5 questions a small business owner should ask the CFO or CFO
Congratulations to you as a small business owner. Your business has grown to a point where you need to bolster your accounting firepower in the form of a CFO. Maybe your business is now a mid-market company, big enough to justify giving your “digital person” the most prestigious title of CFO.
Either way, I commend you for wisely trying to hire someone who is not just a bean counter, but who has strategic vision and at least some depth in several key areas of your business. business, including marketing, human resources and technology.
But how will you make sure you get the most out of this key rental? Below, I’ve compiled five thematic questions to guide you in working with your finance manager. These questions are designed to address both granular and general topics in your business; collectively, they can help create a constructive working relationship to move your business forward.
1. What is our cash flow situation?
It doesn’t matter the size of your business or the margin of safety offered by your bank balances. Knowing your business’s day-to-day cash flow situation (adjusted for deposits and outstanding checks) is one of the best exercises you can do as an owner or CEO. Asking this question frequently and letting yourself know its importance creates a teamwork mentality with your CFO about your business’s most critical resource: cash.
Getting a daily reading of the company’s cash flow situation gives you an intuitive idea of the seasonal ebb and flow of your business. When sales linger too long at a marginal level, you’ll know in your guts that some investigation needs to be done. And rising cash levels will also stand out – they will need to be distributed to stakeholders, placed in investments that can stay ahead of inflation, or reinvested in business operations.
From my past experience as a CFO in the manufacturing industry, I can personally vouch for the value of mutually building this knowledge of cash flow, to support a multitude of larger business decisions. So avoid letting your CFO worry only about cash. Keep it in mind for both of you!
2. What emerges from the dashboard (or other reporting framework)?
Your finance manager will keep a permanent summary of important metrics that deal with financial health, as well as a range of others that deal with sales, asset utilization, and even marketing effectiveness.
Increasingly, accountants are creating visual “dashboards” in Excel or using out-of-the-box business intelligence software available from companies such as Board Where Qlik. It’s easier than ever to get a quick read of an organization’s health and issues, in graphical formats that are easy to understand for non-financial people. Be sure to regularly review these types of reports with your CFO, outside of formal presentation days. Pick your brain over the positive and negative trend lines that form from real-time company data.
3. What do you think is our most important key metric?
This relates to the first two questions, but with a much more specific emphasis. In most businesses, there are a handful of important metrics that, if followed and leveraged, will increase the success of the organization. Key metrics tend to affect revenue, profitability and / or productivity of operations.
But to dig a little deeper into both business and philosophical terms, a business owner needs to know what their business is. The most important the key metric is. In other words, which activity, resource or business outcome is most critical to the current success of the business?
Your CFO or CFO, having an overview of the company’s operations and day-to-day oversight of the finance function, can be a great partner in this exercise. But beware: it may take a while for your CFO to get back to you with the answer, especially if they’ve been hired recently.
4. What should IT spend their money on next year?
In small businesses, and even in some mid-market businesses, IT support is often widely dispersed. Between installing and maintaining computers and mobile devices, and implementing “glue” software that helps get the job done (such as production software, Google Docs, Microsoft Windows, Slack, and similar apps), IT staff may not always have the resources or time to fully assess strategic technology initiatives.
So if there’s one part of your staff that your finance manager needs to integrate closely with, it’s IT. A finance manager can bring a discipline of return on investment (return on investment) to the various projects and purchases suggested by IT. In fact, you’ve hired your CFO for tasks like this: evaluating the costs and benefits of each of the tools that help your business meet both day-to-day work and long-term goals.
Suppose a manager in your architectural services firm wants to order several new AutoCAD licenses. What is the payback period and how effective will the new licenses be?
Or let’s have another scenario: The IT department suggests that your small, flexible manufacturing business is replacing its outdated labor costing software with an entirely new system, which will (of course) run at six digits. Could this purchase increase profitability significantly, or will it end up weighing down profits due to the complexity of the installation and the steep learning curve?
Your finance manager can help you work through project scenarios like this to determine whether to accept or reject an investment. Consider it the duty of the CFO to merge the budgeted IT wishlist with business strategy.
5. What will our capital structure look like in five years?
The capital structure of a business reflects how it is capitalized, that is, how money has been provided both to found the business and to help it grow.
In some cases, entrepreneurial start-ups are provided with equity from day one and thrive through self-funded growth.
In other cases, a company’s capital structure will consist of a mixture of equity and debt. You can review a current balance sheet with your CFO to see exactly what your company’s capital structure looks like today.
If you are planning to grow taller, it is wise to consider the financial part of the trip ahead of time. You may not have a detailed strategic plan written in five-year increments. But as the owner, you probably have a good idea of where you would like the business to be in five years. Will you need to change your capital structure to make this happen?
In other words, will you have to invest additional capital yourself, bring in outside investors, add debt, or combine any of these three strategies? Or could your business provide the income and cash flow necessary to achieve your goals on its own? Debt often plays a larger role in a company’s balance sheet as an organization grows. You may want to read a guide on how small business owners can approach debt with some degree of confidence.
Your CFO can do the heavy lifting of modeling earnings, cash flow, capital spending, and more on a spreadsheet. If projections show that your future capital involves heavy borrowing in Year 3, you can start working on these key banking relationships today. Similar to the cash flow teamwork we talked about at the start of this article, considering capital structure with your finance lease is an extremely fruitful exercise, and it will reward you for the time spent many times over.