Use these three simple questions to make sure that your CEO possesses basic financial skills to manage the P&L, can interact effectively with the CFO, maximize organic growth, and safeguard the company’s liquidity. It is important to take advantage of the short time you have with a candidate and ask questions that are geared to be a speed test of their financial literacy.
First, ask your candidate if the CFO reports to them, and more importantly, if they have a hire and fire function over the CFO, and if not, who does. This is an important area to explore because most CEOs will say that the CFO reports to them, but it can be the case in form only, while the CFO actually reports to the chairman or the board. If the CEO can fire or hire the CFO and is responsible for the performance review, bonus, and incentive rewards, then your CEO truly has bottom-line accountability for the P&L.
There is a big difference to receiving a report from the CFO and receiving the report of the CFO. Don’t let a sworthy CEO fool you, if they don’t have hire fire responsibility over the CFO then they don’t have full P&L responsibility.
Second, ask your candidate which financial statement or management report they use to manage the business. Top-performing CEOs will have a set of deep indicators which are pre-indicators of performance that they will use instead of relying on traditional accounting reports, such as income, revenue or net profit statements. An example of a custom metric would be travel expenses on a weekly or monthly basis against cash-in, instead of projected revenue, which is then benchmarked against their competitors’ figures. You may go in deeper by following up with “What reports did you custom-make in conjunction with your CFO to drive peak performance?” A top candidate will have an answer such as: “In our sales of construction equipment, we changed metrics from pure sales or tonnes sold, to profit per tonne, so the sales people were not only selling construction equipment, they were actually making sure to sell the most profitable construction equipment.”
Third, ask your candidate: “When do you look at gross profit, operating profit, EBITDA and net profit? What is the difference between the three, and when should they be used as a metric?” If they don’t know the difference between the four, then this is a very telling sign that you can get in the limited time that allows you to know that your candidate does not have a deep financial skill set and must be supported by a strong CFO. What’s more, a candidate who speaks of their accomplishments in EBITDA may be attempting to inflate their figures by not taking interest expense, tax, amortization, and depreciation into consideration, which may raise a red flag.
Fourth, ask your CEO “How have you set up your cost allocation across the business? Which is your most costly unit, and which is your least? ” This question is helpful to identify CEOs who don’t have high financial skills or those who try to hide losses by applying the peanut butter cost method, where they spread the cost across the whole organization, to try to hide pockets of losses, which may mean that they are financially savvy but are attempting to mask reports.
A CEO focused on peak performance will want detailed metrics around costing and will know which clients, products and services have the highest cost allocation and will be constantly trying to change the revenue configuration to allow front line staff to sell the most profitable and least costly products and services. They will also be constantly working to rationalize their customer portfolio to remove customers that incur losses. Do not let your candidate answer with a blanket statement, get them to break it down and state the cost and actual metric they use over four different time periods, then have them explain what they’re doing to move the needle.
There are many ways to test your CEO’s financial literacy level and these are a few. My advice is to never give anyone the benefit of the doubt. Come to the interview with the assumption that your CEO has no P&L responsibilities and is financially illiterate, make them present evidence to change your opinion.
Want more questions to ask a CEO? Read “CEO Assessment and Selection” to learn more about the 7 universal success factors for the Chief Executive Officer and unlock over 450 fail-safe questions that allow you to recruit top performers. Get more free CEO Assessment tips at https://tpgleadership.com/ceo-assessment-selection-book/ .
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