When Should A Startup Hire A CFO?
When is the right time for a startup to add a CFO to the Team? Should a Startup Hire A CFO? These questions typically comes from CEOs, Venture Investors, and others within the venture talent community. That’s because they understand that a CFO brings enormous practical financial and strategic skills, and knowledge for a business, especially if it’s a startup.
A report suggests that small or medium-sized entities (SMEs) have been increasingly demanding financial expertise. That’s because the finance function of growth companies and startups has transformed radically. In a startup, the level of detailing in decision-making is more. Plus, there are more challenges related to liquidity and volatility. KPIs and key deliverables for business and functions are not well defined. Thus, there is a constant need to evolve and crystalize them.
For instance, the fundraising activity involves a lot of work in terms of executing the fundraising process. A CFO builds financial models, tracks KPIs, prepares the financials, and leverages angel or VC relationships for SMEs. He finds himself to be a human resource, a legal expert as well as a financial leader, especially in challenging times.
Thus, the answer to the question “When is the right time for a startup to add a CFO to the Team?” depends upon:
- The type of financing your startup needs to grow and flourish
- Whether your startup is undergoing merger, acquisition, or any other new partnerships
- Whether your startup is planning an exit
- The compliance and accounting risks involved
- Level of financial information required to take key business decisions
- The level of business growth a startup is aiming for
Before a startup hires a CFO, they should think through whether it truly needs a CFO. It must also determine the specific functions that would fall under the CFO’s authority. That’s because a startup needs to have a good budget to afford a full-time CFO.
In general, as startups grow, the complexity of their funding sources increases. That’s when the need to bring in a CFO becomes more apparent.
So let’s try to understand the things that determine at what point of growth a startup needs a CFO.
At What Stage Do You Need A CFO?
Typically, startups introduce the CFO position when they want to bring in a strategic, high-level perspective to their startup’s finance and accounting needs. That is, as a business grows in size or complexity, it needs the financial expertise of a CFO to manage its finances.
Additionally, startups introduce CFOs when they want to reduce the excessive workload of their co-founders. These areas may include finance, administration, real estate, technology, or legal.
This means that a startup’s underlying reasons for creating the CFO position will influence at what point of growth a startup needs a CFO. Typically, the following four factors interact with each other to determine at what point of growth a startup needs a CFO.
1. Size Of A Business
Over time, a startup may create new products and services, offer new delivery models, or expand through mergers and acquisitions. Such a complex business change demands strong financial foundations and a strategic plan to navigate financial, legal, and environmental complexities.
For instance, acquiring a competitor or a similar business may require a business to undertake due diligence.
Due Diligence is a process that involves examining the financial records of a business before undertaking the proposed transaction with another party.
As a part of such a process, the startup acquiring a business needs to consider questions like is the company worth buying or what a business is really acquiring with the purchase?
That’s when a CFO can help a startup answer such key questions and carry out Due Diligence before handing over the money in the proposed transaction. Thus, he may prevent the business from taking the wrong decision pertaining to acquisition.
Further, a CFO can give a CEO a clear understanding of what the company is truly purchasing. He may help the startup in building a strategic plan.
A CFO may build the strategic plan after assessing varied options and identifying the ones that are financially viable to pursue. Such a plan includes a roadmap that will help the startup to understand where it is today and where it plans to go.
2. Business Funding
Many startups fail due to a lack of cash flow and sufficient runway. There can be a number of reasons why a startup fails to access the right amount of capital at the right time.
But, one of the important reasons is that such startups do not seek the appropriate financial advice at the right time. As a result, they do not have sufficient cashflows to manage growth and deal with any unforeseen events in the future.
Unlike a CFO, business executives lack the financial tools to plan, budget, and forecast the funds required during the medium and long term. Further, they do not have the expertise to determine the financing options that work best for the business.
Thus, the right time to take a CFO’s help is when there is an increase in complexity with regard to financing a business. Typically, there are two sources through which a business may source funds. These include debt and equity. Both the options have their own set of risks and benefits.
As a result, financial expertise is needed to sift through such financing options. For instance, an investor may not be a good match for the startup as there is a wide variation between the vision of the investor and the startup.
Then, completely relying on debt financing may be a good option for the business. Instead, a more diverse mix of equity and debt financing may be a great option for the startup.
Besides this, there is a need to assess new funding options like crowdfunding which is completely different from traditional equity or debt financing options.
Since all such decisions require financial expertise, a CFO can help a business to you find the right balance of financing.
Besides determining the source of finance to raise capital, a startup or a growing business also needs to manage cash. There are certain key financial metrics that a CFO needs to calculate to avoid cash drying up.
For instance, they need to calculate metrics like Gross Burn and Net Burn to understand the amount of cash the company is spending on overheads. Likewise, determining KPI like Cash Runway helps a CFO in understanding the time period the company has before it runs out of cash.
Similarly, a CFO will help a business manage its receivables so that it gets paid on time and overcomes cash flow issues.
3. Level of Compliance
Startups or growing businesses cannot afford to make key decisions based on gut feelings. If a business is planning an acquisition, merger, or exit, it needs to have a proper strategic plan in place. Besides, a business needs accurate, relevant, and up-to-date information so that it can make the best possible decisions.
When a business undergoes such complex structural changes, the accounting, compliance, and regulatory responsibilities of a business increase. This is certainly the right time to hire a CFO.
CFOs have the expertise to prepare and submit all the relevant documentation on time. They ensure that the company’s reporting helps analysts and investors make sense of the company reports.
In fact, CFOs’ financial reporting expertise guides board members and analysts especially during periods of transitions. Additionally, such insights help the executives and the CFOs to identify the gaps in the effectiveness or efficiency of key systems, processes, and reports.
CFO also helps businesses in preparing business plans, growth plans, budgets, forecasts, models, and devising new initiatives based on the financial reports. They even establish a framework to manage and monitor the business.
Thus, CFOs are not only keepers of the financial information, but also the driver of business change with financial information.
4. Finding A Lender Or Investor
The success of a business lies in establishing relationships with key stakeholders. Such stakeholders may include lenders, investors, banks, and other financial institutions.
There are times when a business may need funds either for expansion or to meet working capital needs. It may be in search of either a lender who is willing to give a loan or an investor who is willing to help a company move to the next phase.
There is a high probability that a business may literally struggle to influence its bank for a loan or find it hard to attract investors or lenders who are willing to take a chance. This is where a CFO can help you as he has good relationships with banks, investors, and lenders.
He can negotiate with banks to help them better understand the business model and how it would generate returns. The CFO would showcase to the bankers the future plans of a business and the manner in which the executives plan to achieve their goals.
Likewise, a CFO would help a business evaluate the company’s worth and the value it creates in case it plans to raise funds from investors.
To determine a company’s worth, a CFO would determine the key drivers of the business. These may include the manner in which the business makes money, its margins, the company’s Return on Capital Invested (ROIC), and the underlying reasons for such ROIC numbers.
Additionally, CFO may also come up with ways to improve such drivers. For instance, operational improvements, changes in business model, sources of growth, and the benefits that business may derive from them.
How Do I Find the Right CFO for a Startup?
Every business can benefit from the expertise of a CFO. This is despite the fact where a business is in its lifecycle.
The services and expertise level required of a CFO depends on the manner in which a business evolves over a period of time.
- A startup or emerging business may not need a full-time CFO. It may benefit from a part-time CFO.
- Growth businesses may benefit from a CFO who is available on a consistent basis over the long term.
- an established business starts with a part-time CFO and transit to a full-time resource over time.
Does a Seed-Stage Startup Need a CFO’s Help?
As per experts, a seed-stage startup typically doesn’t require a CFO. However, it may consider hiring a Part-Time CFO a few months before the fundraising. That’s because the fundraising process involves a lot of work.
Since CEOs focus on attracting investors in case of seed investing, a CFO may help CEOs in building financial models, keeping a track of KPIs, preparing financial reports, and leveraging VC relationships.
Accordingly, Series A-C startups can consider hiring Part-Time CFOs. But once a startup passes Series-D funding, a startup usually hires a full-time CFO to manage growing finance and accounting functions.
Why Do Startups Need CFOs?
CFOs play a crucial role for startups operating in this uncertain, dynamic, and global economic environment in which businesses operate. In fact, the rapid change in technology is making CFO’s role all the more important in a startup. The following are the key reasons why startups need CFOs.
- The increase in regulatory compliance is making it necessary to have CFOs take a personal stake in regulatory adherence.
- Globalization challenges are creating a need for CFOs as they have the expertise to build an effective finance function on the global stage.
- Rapidly evolving technology requires the expertise of CFOs as they are proficient in using big data and analytics to drive business insight.
- Changing nature of risks that startups face demands effective risk management approaches that only CFOs can implement.
- The complex business environment demands the analytical skills of CFOs to validate and execute stratic plans.
- Widening financial reporting requirements is increasing the demand for CFOs.
- Increasing demand for startups to transform the finance function requires the expertise of CFOs.
The CFOs have a fundamental role to play in leading the finance team across a startup. They not only manage the financial aspects of a business, but also create value, raise funds, and meet compliance. The right time to hire a CFO for a startup depends upon factors like business size, fundraising, compliance, and the complexity of financial reporting. In general, the CEOs need strategic partners who not only monitor performance but also create value for a business on the whole.