Running a small business in today’s climate is more complicated and demanding than ever. The market is hyper-competitive, hiring and managing employees is inordinately complex, and government and legal compliance requirements continue to expand unabated. One result of this is that CEOs can no longer afford to operate a growing business under their sole direction.

Today, leading and growing a company takes a team of leaders, beginning with the CEO and then continuing to incorporate a Chief Financial Officer (CFO) as well. The CFO is a seasoned professional with both compliance accounting experience and an understanding of business finance and management. Whether a full-time hire or a part-time or fractional outside expert, your CFO is a critical expert member of your management team.

Once you add a CFO to your executive table, what do you do next? The first thing you can do is ask some key questions to help you and your CFO build the right strategy for the company’s bookkeeping, accounting, tax planning, finance and growth. Here are five key questions you should ask your CFO to kick things off on the right foot:

1. Are we ready to pass a tax audit…right now?

The likelihood of your particular business being subjected to an IRS audit is slim, but it is not zero. In fact, in some tax years the IRS has specifically targeted small businesses such as single-member LLCs for audits. The size of your business has no direct bearing on the likelihood of being audited, so just because you’re small doesn’t mean the IRS will overlook you.

With that in mind, the question is not whether or not you are likely to be audited (since the IRS is constantly adjusting its criteria for targeting and selection), but rather — whether or not you’d pass.

For example, how well documented are your expense allocation procedures and how fully provable are your expense deductions? Are the various ratios presented in your tax return (such as the size of your overall deductions when compared to your gross revenue) in line with reasonable expectations, and if they are outside those boundaries, are they justifiable?

In short, one of your CFO’s jobs is to ensure that you are complying with the law — and can reasonably prove your compliance. Ask this question to begin the process of making sure.

2. What financial statements are we producing each month…when, and why?

One of the essential roles of a CFO is to lead the process of closing each month’s books and then preparing accurate and timely financial statements. These include your balance sheet, profit and loss statement (P&L), and your cash flow statement among others.

These financial statements are intended to provide you with a clear and comprehensive historical picture of your company’s performance, and using them effectively to review the strengths and weaknesses of the company’s current operations is essential to your role as the CEO.

In addition to reviewing and discussing which statements are being produced (and what other statements and reports might be worth adding), you are also looking to understand when statements are produced.

This is another way of asking when the books are being closed at month-end, which is important to know and protect. Understanding this timeframe helps you ensure that your CFO and accounting team are on top of the accounting process and are completing work in a timely and professional manner.

3. Which metrics should we be using to make essential decisions?

In addition to the financial accounting and tax accounting processes that your CFO and outside CPA firm perform to ensure your company’s overall health, another side of accounting you should know about is management accounting. Management accounting is the process of using and interpreting accounting information internally in order to make timely business decisions.

These decisions could be as large in scope as whether and where to open a new business location, or as small as how many employees to add to a temporary overtime shift so you can clear last week’s production backlog. Understanding what decisions you need to make as CEO then allows you to select the right metrics and data points you can use to guide those decisions.

When you ask your CFO what metrics should be used, also look for his or her input on what decisions need to be guided by those metrics as well.

4. What can we do to improve the accuracy of our forecasting in the future?

In addition to using accurate financial metrics and reports to guide business decisions, as CEO you also need to have a reasonably clear picture of what your immediate future will probably look like. Forecasting can be as simple as estimating the number of new deals you expect to win and their projected value, or as sophisticated as examining different market growth trends and extrapolating likely demand for multiple product lines in different market segments.

Regardless of how forecasting is done in your business, the CFO needs to ensure that you’re using the right process to generate the forecasts, and that the forecasts are reasonably reliable and accurate. Ask your CFO to help you understand both points as you look to plan more precisely for your future growth.

5. If we’re growing, where should we invest first…and if we’re facing headwinds, where should we cut back first?

As your company grows and expands, new investments become essential to consider. For example, you need to know when it’s time to hire an additional employee or add a second shift to a production line. You also need to understand when it’s worth making new investments for the first time, such as hiring a marketing agency for a comprehensive rebranding, building out your sales team, or adding a dedicated human resources executive to oversee your workforce.

On the flip side, protecting cash flow and operational health in lean times may require cutbacks. Some companies cut advertising and marketing instinctively, then act surprised when sales plummet further. Others aren’t clear on how and when to proceed with or back off of planned capital expenditures (such as new equipment, upgraded facilities or other major steps) since they may not understand financial markets and the factors that drive changes in interest rates.

The CFO should be able to guide you in road mapping both scenarios and help you avoid making poor decisions, all while strengthening your ability to prepare the company for success in all kinds of weather, whichever way the economic wind is blowing.

These five questions give you a solid footing for engaging your CFO in the right discussions that will help you ensure outstanding compliance, precision and accuracy in your operations today, and key decisions for tomorrow. With your leadership as CEO and the support of your CFO, your company will benefit from the power of a core executive team that is well prepared for the future.

Image Credit: niexecutive (Flickr @ Creative Commons)