The New CFO Financial Leadership Manual, Second Edition

Chapter 11. Other Financial Analysis Topics^[*]

The cost of capital and capital budgeting are extensive topics, and so were accorded separate chapters preceding this one. However, the CFO has need of other analysis tools that can be explained more briefly, and which are contained within this chapter. The first is risk analysis, which addresses the variability of data the CFO uses to make decisions. Another is capacity utilization, which is of great importance when determining the ability of an organization to change the amount of revenue it produces and also monitors its bottleneck operations. Another analysis tool is the breakeven chart, which is addressed in increasing levels of complexity in order to show how it can be modified to incorporate a variety of variables. Finally, we cover the use of business cycle forecasting to assist with the budgeting process. The CFO will require all these tools in the conduct of his or her business.

Risk Analysis

A CFO is sometimes called on to issue opinions based on projected information. This happens whenever a business forecast or sales projection is issued. In particular, it is a primary element of any cash-flow projection for a capital expenditure. If there is even a small difference between actual and projected cash flows from a project, it may result in a negative net present value, which means that an implemented project should not have been initially approved. To avoid this problem, one must have a good knowledge of the risk of any projection, ...