As the person in charge of your company’s financial health, the chief financial officer (CFO) is vitally important. But how can you measure their effectiveness? In this article, we discuss the duties of a CFO, how they can add value to your company, and how to tell if they are helping your business achieve and maintain financial success.
What are the Duties of a CFO?
A CFO holds two jobs: managing the accounting and finance team and contributing to company strategy. A good CFO does both, a bad CFO can only do one or the other (or sometimes neither!) What kind of CFO does your organization have?
A CFO that is ineffective at management:
- Spends lots of time in the books, making journal entries, or reviewing accounting work.
- Is the only person who knows how to update the forecast, build a budget, or analyze data.
- Has high employee churn in their team.
- Uses an “all-in-one” model for forecasting, variance analysis, and budgeting.
- Consistently blames issues on the accounting system or their team members.
A CFO that is ineffective at strategy:
- Cannot provide you insights to help drive business decisions.
- Is unable to make recommendations to you and other managers.
- Always agrees with you and never pushes back against your ideas.
- Cannot present confidently in front of your Board of Directors.
- Usually recommends cost cuts as a default remedy to boost profits.
How Can a CFO Add Value to a Business?
A CFO uses savvy financial strategies and data analysis to improve cash flow, grow revenues, and grow profits. A CFO collaborates with other managers to guide their actions towards the company’s financial goals. CFOs use their leadership to keep financial departments focused on goals and handle bank and investor relationships. Most importantly, when it is time to exit the company, CFOs use their expertise in your business to impress acquirers and execute the sale of your business.
Why is it Important to Have KPIs for CFOs?
A CFO uses key performance indicators (KPIs) to monitor your company’s health. What about KPIs to evaluate your CFO? This executive sets the direction of your company’s financial decisions, greatly influencing cash flow, expenditures and sustainability. CFO KPIs provide a way to measure effectiveness.
KPIs for CFO Performance
When it comes to your team’s CFO, how do you define success? Whether you are conducting an annual CFO performance review or considering a potential change in leadership, CFO KPIs help you measure the value of this key executive.
Start by comparing your company’s goals against the CFO’s job description and see how they contribute to your success. Are they hitting the desired goals and are they focused on the important issues?
Next, define a set of metrics to measure the success of those issues. Keep in mind that companies are unique in their needs and expectations, so you need to develop your own CFO performance measures that relate to your business and industry. Here are some examples of common CFO metrics:
Measuring a CFO’s management effectiveness
- Are the books closed consistently within 10-15 days of month end? (Best practice is 5 days)
- Can the CFO explain changes in profitability, costs, inventory, etc.?
- Does the CFO own failures and misses, or do they blame errors on other people?
- Does the CFO have a low employee churn rate on their team?
- Has the CFO innovated changes to the accounting process, forecasting, or budgeting?
Measuring a CFO’s strategic effectiveness
- Does the CFO engage with my managers in forecasting, or do they stay siloed within their department?
- Do I value my CFO’s input on key business decisions? Has their opinion influenced my decisions?
- Does the CFO analyze data based on business needs, or do they analyze based on their own personal fascinations?
- Does my CFO have good rapport with our bank, our investors, and our board of directors?
- Will my CFO be confident presenting to potential buyers of our business?
Ask yourself if your CFO collaborates effectively with the rest of your financial team, and if every team member has what they need to help grow the business. Examine your entire operation, from sales reps to supply chain to management, and determine if your chief financial officer is helping everything run smoothly. Your CFO should be making a substantial contribution to your company’s profits and growth and be actively involved with top-level management. The information that they provide must be timely, accurate and well-presented so that you can make the right business decisions.
Using these CFO financial metrics and asking these questions will help you to determine if your CFO is performing at the level required to meet your company’s financial goals.
Learn How CFOShare Can Help Your Company Grow
If you find you need the services of a professional CFO, but you’re unable to bring on a full-time executive, CFOShare’s fractional CFO is a smart alternative. You may be the owner of a small business or startup, ready to take your financial planning to the next level. Or your team may not have the necessary bandwidth to take on higher level financial tasks, such as an audit or a business acquisition. The beauty of using a fractional CFO is that you choose only the financial services you need, when you need them.
Hire a financial professional who can perform the services your company needs, from daily bookkeeping and accounting to analysis, budgeting and long-term strategies that capitalize on your company’s strengths. With expertise in your industry, they will be able to seamlessly integrate with your team and help nurture important relationships with banks and investors.
Call CFOShare for a free consultation, and we will show you how our financial experts can provide you with the services and the insight you need to make smart business decisions and stay competitive.