Communicating with CFOs Microsoft Sales Pilot Program January 6-7, 2009

1. Slide Deck 1 Communicating with CFOsMicrosoft Sales Pilot ProgramJanuary 6-7, 2009 Tony Dimnik, PhD tdimnik@business.queensu.ca

2. Today’s Agenda • Introductions • Objectives – Pilot Program (Fire, Ready, Aim) • Finance issues • Language and tools • CFO concerns • Organizational structure • Fundamentals of Financial Accounting - QT • Costing – allocations and drivers • Decision making tools • Strategy and finance • Shareholder value • Control • Selling to the Finance Department

3. Why are you here?

4. Sales must take the initiative • Most mangers focus on their own area of responsibility – sales, IT, operations • Most managers don’t know their own company’s financial situation - revenues, profit, cash and debt situation, key ratios • The CFO’s area of responsibility is finance – that’s where they live • CFOs use financial language and tools • Sales people have to take the initiative and bridge the divide

5. Language Which of these 150 acronyms can you use with CFOs?

6. Some Accounting and Finance Acronyms

7. CFO Concerns • Impact of global economic conditions on Finance/IT • Financial crisis → conserve cash and reduce costs • Volume and velocity of information → simplify • Competition → pursue strategic advantages • Environmental pressures • Limits to growth • Continuous improvement

8. CFO Functions • Treasury • Cash and credit management • Capital expenditures • Financial planning • Controllership • Tax management • Cost and financial accounting • Data processing • Internal audit • Communication and investor relations • Shareholder relations • Institutional relations • Risk management (CRO) • Information technology (CIO/CTO)

9. Accounting Tensions for the CFO/Controller • Financial Accounting • Entire entity • External focus • Stewardship (historical) • Designed to meet GAAP – prime directive is compliance • Management Accounting • Pieces of the entity • Internal focus • Plans/decisions (future) • Contingent design – prime directive is relevancy

10. Fundamentals of Financial Accounting The Q-T

11. Accounting Output Journal Record of Transactions Ledger Individual Accounts Financial Statements Balance Sheet Income Statement Cash Flow Statement

12. Balance Sheet • Assets = Liabilities + Owner's Equity • Shows financial resources and claims against those resources at a specific point in time • Assets • Items of value owned by the firm and measured according to GAAP • Liabilities • Financial obligations • Owner's or Shareholder's Equity • Residual value of the firm

13. Income Statement • Net Income = Revenues – Expenses • Shows results of operations over a given period of time • Revenues • Amounts earned by selling goods and/or services • Not the same as cash receipts • Expenses • Amounts expended in order to earn revenues • Not the same as cash payments

14. Cash Flow Statement • Beginning Cash + Cash Inflows - Cash Outflows = Ending Cash • Shows cash flows (not accruals) • Sources and uses of cash • Operating • Financing • Investing

15. A Three-Dimensional Perspective • Buy a building for $6 million • Sell the building five years later for $1 million • Cash Flow Statement • Balance Sheet • Income Statement

16. Generally AcceptedAccounting Principles (GAAP) • Money Measurement • Report only facts that can be expressed in monetary terms • Entity Concept • Report the financial results for the entire company • Matching • Report all expenses incurred to earn revenues in a period • Conservatism • Anticipate no profits but provide for all losses • Consistency • Use the same methods of accounting in each period • Full disclosure • Substance over form

17. The Accounting Process Record Classify Report

18. Washington Debit Credit

19. Liabilities and Owner's Equity Assets Expenses Revenues

20. Permanent Accounts (Balance Sheet) Temporary Accounts (Income Statement)

21. Sources Applications

22. Rule One for Using the Q-TLeft = Right

23. Rule Two for Using the Q-TLeft Up Left and Right Up Right Increase Left Increase Right

24. Rule Three for Using the Q-TAlways Start with Cash Cash Up Down

28. Outflows - Uses Inflows - Sources Investing Financing Operating Operating

29. Direct Format

30. Accounts Receivable (A/R) and Accounts Payable (A/P)What happens to your cash balance if… • Revenues increase by $100? • Revenues increase by $100 and A/R increase by $25? • Inventories increase by $100? • Inventories increase by $100 and A/P increase by $25?Increases in A/R are a use of cashIncreases in inventories are a use of cashIncrease in A/P are a source of cash

31. Indirect Format

33. Q-T Entries for Rapwear 100 (3) 150 (4) 30 (5) 40 (8) 20 (10) ASSETS LIABILITIES AND SHAREHOLDER EQUITY Loan Cash Fixtures Owners' Equity 200 (2) 300 (1) (1) 300 (3) 100 10 (9) (2) 200 (6) 250 Retained Earnings Inventory (4) 150 100 (7) 50 (g) EXPENSES REVENUES Income Summary Rent COGS Salaries Sales (f) 250 250 (6) (a) 30 250 (f) 40 (c) (7) 100 (5) 30 30 (a) 100 (b) (8) 40 (b) 100 (c) 40 Depreciation Interest (d) 10 (e) 20 10 (d) (9) 10 (10) 20 20 (e) (g) 50

34. Users of Financial Statements

35. Under generally accepted accounting principles, I can turn a $4 million profit into a$2 million loss and I can get every national accounting firm to agree with me. Paul Beeston, CAFormer Toronto Blue Jays President

36. 36

37. Key Messages • GAAP is flexible - bend it but do not break it • Flexible GAAP is needed because different organizations need to tell different stories • A flexible GAAP requires knowledgeable internal and external users of financial information • Auditors ensure that financial statements present fairly, in all material respects, the financial position of the organization in accordance with GAAP

38. Financial Accounting Issues • Sarbanes-Oxley (SOX) and its offspring • Change in understanding of control – more holistic view • Identifying and eliminating non-value-added activities • More to come after 2008 debacle – contact opportunity • Management Discussion and Analysis (MD&A) • Enterprise risk management • Link to reporting on environmental and other social issues • IFRS • XBRL

39. International Financial Reporting Standards (IFRS) • Single set of globally-accepted, high-quality, principles based accounting standards • For general purpose financial statements for profit oriented businesses • Used in 100+ countries, including five G8 countries • Established by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC)

40. Canada’s Plan to Adopt IFRS • Canadian GAAP – will cease to exist for “publicly accountable enterprises” • listed companies (debt or equity securities) • enterprises that hold assets in fiduciary capacity for broad group of outsiders • likely government business enterprises as well • Tentative change-over date of January 1, 2011 • Reporting after January 1, 2011 will be solely under IFRS

41. eXtensible Business Reporting Language • XBRL is “tagged data.” Each piece of data is assigned a unique, predefined data tag like a barcode identifying its content and structure. • Tags impart identity and context to data, making it understandable by various software applications and allowing it to interface with databases, financial reporting systems and spreadsheets.

42. The Inevitability of XBRL • Auditors (risk management) • Regulators (ensure compliance) • Banks and creditors (low cost filing and effective pricing) • Governments (efficient and low cost data collection) • Analysts (competition) • Stock Markets (accessibility and lower cost of capital – about 1.4% difference) • Tax Agencies (low cost filing and efficient communication)

43. Costing(Financial and Management Accounting) Allocations and Cost Drivers

44. Ayers Sawmill – Common Cost Allocations Logs Split-off Point Grade A Sawing Grade B Revenues Common Costs B&S Incremental Costs

45. Ayers Sawmill Case

46. Questions • Speculate as to why costs were allocated to bark and shavings in the first place? • Should Mr. Ayers throw away the bark and shavings? • Is there a better way of allocating costs to bark and shavings?

47. Ayers Sawmill -- Byproduct Allocation

48. Ayers Sawmill -- Allocating on Revenue

49. What is the right way to allocate common costs of logs and sawing? A = Volume B = Byproduct C = Revenue D = None of the above E = All of the above

50. Cost Allocations Cost Pool Allocation Base or Key Direct/Traceable Costs Cost Object