly what data is needed to get a clear understanding of the issue. Make no assumptions.

(2) Diagnose Underlying Causes. Have poor decisions been made by managers? If so, it is usually due to one of two underlying causes: insufficient motivation and/ or cognitive biases. Identify these.

(3) Design the Solution. Structure how information and options are presented to managers to encourage good decision-making.

The methodical approach to System 2 thinking helps C-suite executives to be the architects of sound, logical decision-making, which then filters down to the rest of an organization.

Preparing for Private Equity

As Seen in CFO Studio Magazine Q1/Q2 2016 Issue

WHAT COMPANIES MUST DO TO RAISE CAPITAL

Going after private equity funding was the focus of a CFO Studio Executive Dinner held at Blue Morel in Morristown, NJ. Luke McKinnon, recently having served as Chief Financial Officer of a global engineering services company, was the discussion leader.

“Going out and raising private equity is a huge effort,” said Mr. McKinnon.

Successful private equity firms have financial controls in place that focus on the basics of performance— revenue, operating margins, and cash flow. McKinnon was tasked with finding a long-term minority-interest investor for the global engineering services company he was part of, one who would be willing to have a seven- to ten-year relationship. “We found three firms interested in this length of term. Although they are called private equity, many of those investment companies are more family-run type places,” explained McKinnon.

The company McKinnon was with was global in nature, with operations in countries including Afghanistan, Iraq, Sudan, the Congo, Vietnam, Thailand, and Indonesia. “At one point, I had 2,000 bank accounts around the world,” said McKinnon.

This wasn’t the only challenge the private equity firm had to contend with. “They are focused on Day Sales Outstanding (DSOs) and cash flows,” said McKinnon.

This comment led to a discussion about DSOs. Bill Baldwin, Chief Financial Officer, Kepner-Tregoe, Inc., a Princeton, NJ–based capability development and consulting solutions company said, “Our most troublesome country is India, whether it’s with a major IT company or another Fortune 500 client that we deal, in India it’s a very, very long payment cycle.”

Delayed payments have become the norm. Historically, government agencies are known to be sluggish. “We provide engineering and consulting services to the government sector, mainly municipalities and counties, and they’re always dealing with funding and processing issues, so we’re probably at 115 to 130 days,” said Michael Dentici, Senior Vice President, Chief Financial Officer, T&M Associates, an engineering, planning, and environmental consulting firm based in Middletown, NJ.

Procurement and finance are becoming more interwoven than ever. “We’ve been involved in deals where the client’s procurement executives say, ‘We require 60- to 90-day terms, to which we counter that our prices will go up 15 percent, to which the client often agrees. This makes absolutely no financial sense, because the 15 percent fee increase is much more than the cost of money. There is a disconnect in the performance systems and communications between procurement and finance when this happens,” said Mr. Baldwin.

Peter Pfreundschuh, Vice President Finance and Chief Financial Officer, Immunomedics, Inc., a Morris Plains, NJ– based biopharmaceutical company, said not only are payments in each country unique, but they are ever changing. “When I first audited payments with some French companies, we were seeing 360-day payment cycles. A law was then enacted in which companies were required to pay on time.”

John McAndris Jr., Chief Financial Officer and Vice President of Finance, JJM Consulting, LLC was previously in charge of Latin America for Pfizer/Wyeth. “Venezuela is a country that is very tough, as many companies there never release money. You have to go to the government to get a special dispensation to get the money out of the country,” he explained.

This discussion put things in perspective for Andrew Wood, Chief Financial Officer, J. Fletcher Creamer & Son, Inc., a Hackensack, NJ–based contractor. “About half of our work is with government agencies and the other half is with private companies. Most of our work is with utility companies, which are semi-regulated. I used to complain…until I heard you guys. Our DSOs are in that 65- to 68-day range, which is not that bad, compared to all of you,” said Wood.

Selling accounts receivable is a standard form of managing cash flow and is something with which Gunther Mertens has experience. Mr. Mertens is President, North America Region of Elmwood Park, NJ– based Agfa Corporation, the North American arm of global imaging leader Agfa-Gevaert N.V. “Our DSO is actually 45 days, which is good. But what we see is that some bigger companies are asking us to offer extended-payment terms beyond the standard 30 days, in exchange for a supplier-side financing program,” said Mertens.

As an example, Mertens explains that if a customer owes Agfa $1,000 and payment term is 60 days, the customer’s bank will pay Agfa $995 after only 10 days. The customer in turn will pay his bank $1,000 after 60 days. “So the customer achieves his goal of improved cash flow by keeping his cash 30 days longer,” said Mertens. “The customer tries to make this palatable to Agfa by not deteriorating vendor’s cash flow by 30 days and instead improving vendor’s cash flow by 20 days. But there is a cost to the vendor similar to if the vendor were to sell its receivables.”

Prioritizing revenue cycle issues was of paramount interest to most CFOs at the CFO Studio Executive Dinner. “If you don’t bill them, they don’t pay. The start-up time is in the invoice. If you change the terms of your agreements, so that your billing point is earlier, you can actually move forward the payment,” said Barry Lederman, Chief Financial Officer, Whippany, NJ–based Halo Pharmaceutical, a contract development and manufacturing organization that provides scientific and development expertise.

A steady billing cycle is key to success. “When I was in professional services, one of the things we changed right away was, instead of billing at the end of the month, we started billing every two weeks,” said Michael Roth, Chief Financial Officer, Chief Operating Officer, Beefeaters Holding Company, a North Bergen, NJ–based manufacturer of dog treats. “We dramatically increased cash flow by billing major customers every two weeks.”

The Right Partner

“One of the most important lessons for everybody is to get the right people to invest,” said Ed Schultz, Principal, of New Jersey–based Highlands Business Group, a consulting firm. “It’s important to make sure the due diligence is right, that the fit is correct, and that you’re not going to get beaten up. A lot of deals go south because the private equity firm didn’t listen and didn’t gain a solid understanding of the business. Sometimes, they only want to do the deal and aren’t thinking about who they’re investing in.”

The correct fit is important. “There are two things to consider: style and strategy. Does everybody agree about what the company is going to look like in the future? Is there knowledge of the industry and can you really get along with these folks? What is their style going to be on a tactical basis, too?” ponders New York City–based Curt Cornwell, Partner, Transaction Services, PricewaterhouseCoopers, a leading professional services network, and a CFO Studio Business Development Partner.

Andrew Savadelis, Chief Financial Officer, Angion Biomedica Corporation, a Uniondale, NY–based biopharmaceutical company, pointed out the uniqueness of the arrangement made at the company McKinnon had worked for. “It’s not private equity in normal terms. It sounds like it is more Venture Capital than Private Equity. VCs tend to take a longer-term perspective, but they also look for higher returns on their capital gains.”

Many agreed with Savadelis. “I concur, as the VC model typically includes raising a fund that is very industry-centric,” said Gregg Kam, Chief Financial Officer, Sonneborn, a Parsippany, NJ–based manufacturer and supplier of high-purity specialty hydrocarbons.

When preparing for private equity, sell-side reports have become a trend, according to PricewaterhouseCoopers. A selling company has an accounting firm come in, prepare a quality earnings analysis, a debt analysis, as well as details on trends being experienced, and that book goes out.

Allen Lane, Senior Vice President and Chief Financial Officer, Solix, a Parsippany, NJ–based provider of program administration, eligibility determination, and call center services, said, “I’ve been reading through a lot of these recently. There is a definite marketing slant on the part of the seller in these documents. They are a nice road map to begin your discussions with, but you still have to do a full due diligence review.”

Mr. McAndris of JJM Consulting said sell-side reports help from another perspective. “You can steer the course of where you want the buyer to look. You’re controlling the conversation,” he added.

In some instances, these procedures are not necessary. “We were headed down the road of going public and [our investors] came along and made us an offer that was about 50 percent above our projected IPO price. That’s what we call a no-brainer,” said Bert Marchio, Chief Accounting and Operations Officer, Edge Therapeutics, a Berkeley Heights, NJ–based clinical-stage biopharmaceutical company.

There are cases where acquirers don’t see the forest for the trees. “Every due diligence sale that I’ve been through, some companies got involved and looked at minutiae that didn’t really mean anything. For example, ‘I see you spent $22,000 on a particular purchase. What was it? Oh, it was a Christmas party,’ ” said Mr. Kam. “They often miss the big picture about the business in due diligence, focusing on immaterial items.”