What CFOs Look At First
A Step-by-Step Guide to Diagnosing Your Company’s Financial Health
When a seasoned CFO walks into a new company, they don’t look at everything—at least not right away.
They begin by examining the key factors that matter most: margins, cash, risk, and financial clarity. Not because they’re trying to pass judgment, but because their job is to understand what’s working, what’s not, and what’s at risk if nothing changes.
This kind of diagnostic thinking isn’t limited to CFOs. In fact, once you understand what they look for—and how—it becomes much easier to evaluate the financial health of your own business.
In this article, we’ll walk through the process financial leaders use to assess a company’s numbers, identify risks, and shape strategy. Whether you’re doing your own books or working with a team like ours, these steps will help you think more clearly and manage more proactively.
Step 1: Understand the Business Model
Before looking at any numbers, a CFO asks:
How does this business make money?
What do they sell?
Who are the customers?
What does fulfillment cost?
Where are the pricing levers?
Is it recurring revenue or one-time?
Financial analysis is meaningless without context. You can’t assess margin without knowing what it takes to deliver the service. You can’t evaluate overhead if you don’t understand what drives revenue.
So the first “step” isn’t a spreadsheet. It’s a conversation—a high-level understanding of how the business actually operates.
“The numbers tell a story. But first, we need to know the characters and plot.”
Step 2: Review the Income Statement — for Margin, Consistency, and Control
Once the business model is understood, the income statement becomes a powerful tool. But CFOs don’t just glance at the profit line. They walk through it line by line—looking for clues.
Here’s what we examine first:
🔍 Gross Margin
This is one of the most important numbers in the business.
Revenue – Cost of Goods Sold (COGS) = Gross Profit
Is it healthy for the industry?
Is it consistent month to month?
Is it improving—or slipping over time?
Are labor or vendor costs eating into it?
Changes in gross margin often signal deeper operational issues—like underpricing, scope creep, supply cost increases, or team inefficiencies.
🔍 Operating Expenses
We look at:
Payroll: Is headcount growing faster than revenue?
Marketing: Are dollars spent producing a measurable return?
Rent/software/overhead: Are we overextended?
The CFO mindset here isn’t to cut costs—it’s to make sure costs are controlled and aligned with the growth strategy.
🔍 Net Income
Finally, we look at the bottom line. But we’re not just asking “Did we make a profit?”
We’re asking:
Is this sustainable?
Is this before or after owner draws?
Are there one-time items skewing the result?
This gives us a first sense of whether the business is creating value—or just generating activity.
Step 3: Analyze the Cash Flow and Balance Sheet — for Strength and Stability
After understanding income, we turn to the balance sheet and cash flow. This is where risk lives—and where opportunity often hides.
🔍 Cash
How much is in the bank?
How many months of expenses does that cover?
Is the cash balance growing or shrinking?
CFOs don’t just look at the numbers. We look at movement over time. If the business is profitable but cash is falling, that’s a red flag—and a clue.
🔍 Accounts Receivable (A/R)
How much money is outstanding from customers?
How long are invoices taking to get paid?
Are there old or doubtful accounts?
A bloated A/R balance often means revenue isn’t being collected—and cash is tighter than it looks.
🔍 Accounts Payable (A/P) and Debt
What does the company owe, and to whom?
Are payments current?
What’s the repayment schedule on loans?
A CFO wants to understand if the business can meet obligations and invest in growth—without running out of runway.
Step 4: Spot Red Flags and Bottlenecks
By this point, the CFO has a mental map of the business. Now comes the diagnostic layer:
Is margin compression eating away profits?
Is cash tight because collections are slow?
Is payroll rising faster than revenue?
Are vendors being paid late?
Are there too many personal expenses flowing through the business?
This step isn’t about blame—it’s about clarity. It’s about recognizing where the gaps are so they can be addressed with intention.
Often, this is where the real work begins: fixing processes, tightening systems, adjusting pricing, or cleaning up books so the reports reflect reality.
Step 5: Evaluate the Financial Infrastructure
Healthy financials come from healthy systems. So the next layer is about how the numbers are being produced.
A CFO will ask:
Are the books closed monthly?
Are accounts reconciled?
Is there a chart of accounts that actually makes sense?
Is there a forecast, and is it being updated?
Are financials being used for decision-making—or just for tax prep?
These questions determine whether the business is reactive or proactive—whether it’s managing from real insight or making it up as it goes.
“Financial health isn’t just about profit. It’s about control, clarity, and confidence in the numbers.”
Step 6: Recommend Focus Areas
With a full view of the business, a CFO can now answer the real question:
Where should we focus next?
That might include:
Cleaning up the books or simplifying reporting
Building a 12-month rolling forecast
Reducing overdue A/R or adjusting pricing
Establishing a consistent month-end close process
Starting monthly performance reviews
It’s not about doing everything at once. It’s about identifying the changes that will have the biggest impact—on profitability, clarity, and owner peace of mind.
You Don’t Need to Be a CFO to Think Like One
What experienced financial leaders do isn’t magic. It’s methodical. It’s structured. And it’s learnable.
If you’re a business owner trying to get a better grip on your numbers, this step-by-step approach will help:
Understand your business model
Review your margins and expenses
Analyze your cash and balance sheet
Spot red flags
Evaluate your systems
Prioritize your next move
And if you’re already working with a financial partner, these are the areas they should be helping you strengthen.
Financial health isn’t a destination—it’s a practice. And with the right habits, visibility, and support, it’s absolutely within reach.
