Curiosity is a critical trait that fuels the success of corporations. Entrepreneurs looking to grow their businesses and innovate must possess this character trait. Are you looking for questions to ask your CFO? To scale your businesses, you must be aware of the ground realities and what exactly is happening out there.
Among the most crucial aspects you should focus on are your finance personnel. If your business has grown to a point when the head of finance is now supposed to be the Chief Finance Officer (CFO), you need to take appropriate action.
Before anything else, be sure that the position is occupied by a high-caliber professional with a strategic vision and who has a sufficient understanding of the key areas of your business such as IT, HR, marketing, etc. They must also understand the complexities associated with the business and the industry as a whole. If the proposed plans or actions seem to be going against the long-term interest of the company, they should have the guts to raise issues at the right time.
After that, all you need to do is maintain a constructive working relationship with the CFO. This involves asking them the right questions while working with them. However, entrepreneurs need to know the best way to channel their curiosity so that the CFO is determined to add value to the company. While they used to be a back-office function, that’s no longer the case.
CFOs are more business partners today and part of the senior management team reports directly to the CEO. Entrepreneurs should know the importance of their role. Besides raising capital and taking care of the day-to-day cash management, they play a supportive role for the CEO. Hence, it makes complete sense to adopt a constructive approach at all times.
We’ve compiled a list of questions to ask your CFO that can be a starting point of relationship-building between you and the CFO to ensure business success.
1. What Do You Think the Capital Structure Will Look Like 5 Years From Now?
The capital structure is the foundational element of any business. It forms the financial backing for both the launch and business growth. Generally, there are two common scenarios depicting the capital structure of companies. The first case is when a business is founded with the help of owners’ equity only and utilizes self-funds to expand.
In the second scenario, companies’ capital structure consists of both owners’ equity and debt since the very beginning. The mix of debt and owners’ equity can be reviewed from the firm’s year-end balance sheet. Since these companies have stronger financial backing, they typically grow faster than self-funded businesses but carry much higher risk. Higher risk means that if the business fails, the owners may find themselves in trouble. Hence, it’s among the most important questions to ask your CFO.
Coming back to our question, proactive entrepreneurs will want to envision the capital structure ahead of time to foster business growth. They typically have an idea of where they want their businesses to be in 5 years’ time. To fuel the desired growth, the company must possess a sustainable capital structure.
Depending on how your CFO responds to this question, you may want to invest more or look into how your business earnings and cash flow can be improved to achieve the desired growth. You may even decide that it’s time to approach external investors or even consider obtaining loans from financial institutions. Many firms choose to go for a mix of these strategies. Debt is not necessarily restricted to large businesses. There are many options for even small business entrepreneurs to obtain finance.
Whatever they decide to do afterward, entrepreneurs really need to inquire about how the capital structure looks like in the future.
2. How Can We Improve Accuracy in Forecasting Cashflow?
Have you ever thought why the cash flow statement joins the Income Statement and Balance Sheet as part of the year-end financials? This is because the flow of cash in and out of your business is just as important as other profits, capital, assets, etc. No matter how much capital is tied with your inventory, equipment, vehicles, etc, your business won’t function if it doesn’t have access to cash when needed.
Suppose you have a lot of money tied up with a beautiful business premises and luxurious vehicles but don’t have sufficient cash to pay for the day to day business operations. You won’t be able to earn profits, nor achieve business growth. Plus, time is also very important when it comes to the availability of cash. You might be expecting a one million dollar payment next month but if you don’t have the cash to pay your employees, it can prove disastrous for your business.
Hence, maintaining stable cash flow is extremely important so that you’re able to finance the payroll, get an important software upgrade, a marketing program, buy equipment, etc,
One of the best strategies to improve your cash flow position is to make accurate predictions for the future. This involves forecasting the cash balances projected for the next month or the next quarter, accounting for all the expected cash inflows and outflows during the respective periods. This should help streamline the business operations in those periods.
Finance personnel, particularly the CFO, have an in-depth understanding of this area so asking them how the accuracy of the estimates can be improved should be of great help. It will also ensure that cash flow statements are not just prepared as a formality but they effectively help the business function in those periods as well.
When listening to the response, you need to look into how the CFO derives the cash flow forecast. If they rely on their own understanding to prepare the forecast, their answer will only reflect their own judgment. In contrast, if they happen to utilize all the talent in the company and obtain inputs from sales, marketing, IT, R&D, they are more likely to come up with a realistic forecast because expenses mostly tend to arise from these departments.
Finally, the response by your CFO can also help you decide whether to raise more finance to improve the company’s cash flow position.
3. How Should the Money Be Allocated to the IT Department?
Everyone knows how rapidly evolving technology is changing the business approach. Business activities are subject to an incredible degree of innovation and automation. To keep up the pace with digitization, IT departments of companies all over the world are undergoing tremendous transformations as their roles expand to affect every other department.
Yet in many small businesses, IT departments don’t receive sufficient resources to make the most effective technology initiatives. Entrepreneurs need to realize that technology is going to be the real difference between successful and failing businesses in the future. Also, due to the rapid flow of information and globalization, this phenomenon is not restricted to Silicon Valley.
You not only need to prioritize your IT department when it comes to allocating financial resources but also give a free hand to the technology talent in your firm. On top of that, your CFO should be well aligned with the IT department so as to weigh the ROI implications of various IT-related purchases and projects, while being well aware of the importance of investing in IT.
Your CFO should also be broad-minded so that they don’t just approve projects that affect their personal interest such as investing in the development of an accounting software solution. They must be willing to accommodate others such as purchasing an email marketing software package for the marketing department. In other words, they should be unbiased when evaluating the costs and benefits of different technology projects before funding them.
It’s your CFO’s responsibility to merge the IT’s budgeted wish list with the company strategy. Hence, asking them about their plans for financing the key IT projects is one of the most significant questions to ask your CFO. They must let you know why they think it’s rational to finance certain IT projects while others are not.
4. What Is Your Biggest Concern in the Current Year’s Financial Statements?
This is an ongoing question that entrepreneurs should ask every time they sit with their CFOs to analyze the quarterly or yearly performances. While there are so many things to look upon in financial statements, asking your CFO this helps you get a specific focus. Every business has a handful of the most important performance metrics that eventually determine the success of your business.
The key metrics will most certainly impact the productivity, revenue, and profitability of your business. Among those metrics lies the most important key metric which can be a result, an activity, or even a resource that’s most important for the success of your company.
If there’s anyone in your firm who can uncover them, it has to be your CFO. They’re the ones who can provide you which this critical insight because they not only have the day-to-day oversight of the financial function, but also possess a broad view of the firm’s operations.
However, don’t expect an immediate answer when you ask them this question, especially if they joined the company recently. In fact, even if they think they can respond abruptly, tell them to think over it first. This way, you’re more likely to get better insights.
5. If You Owned the Business, What Would You Do Differently?
The role of a CFO is not the same as that of other employees. They’re the person you’ve trusted with the most sensitive information of your business: the financials, including your stake, the profitability, the rate at which the business is growing, and more. Therefore, you will want them to take ownership, and feel and act as if it were their own business.
By asking this question, you’re encouraging the CFO to think big and feel free to disclose what they’d do if they had complete control over the company’s operations. This can be a great way to identify the “blind spots” as you may not have thought from the perspective of the CFO. He may point out some daunting realities that might be hindering the progress. It’s not about hearing your CFO vent on petty issues but asking them for suggestions backed by logical explanations and numerical analysis.
Besides the issues related to business activities, probe them to share their thoughts about people issues because oftentimes, they are the real reason for business growth and success. Since the role of a CFO is a critical one, they must be comfortable with people around them to function well. They should talk about how they feel about the relationship with you, their supervisor (if it’s someone other than you), and business partner.
Furthermore, encourage your CFO to raise concerns that may go against what you favor. Tell them to be critical and share different viewpoints.
Key Takeaways
The bottom line is, your CFO is one of the biggest assets of your company, who, if utilized well can do wonders for your business. Entrepreneurs should not just hire the best talent to fill the post but also make the most out of them by asking them the right questions.
If you’re an entrepreneur who’s not sure what questions to ask your CFO, the 5 questions explained above can be great to experiment with. You’ll be amazed by the insights they share and would want to act upon them immediately. However, as mentioned earlier, you will need to give them the respect and freedom to honestly share their opinions and encourage them to be critical.
Chris Giorgio is the President of Fully Accountable. Fully Accountable is an outsourced accounting firm specializing in eCommerce and digital businesses. Chris has served as a CPA, CFO and has over 14 years of experience in the accounting and finance industry. Chris has dedicated his career towards helping entrepreneurs and high-level business owners achieve greater profitability through specialized outsource accounting functions.
