Cash Flow From Financing Activities Better Be Positive Or Negative How to Evaluate Your Finance Department

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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 is carrying their weight and who is not. That is, unless we are talking about finance and accounting managers.

Most CEOs, especially in SMEs, come from operational or sales backgrounds. They often acquired some knowledge of finance and accounting throughout their careers, but only to the extent necessary. But as CEO, he has to judge the performance and competence of accountants and operations and sales managers.

So how does a diligent CEO evaluate the finance and accounting function in his company? All too often, the CEO assigns a qualitative value based on a quantitative message. In other words, if the manager presents a positive, optimistic financial report, the CEO will have positive feelings toward the manager. And if the supervisor delivers a dark message, the CEO will react negatively to the person. Unfortunately, “shooting the messenger” is not uncommon.

The dangers associated with this approach should be obvious. A controller (or CFO, bookkeeper, whoever) may realize that to protect his career he needs to make the numbers look better than they really are, or he needs to distract from the negatives and focus on the positives. This increases the likelihood that important issues will not receive the attention they deserve. It also increases the likelihood that good people will be lost for the wrong reasons.

CEOs of large public companies are at a great advantage in evaluating the performance of the finance department. They have a board audit committee, auditors, the SEC, Wall Street analysts and public shareholders giving them feedback. In smaller companies, however, CEOs must develop their own methods and procedures for evaluating the performance of their CFOs.

Here are some suggestions for the small business director:

Timely and accurate financial reports

You’ve probably been advised at some point in your career to insist on “timely and accurate” financial reports from your accounting group. Unfortunately, you’re probably a pretty good judge of what’s timely, but maybe not nearly as good at what’s accurate. You certainly don’t have time to test transaction logging and verify the accuracy of reports, but there are a few things you can and should do.

  • Insist that financial reports include comparisons over many periods. This will allow you to judge the consistency of transaction recording and reporting.
  • Make sure all anomalies are explained.
  • Recurring expenses such as rent and utilities should be reported in the appropriate period. The explanation that – “there are two rents in April because we paid early for May” – is unacceptable. May rent should be reported as a May expense.
  • Periodically ask to be reminded of the company’s policy regarding revenue recording, capitalization of expenses, etc.

In addition to monthly financial reports

Expect to receive information from your accounting and finance teams every day, not just when monthly financial reports are due. Some good examples are:

  • Daily cash reports.
  • Debt Collection Updates.
  • Cash flow forecasts (cash requirements)
  • Significant or unusual transactions.

Consistent work habits

We all know people who have put in weeks and then pulled an all-nighter to meet a deadline. Such inconsistent work habits are a strong indicator that the individual is not paying attention to processes. It also greatly increases the likelihood of making wild last-minute mistakes.

Willingness to be controversial

As a CEO, you need to make it very clear to CFOs/accountants that you expect open and honest information and that they will not fall victim to a “shoot the messenger” mindset. Once that assurance is in place, your finance managers should be an integral part of your company’s management team. They should not hesitate to express their opinions and concerns to you or other department heads.

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