Six Strategic Questions You Should Be Asking Your CFO

As a business owner or CEO, understanding your company’s financial footing is crucial to making informed decisions that drive growth and success. But if you are not a finance expert yourself, it can be challenging to know where to start. For guidance, this list of six essential questions to ask your CFO will help you unlock the potential of your company’s finances so you can make better-informed decisions.

1. What are our company’s revenue streams, and how do they contribute to our overall financial picture?

To gain a comprehensive understanding of revenue streams, it is essential to consider all sources of income. This may include sales revenue, service revenue, interest income, and any other streams specific to your business. Your CFO can help you by analyzing the contribution of each of these income streams to understand which areas are performing well and which may need improvement.

Once the revenue streams are identified and quantified, your CFO can work with the sales and marketing leaders in the company to create strategies such as upselling, cross-selling, and exploring new markets and sales channels.   Your CFO can assess the profitability of the new strategies and help design a comprehensive action plan that can unlock new growth opportunities.  By having a clear picture of the sources of income that drive your business, owners and management can make informed decisions that will ultimately lead to growth and profitability.

2. What are our biggest expenses and are there any areas where we could cut costs without sacrificing quality?

Keeping costs under control plays a major role in achieving profitability. However, it can be challenging to manage expenses while still maintaining the quality of your products or services, especially in an inflationary environment. Your business advisor and CFO can provide a profitability analysis to help you effectively manage cost control in your business by determining what products and services are profitable as well as what expenses are draining your profits. Through benchmarking tools such as the B2B CFO® Gap Diagnostic Analysis™, we can assess if costs are higher than the industry average. This knowledge enables you and your team to explore ways to lower expenses,  and improve gross margins.  If your business has inventory, more efficient inventory management can also reduce costs and contribute higher profits.  A CFO has the expertise to drive profitability through effective cost control.

3. What is our cash flow situation like and are there any potential cash flow issues on the horizon?
   

Cash flow is a crucial aspect of any business that directly impacts its ability to sustain operations and achieve long-term success. Without proper cash flow, businesses may struggle to pay bills, make payroll, or invest in new opportunities. The consequences of poor cash flow management can be catastrophic, leading to insolvency and the demise of companies. It is essential to have a consistent, accurate, and timely method for tracking the company’s cash flow. A CFO can implement strategies to help improve a negative cash flow situation or alert to red flags on the horizon and give suggestions about how to course correct.

There are several ways to improve cash flow.  Strategies should be considered to both increase the incoming cash and decrease the outgoing cash.  The timing of the cash benefit is another factor in decisions that change cash flows.  Any changes implemented should quantify the overall impact to your bottom line.  For example, a new product offering is a way to increase cash receipts.  If there are substantial costs to sell the new product, it may not provide the net benefit you expect.  Your CFO can help you evaluate which strategies would have the highest impact in your company.

4. What is our debt situation, and what steps are we taking to manage and pay down debt?

As businesses grow and expand, it is natural for them to incur debt. Debt is a common way for businesses to finance their operations, investments, and growth. It allows them to make large purchases, expand into new markets, and invest in new projects without having to rely solely on the cash generated from operations and personal funds invested. Effectively managing debt is the key to successfully using it as a tool that fuels growth in your company. It is crucial that the financial planning and subsequent results for the company take the debt payments into account.  If cash balances are growing, it is also important to assess whether early payoff of debt would be the company’s best use of the cash.

One way to monitor debt is by reviewing the debt ratio on the company balance sheet.  The formula to calculate the debt ratio is total debts divided by total assets. For example, if a company has assets of $100,000 and debts of $55,000, the debt ratio is 55. ¹  The debt ratio is an indicator of the degree to which the assets of the company are bound by debt – whether the loans directly financed the acquisition of the assets or not.   A debt ratio below 100% indicates the book value of the assets outweighs the debt owed.   The higher the debt ratio, the higher the return on investment in the assets needs to be to re-pay the debt. Optimal debt ratios vary by industry and company capitalization structure.  Generally, companies with a high debt ratio should prioritize debt reduction strategies in their cash management plans. Your CFO can help you assess your company’s overall debt position and develop effective debt management strategies.

5. What is our current financial outlook, and what are our goals for the future?

Financial success is not just about the bottom line. It is about creating a sustainable, thriving business that can weather times of inflation and recession. Knowing your company’s financial health and financial outlook will help determine the goals you set and whether they are obtainable.  If your company plans for continued growth and expansion, both in terms of reach and impact, your CFO can create strategic plans that are focused on increasing revenue, building a robust savings plan, and investing in new projects and initiatives that will help the company achieve future objectives.

6. What key performance indicators (KPIs) do we track, and how can we use them to measure and improve our financial performance?

Key Performance Indicators (KPIs) are essential metrics used by businesses to track and measure progress toward their goals. They provide a clear understanding of whether a company is performing the activities necessary to achieve its objectives or not. KPIs help identify when the company’s revenue-generating or cost control activities are veering off track.  This allows businesses to take corrective action to avoid the negative financial consequences of declining performance.

KPIs also help in setting realistic goals for your business. By tracking KPIs, you can identify areas that need improvement and focus on the most critical aspects of your business. Components of KPI’s frequently tracked include quality, time, and quantity as well as their relationship to dollar values.  There are countless KPIs you can assign and monitor.  The key is determining which ones best fit your company’s operations and use those in your budgeting and long-term financial planning.  It is important to monitor the actual metrics compared to targets set.  You get the most powerful results from KPI’s tracking when you understand that variances are occurring, determine the cause of the variances and take action to capitalize on positive changes and to correct a negative change.

Your CFO can help you select the KPIs that are most important to your business, industry, geography, competitive environment, and goals.

By asking these six questions, you can gain a deeper understanding of your company’s financial situation and make informed decisions that drive growth and long-term value.  Schedule a discussion with your local B2B CFO – Peggy Head– today and start unlocking the secrets of your company’s finances!  Email PeggyHead@b2bcfom.com

Sources

1.https://www.sba.gov/blog/5-things-know-about-your-balance-sheet