If you are considering hiring a Chief Financial Officer for your business, make sure they can answer these questions:
- Why do companies have four different measurements of financial value?
- Why does maximizing the creation of shareholder value maximize the return to all the stakeholders, for example, stockholders, customers, employees, etc.?
- What are the components of shareholder value creation, and how do they relate to one another?
- What are value based management techniques and how can they help to maximize the return to shareholders? How do you calculate the minimum amount of profits and “free” cash flow required to provide a sufficient return to stockholders?
- What are the three measurements of financial return and why is each measurement required to properly evaluate a business venture?
- What are the major sources and uses of cash and why is it important to distinguish between profitability and “free” cash flow?
- Why is profitability “necessary” to maximize financial success and shareholder value, but not “sufficient?”
- Why is “cash flow” income or “free” cash flow the “necessary and sufficient” measurement of financial return?
- What is the financial "common denominator," that factors in profits, investments, and free cash flow; and how do you calculate it?
- What are the working capital accounts, how do they differ from net working capital, and why are they important in respect to managing the cash requirements of a business?
- What are the differences between cost of sales, direct costs, indirect costs, manufacturing overhead, variable costs, fixed costs, gross margin, etc.?
- What does it mean to capitalize an asset, and why are software development expenses typically capitalized?
- How do you calculate the cost of individual financing methods and the weighted average cost of capital (WACC)?
- Why does cash invested in new or existing products, marketing and sales programs, manufacturing automation equipment, information technology software and systems, etc., have to earn a return considerably greater than the weighted average cost of capital (WACC)?
- Besides increasing cost, in what ways does the WACC impact the type and number of investment opportunities, for example, new product investments, that a business can undertake?
- What is the difference between common stock, preferred stock, treasury stock, bonds, debentures, warrants, etc.?
- What are the preferred methods of financing a business, and when is a business financially self-sufficient?
- Normally, why is common stock the most expensive method to finance a business and why do companies dislike issuing preferred stock?
- Why should breakeven analysis not be used as a return on investment (ROI) analysis technique?
- Why are return on equity (ROE) and return on assets (ROA) “accounting” measurements of return on investment (ROI), and not the “real” measurements of ROI?
- What are the various techniques used to measure return on investment (ROI), which one is the “proper” technique, and what are the measurement criteria?
- What is the difference between the net present value (NPV) and the internal rate of return (IRR) of a business venture, and is the IRR a valid return on investment (ROI) analysis technique?
- What is the difference in the ROI calculation for a business, and a product, that is part of the business?
- What is reverse planning, and is it a useful and effective technique for managing the financial and quantitative assumptions that are pervasive in new product development programs and business ventures?
Make sure your MBA program answers these financial questions.