A company’s chief financial officer (CFO) is one of several senior management team members reporting to the CEO.
Historically, CFOs were a back-office functionary, but they have recently become more of a business partner. Many are expected to support the CEO, as well as raise issues when plans or proposed actions might not be in the company’s best long-term interest.
To help ensure you have the right business partner, I’d like to share general questions you might want to ask your CFO. The questions are listed by the functions a CFO is typically responsible for.
These questions are based on my experiences as a CFO, board member and audit company chair at for-profit (publicly traded and private companies) and nonprofit organizations. These questions can be the starting point for a series of conversations and relationship building between a CEO and their CFO. The New Year is often a time of setting the year ahead plan, setting goals and doing performance appraisals—it can also be a great time to start this CEO-CFO conversation.
1. If we had an audit, would we receive a clean opinion?
Many small, privately held businesses do not need nor can afford to undergo a full accounting audit. But a clean audit opinion is the standard used to gauge the quality of an accounting system. Not qualifying for a clean audit might imply low-quality financial and management reports, customer billing issues, incorrect information provided in tax returns, gaps in financial controls for detecting theft or fraud or other issues.
What to listen for in an answer: If your CFO knows there are material gaps in the accounting and financial processes, maybe you should be concerned. Does the CFO have a reasonable plan to make any necessary improvements?
2. What is our relationship with our accounting firm?
When businesses start, they focus on making and selling a product or service. They may not be able to afford full-time, in-house financial staff to handle processing transactions and preparing financial statements, so they outsource these activities.
As the business grows it may hire financial staff, but they may also keep the existing relationship with the accounting firm. When asking this question, you’re wanting to get an update on where you stand.
What to listen for in an answer: If the company is performing many accounting and financial functions in-house, these should no longer be performed by the accounting firm and billings should be reduced accordingly.
Another possibility? When businesses are just getting started, they usually have a difficult time getting a full-service accounting firm, instead opting to work with a smaller firm. So when the business grows, it may have outgrown the original firm. If that’s the case for your business, now could be a good time to look for a new firm. This concept of outgrowing one’s initial professional service provider can also apply to your law firm, insurance agent or banker.
3. Why do we close the books and produce the financial statements on X workday each month?
Closing the books and preparing the financial statements is a necessary and important function. It’s work that takes a historic look at the company’s business transactions.
The value added of having a CFO and in-house financial staff is their assistance in running the business more effectively and providing a forward-looking view of the company’s finances.
What to listen for in an answer: First, it’s important to know that the CFO has a well-thought-out and documented process for closing the books and producing financial statements. Second, it’s good to know that the CFO is not procrastinating in closing the books, which might be his or her “comfort zone,” instead of making time available to help you run the business.
4. How can we become more accurate in our cash-flow forecasting?
While sales and income are often the two most frequently reported metrics for a company’s performance and achievements, cash flow can be just as important. Will there be sufficient funds to make payroll, to buy equipment, to undertake an IT upgrade or marketing program, etc.?
While knowing that there’s cash in the bank last night is important, having a good estimate of cash balances projected for next month or next quarter can help make a business function smoothly.
What to listen for in an answer: It helps to know that your company has a cash forecasting process, and not just a back of the envelope swing at it.
You can also listen to see if the CFO is using all the talent in the company to derive the forecast. A forecast based on inputs from marketing, sales, operations, R&D and the other company functions carries the full knowledge of the company. Conversely, a forecast prepared solely by the CFO will have only his or her best judgement. The CFO’s answer can also help you understand when new financing might be required or desired so it can be appropriately planned for.
5. What are the best metrics for measuring our profitability and productivity?
(Some might phrase this as “What keeps you up at night?”) Businesses can keep evolving with new product lines, manufacturing processes, channels of distribution or number of locations. Is your business reporting and analytics keeping up with the changing business? Are you adopting new industry reporting standards? Are employee bonuses being paid on the right metrics?
What to listen for in an answer: A good answer can show you that the CFO is thinking about the whole business. They can show you that they have thought about the metrics and are forecasting the results to identify business risks and concerns.
6. If we are ever in challenging times, where can we tighten our belts?
Layoffs, cut backs and other similar reactions to a reduction in sales and cash flow can be difficult and fraught with tension. You may never know when it will happen, but it’s good to be prepared.
What to listen for in an answer: Ideally, you would want your CFO to convey that they have been thinking about the business. It’s reassuring to know that they have an inventory of ways to preserve cash if the need arises. They don’t necessarily need to broadcast these tools until they’re needed, but it’s good to have a pulse on the business.
7. What backup plans are in place in case you’re unavailable to carry out your duties?
This question is about succession planning in the short term. As CEO you may want to be thinking about this for each of your direct reports and theirs.
What to listen for in an answer: If your CFO ever needed to step away from their duties, you want to know that there are plans and procedures in place to keep the show going in their absence.
8. If this were your business, what would you do differently?
To be an effective business partner, your CFO needs to feel like they are a part of the business—not just that they work there. This question asks the CFO to think big—if they were in complete control, what would they do? This might help you identify any of your “blind spots.”
What to listen for in the answer: This isn’t an opportunity for your CFO to complain or vent. You want to hear them give specific suggestions regarding elements of your business, and have them be explained in a logical manner and supported with appropriate analysis.
In addition to the specific business issues, also listen for people issues, especially how the CFO is feeling about the relationship with you, their boss and business partner. If you are looking for the CFO to be a business partner, then he or she should be encouraged to provide suggestions and critiques that might go against something you favor. In my experiences, the CEO looked to me to provide the contrarian viewpoint.
To be effective business partners, CEOs and CFOs should have a continuous dialogue about the business and often about their relationship. The CEO can initiate the conversation, provide suggestions where appropriate and help the CFO continue to be or become a valued business partner.