Be Prepared for these Finance Questions from your Board of Directors
As a financial professional, it is crucial to be well-prepared to answer questions from your board of directors. Being able to articulate complex financial concepts and provide clear, concise explanations can help build trust and credibility with your board, which is essential for the success of your organization. In this article, we will explore some of the most common financial questions your board of directors may ask and provide tips on how to best answer them.
Financial insights are the foundation of a healthy, strategic partnership with the CEO, board, and other key decision-makers. So, too, is understanding data assessments and projections in order to glean important information to share with leadership. Knowing what and how to share financial information can be particularly tricky when answering to a board of directors or outside influencers, who may not be privy to industry or strategic details.
So what should you be prepared to address when meeting with your board? We've gathered key questions leaders will likely face at one point or another.
What can you tell me today about our financial health tomorrow?
When leadership is questioned about cash and sources of funds, they are asked to share a sense of company spending and to make projections about both near- and long-term growth. Knowing where the company’s cash is—and analyzing both best and worst-case scenarios—is essential in painting an accurate financial picture of the company.
Finance teams can help provide the visibility required to keep the board abreast of historic transactions, real-time issues, and future possibilities, so they have confidence in what's ahead.
While a board is likely concerned with having sufficient funds to handle payroll or other overhead expenses, what they really want to know is if now is the right time to make an investment in resources. If you haven't established key performance indicators (KPIs) for your business, now is the time to do so. It's also time to have a clear system for measuring and monitoring them. Financials are important, clearly, but KPIs can help inform decisions.
There will also inevitably be a time when the answer to the question of the financial health of a business is not a positive one. Maintaining a transparent and honest relationship with the board is critical. Moreover, this news always needs to come up with a data-driven strategy to improve the situation.
How are we hitting company goals?
Developing and maintaining an organization's mission, values, and growth strategy is a key part of any executive's role, and every board of directors wants to know exactly how the team is working to achieve this. This conversation isn’t just asking you where the company is in relation to set goals, but instead, how the company got where they are, what comes next, and what changes need to be made. This is where accurate financial reports, up-to-date data, and CFO insights come into play.
If the CEO or CFO cannot come equipped to the meeting with this data, it’s time to upgrade your financial management resources (and that may mean looking outside the organization). Change occurs quickly in any business, and it’s up to finance and accounting to know why these changes are happening. Goal tracking is a huge part of a CFO’s job, but analysis of movement on said goals is what moves an organization forward, and what elevates the finance team's role within the leadership team. This question on goals will likely serve as the foundation for conversation, so coming in with a full picture, and an accurate answer can set a positive tone for the rest of the meeting.
What strategies are in place to manage risk?
Business is unpredictable—markets change, technologies emerge, competitors enter and exit the marketplace—and leaders need to prepare for all unknowns. Board members, executive leadership, and stakeholders know that there are strategic advantages to taking risks and that realizing growth requires some degree of risk. It is a delicate balancing act that requires accurate data, flexibility, and oversight.
This oversight has increasingly become the responsibility of the board. A good board will ask tough questions regarding policies and procedures around risks, along with the organization's strategies and risk appetite. So, come prepared.
The scope of what is required varies by industry but may include a risk and recovery plan, competitive intelligence, merger and acquisition (M&A) targeting, remediation options in case of downturns, and value-added contribution strategies to sustain a competitive advantage or improve performance. This will allow for deeper conversations, and yes, deeper questions into the company's health. For example:
- What are the company’s top risks, what is their estimated impact and how likely are they to occur?
- Does the company truly understand the key assumptions underlying its strategy?
- How often are top risks assessed?
- Who owns the top risks and is accountable for results, and to whom do they report?
- How effective is the company in managing its top risks?
- Are there any “blind spots” within the organization that need addressing?
This dialogue should continue throughout the lifespan of a company. The board should engage in periodic discussions about the risks the company should take, those it should avoid, and the parameters it should operate within.
What does the capital structure look like in five years?
An organization’s capital structure reflects the way it’s capitalized. In other words: how has money been supplied to fund the business and to help it grow? A healthy capital structure that reflects a low level of debt and a high amount of equity is a positive sign of investment quality. A board and outside investors will want to know whether a business has enough capital structure to achieve its vision. If not, what is the plan to get there?
In other words, will it take in outside investors, additional debt, or other strategies? Or are estimated business earnings enough to hit cash flow targets? A savvy finance manager or CFO can do the heavy lifting by modeling earnings, cash flows, capital expenditures, and more. Projections can model different timeframes and market impacts.