Identifying Red Flags: Signs Your Finance Function is Underperforming

By Anne Samak de la Cerda

At FLG Partners, our financial experts are often called into situations where the finance leader or finance team has been underperforming for some time, yet management has not taken timely action. These delays typically have significant repercussions, from missed opportunities to financial instability.

Underperforming finance teams negatively impact the business in two significant ways:

• Failure to provide key stakeholders with the right metrics to drive better performance.
• Failure to anticipate a business financing need resulting in drastic strategic changes and sudden cost cutting.

Both of these scenarios are unhealthy situations for any business. By recognizing the red flags and understanding the strategic interventions needed, you can ensure your finance function operates at its highest potential.

Today’s climate is even more challenging, as CFO turnover spiked in the first quarter of 2024 at levels that match Q1 2021. Tech industry CFOs took the biggest hit, with a 6.2% turnover rate, three-quarters of which came from S&P 500 organizations.

This article is designed to help you identify the warning signs early and take proactive steps to address these issues before they escalate.

Finance Team Red Flags

Red Flag #1: When finance teams work in a silo 

Like other teams, finance has key deliverables that must be met: tax filing, financial reporting, cash flow, and accounting. While each of these responsibilities is business-critical, in my experience, the top objective for any finance function should be focused on serving others within the organization.

When the finance team works in a silo, it is not leveraging its knowledge to serve, nor is it collaborating to understand the rest of the organization’s needs or opportunities.

Example: I’ve worked with several finance teams, particularly at larger organizations, that were highly focused on meeting auditor requests while the business suffered from lower-than-expected returns.

Solution: In this instance, the CFO should have prioritized sales team support and recommended immediate corrective actions. Instead, a full quarter was spent heads down managing auditor expectations.

Finance teams must find ways to foster collaboration. Appropriate cross-departmental meetings and integrated financial planning systems are essential for frequent communication and building a culture of proactive behavior.

Red Flag #2: When finance does not challenge the executive team 

Unfortunately, it is more common than not that finance teams are expected to report on performance without understanding the need to provide actionable recommendations. Worse, there is frequently no pathway to question or challenge these executive requests or decisions. This inevitably leads to poor strategic choices and a lack of critical oversight.

Example: I recently worked with a client expecting to triple sales after 18 months of stagnation thanks to the launch of a new product. The finance team was asked to model the impact of success on the business and prepare a budget for the following year accordingly.

The team created the model, which lacked significant detail. Tripling sales so fast is entirely unrealistic, and even if possible, customer data would need to be present to support such growth, not to mention the risks associated with cannibalizing the core business from the new product.

Solution: Build a culture where finance professionals feel comfortable voicing their insights and concerns. Empower team leaders to ask questions, share opinions, and present alternative solutions to financial challenges.

Red Flag #3: When finance uses obsolete tools or manual processes

While it may seem evident that outdated tools and manual processes result in inefficiencies, many financial teams continue to operate this way. The main symptoms of these outdated teams are challenges around timeliness and accessibility of critical financial information.

Example: If financial reporting takes more than a few days post-month-end, poor processes are likely impacting the finance team’s work. You can also expect errors and slow response times.

A client of mine at a late-stage growth company that had already experienced several rounds of preferred stock financing had failed to implement a Cap Table management tool. In addition to the high risks of errors in complex spreadsheets, employees lacked visibility into their stock options. And the People Team struggled to use equity as part of the company’s compensation package. The outdated technology had repercussions throughout the organization, from hiring to growth.

Solution: Finance is not the place to cut corners. Advocate for investing in modern financial technology and automating routine tasks.

Red Flag #4. When there are compliance issues

Common compliance problems finance teams may face include sales tax compliance, labor law compliance, and industry-specific rules. At startups, these issues are often ignored by founders solely focused on growth. These founders tend to rely on their finance function to keep things in check. No processes are built to identify risk.

Needless to say, the risks are real. Legal penalties, brand reputation damage, and financial loss are all possibilities. Running an efficient finance organization is a constant balance of compliance risk versus efficiency. Neither can be ignored.

Example: I recently worked with a client in the education space where the operations team failed to implement proper processes around registration with the Industry’s Bureau. As a result, the company faced risk of penalties and the potential to be barred from doing business in that state. The finance team was left out of initial discussions and, consequently, could not support or follow up on the requirements.

Solution: Leverage your CFO’s expert network to stay updated on regulations and have robust compliance systems in place.

Red Flag #5: When finance fails to build trust with the Board 

A lack of trust in the CFO can lead to governance issues and unnecessary time spent by board members on the details of financial performance.

Example: At a company where I was brought in as a Fractional CFO, the Board spent significant time reviewing historical performance numbers and left almost no time for strategic discussions. This led to frustration from both the management team and the Board.

Solution: You should trust your CFO to provide them with full access to Board Members and be able to leverage the audit committee to do deep dives into financials whenever needed.

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A well-functioning finance team supports day-to-day operations, drives strategic decision-making, and ensures financial stability. This team’s health is crucial for any organization’s success and growth.

Be proactive and avoid costly turnover if you can. Take the time to assess your organization’s finance team. By recognizing the red flags outlined—working in silos, failing to challenge the executive team, using outdated tools, facing compliance issues, and not building trust with the Board—CEOs and leadership can take the necessary proactive steps to address these issues before they become critical.

At FLG Partners, we specialize in turning around underperforming finance functions. Our team of experts is dedicated to helping businesses identify these warning signs early and implement effective solutions. Don’t wait for these issues to escalate. Take action now to optimize your finance team’s performance and set your business on a path to success.