5 key things accounting needs to communicate to the CEO

Whether you are operating in a small, medium-sized or large business, the role of the accountant, financial controller or Chief Financial Officer (CFO) is critically important to the success of the business.

If you are in one of these roles, you are often seen as the business owner or CEO’s right-hand person. He or she will lean on you, defer to you or rely on your input before making important decisions. You need to be on the front foot providing your superior with advice, rather than waiting to be asked.

Here are five key areas where accounting can add serious value to any business:

1. Timely management information

If your CEO or boss is financially savvy, they will probably demand financial and management reports shortly after month end. However, many CEOs (especially in smaller businesses) excel in other areas, and, because they do not understand the financials, they tend to ignore them. As an accountant, you would be remiss not to insist that he or she spend time every month going over the numbers and asking questions.

Set a monthly meeting with the CEO within a week of month end, and present the accounts in a way your boss can understand. Present charts and graphs that identify trends and actual versus budget comparisons. Explain the numbers in layman’s terms, and be prepared to elaborate as required.

2. Reports on key performance indicators

As important as the profit and loss account and balance sheet are, you can go one very important step further by working with the CEO to determine the key performance indicators (KPIs) for the business and then implementing a system to measure and monitor those KPIs on a regular basis.

The term ‘KPI’ is often bandied about in business circles, and it’s one of those terminologies that people often nod their heads at without truly understanding the meaning. To be clear, most businesses will have a small number of critical success factors — things they have to get absolutely right to succeed.

Once you have figured out what they are, work out how you would measure each critical success factor. The metrics you settle on are the KPIs. Aim to identify between five and eight of the most important KPIs, and incorporate them into your monthly management report.

Go one step further than that. If there are one or two indicators that are the most important numbers for the business — numbers which, when monitored every day would show that you are either on track or off track, then put in place more regular reporting just for those indicators.

3. Cash versus profit

You will often find that some business owners do not understand the difference between profit and cash flow. So, if they see a profit on paper, they figure that everything is rosy and continue to spend money on new initiatives without considering cash flow implications.

For example, what if customers suddenly take longer to pay you because the sales team are offering extended terms to win business? Or, in small businesses, maybe the owners are pulling out excessive amounts of drawings that are not showing in the Profit and Loss (P&L) account? Or maybe there is a significant capital expenditure program that is putting a strain on cash flow but, again, not making its way onto the P&L account.

As CFO or accountant, it is vital that you explain the difference between profit and cash flow. Always have a current short-term cash flow forecast to back it up. Present this at your monthly meetings, and discuss all potential new projects. Remember, cash is king, and it’s your job to preserve it.

4. Customer data

I wonder if you have ever heard the following in your career: “We need to up the marketing spend — we need more customers.” It is a natural knee-jerk reaction if sales are falling, but is it always the right reaction? What if you were able to present the following data to your CEO?

 

Last year

This year

Total customers

100

85

New customers

15

14

Acquisition rate

15%

16%

Lost customers

8

29

Attrition rate

7%

29%

Average transaction value

$3,500

$3,200

# Transactions per customers

4.2

4.3

Based on a cursory review of the data, there are least two issues more pressing than customer acquisition (acquisition actually increased year on year in percentage terms). The real problem appears to be attrition. Perhaps a better use of funds would be to sort out the customer retention issue first.

5. A sense of realism

Because of your excellent grasp of the numbers, you are able to act as an important foil to a CEO or business owner focused on the big picture, especially in smaller businesses.

In smaller businesses, the boss is often entrepreneurial — in some cases flying by the seat of his or her pants and making decisions based on gut feel. You can be their conscience. Double-check everything. Be a sounding board, but be prepared to push back with the reality.

Ask questions to understand the evidential base from which the CEO is operating. Encourage them with their ideas, but look at the worst-case scenario. Push them for a Plan B. Agree how much should be spent before pulling the plug in case Plan A does not work out.

Make sure you present bad news in a timely manner — most business owners hate surprises, and they are relying on you to be ahead of the game. Of course, if you’re the CFO in a large business, you have a delicate balancing act between your responsibilities to the CEO and the Board of Directors. Be the voice of reason, and you will be of incredible value to the business.