Business

How to evaluate your finance department

No one knows your business better than you. After all, you are the CEO. You know what engineers do; you know what production managers do; And no one understands the sales process better than you. You know who carries their weight and who doesn’t. That is, unless we are talking about finance and accounting managers.

Most CEOs, especially in small and medium-sized businesses, come from operational or sales backgrounds. They have often acquired some knowledge of finance and accounting throughout their careers, but only to the extent necessary. But as CEOs, they must make judgments about the performance and competence of accountants, as well as sales and operations managers.

So how does the diligent CEO assess your company’s financial and accounting functions? Too often, the CEO assigns a qualitative value based on the quantitative message. In other words, if the Controller delivers a positive and upbeat financial report, the CEO will have positive feelings toward the Controller. And if the Controller delivers a grim message, the CEO will have a negative reaction to the person. Unfortunately, “shoot the messenger” is not uncommon.

The dangers inherent in this approach should be obvious. The Controller (or CFO, accountant, whoever) may realize that to protect his career, he needs to make the numbers look better than they really are, or he needs to divert attention from the negative issues and focus on the positive ones. This increases the likelihood that important problems will not receive the attention they deserve. It also increases the likelihood that good people will get lost for the wrong reasons.

CEOs of large public companies have a great advantage in evaluating the performance of the finance department. They have the audit committee of the board of directors, the auditors, the SEC, the Wall Street analyst, and the public shareholders who give them feedback. In smaller companies, however, CEOs need to develop their own methods and processes for evaluating the performance of their financial managers.

Here are some tips for the small business CEO:

Timely and accurate financial reports

Chances are, at some point in your career you’ve been warned that you should insist on getting “timely and accurate” financial reports from your accounting group. Unfortunately, you are probably a good judge of what is timely, but you may not be as good a judge of what is accurate. You certainly don’t have time to test the transaction log and verify the accuracy of the reports, but there are a few things you can and should do.

  • Insist that financial reports include comparisons over multiple periods. This will allow you to judge the consistency of recording and reporting transactions.
  • Make sure all abnormalities are explained.
  • Recurring expenses, such as rent and utilities, must be reported in the appropriate period. An explanation that – “there are two rentals in April because we paid early May” – is unacceptable. May rent must be reported as May expense.
  • From time to time, ask to be reminded of company policies for recording income, capitalizing costs, etc.

Beyond monthly financial reports

You should expect to get information from your finance and accounting groups on a daily basis, not just when your monthly financial reports are due. Some good examples are:

  • Daily cash balance reports.
  • Accounts receivable collection updates.
  • Cash flow forecasts (cash needs)
  • Important or unusual transactions.

Consistent work habits

We all know people who took it easy for weeks and then stayed all night to meet a deadline. These inconsistent work habits are strong indicators that the individual is not attentive to the processes. It also dramatically increases the likelihood of errors in hectic last minute activities.

Willingness to be controversial

As CEO, you must make it very clear to finance / accounting managers that you expect frank and honest information and that they will not fall victim to “shoot the messenger” thinking. Once that assurance is provided, your financial managers should be an integral part of your company’s management team. They should not be reluctant to express their opinions and concerns to you or other department leaders.

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