A Company Has A Negative Cash Flow From Operating Activities 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. It is known who carries their weight and who does not. That is, unless we are talking about finance and accounting managers.

Most CEOs, especially in SMEs, come from an operations or sales background. They often acquired certain knowledge about finance and accounting during their careers, but only to the extent that it is necessary. But as a CEO, they must make judgments about the performance and competencies of accountants as well as operations and sales managers.

So how does the hard-working CEO rate the finance and accounting functions in his company? Too often, a CEO assigns a qualitative value based on a quantitative message. In other words, if the controller delivers a positive, optimistic financial report, the CEO will have positive feelings toward the controller. And if the controller sends a gloomy message, the CEO will have a negative reaction to the person. Unfortunately, “shooting the messenger” is not at all uncommon.

The dangers arising from this approach should be obvious. A controller (or CFO, bookkeeper, whoever) may realize that in order to protect their career, they need to make the numbers look better than they really are, or they need to shift attention away 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 have a big advantage when it comes to evaluating the performance of the finance department. They have an audit committee of the board of directors, auditors, the SEC, Wall Street analysts and public shareholders giving them feedback. In smaller companies, however, CEOs must develop their own methods and processes for evaluating the performance of their financial managers.

Here are some suggestions for the small business CEO:

Timely and accurate financial reports

Chances are you’ve been advised at some point in your career that you should insist on “timely and accurate” financial reports from your accounting group. Unfortunately, you’re probably very good at judging what’s timely, but maybe not nearly as good at judging what’s right. Of course you don’t have time to test traffic logs and check reports for accuracy, but there are some things you can and should do.

  • Insist that financial statements include comparisons over several periods. This will allow you to assess 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 for recording revenue, capitalizing expenses, etc.

In addition to monthly financial reports

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

  • Daily cash balance reports.
  • Accounts Payable Updates.
  • Cash flow forecasts (cash requirements)
  • Significant or unusual transactions.

Consistent work habits

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

Ready for controversy

As a CEO, you need to make it clear to finance/accounting managers that you expect honest and forthright information and that they will not fall victim to a “shoot the messenger” mindset. Once you have that assurance, your financial 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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