FINANCE GUIDE, SPEND MANAGEMENT

Does your startup need a CFO?

March 24, 2020

Startups today usually have a chief executive officer and (probably) a chief technology officer. But do they really need a chief financial officer?

The answer is yes: CFOs today don’t just handle compliance issues, but they also take a direct role in strategic planning. Read on to find out some of the most common signs that you’re ready to hire a full-time CFO.

What does a startup CFO do?

Think of CFOs as your team’s financial coach. They’ll handle your company’s long term financial strategy and help you decide how to use your funds to get where you need to go. A CFO may not necessarily have a background in finance, but you’ll find that many of the best hires will have extensive financial experience that you can leverage as your company scales.

In the past, CFOs mainly handled books and records, financial reporting, and legal compliance. More than anything, they acted as supporting characters who either agreed or vetoed budget allocation requests.

Now, however, CFOs have created a role of their very own as advisors and strategic leaders within a company. They may even take part in shaping internal company policies. For example: Google Alphabet CFO Ruth Porat is famous for her work ethic, but last year in 2018 she participated in a walkout with fellow Google employees to protest sexual harassment.

She shares, “What we did [at the C-suite level] was [take] in a lot of information, step back, and think about the breadth of policies we could put in place that would up our game on something we feel is really important, which is ensuring diversity and equity in the workplace." The protest resulted in new policies from management to help increase and promote safety and diversity at Google.

Any of these may be part of a CFO’s job description:

  • Guide a company through changes (IPOs, funding rounds, restructuring)
  • Handle business expansions
  • Consult on internal issues
  • Investigate and research new markets of opportunity
  • Manage assets and stakeholder or investor relations
  • Handle company spending through investments
  • Forecast market trends
  • Interpret relevant data

And here are some of the unique benefits a CFO can bring to your table:

A robust network of connections

Most startups will find a CFO’s connections very valuable when jumpstarting growth, especially if the current founders have little experience in the startup world. CFOs in Singapore and beyond often have connections to government regulators, lawmakers, venture capital firms, and investors, and they may be able to rally support for your young business.

Guidance and strategic vision

CFOs are increasingly taking on strategic roles across industries. Many help their CEOs make decisions in key hires, market expansion, and even product development. In many tech startups, for example, CFOs must work directly with CTOs/CIOs to ensure that tech development runs on schedule and within budget.

Experience in leading (much-needed) financial change

After nearly three years without a CFO, Uber finally brought on Nelson Chai in August 2018. Chai held top finance jobs at Merill Lynch & Co and NYSE Euronext Inc., and has experience taking companies public. Uber leveraged his background to launch its IPO in May 2019.

Do I need a CFO?

Every business is different, which means the answer to this question is—it depends. The only person who can answer that question is the leader of your startup—the one who is most familiar with the startup’s needs, expenditures, and pain points.

Though there is no clear consensus on what makes a business ready for a CFO, there are a number of reasons why a company may find itself in want of a CFO. If you see yourself in the list below, it may be time to consider bringing on a chief financial officer of your own.

I’m running low on finance talent

A startup founded by college students has a very different set of capabilities from one that is founded by finance executives. If your existing team is suffering from a lack of finance talent or knowledge, it would be prudent to hire a key finance team member.

This hire doesn’t necessarily have to be a CFO. For example, you may be able to suffice with an accountant instead. What matters most is that you have a realistic idea of what your team members are and are not capable of in terms of financial reporting, growth, and investor relations.

My business is rapidly changing

In the fast-paced world of startups, changes are made every day. Businesses fall apart, others make plans to acquire a smaller company. A CFO would be incredibly helpful in both of these situations. For example, acquiring another startup is no easy feat. It requires financial and regulatory due diligence, plus plenty of negotiating with the other parties. A CFO would be able to lead the startup’s evaluation strategy and ultimately make the final decision to acquire (or not).

On the other hand, a business that’s on its last legs may benefit greatly from a CFO who can delegate limited funds and restore some financial order.

Regardless of the situation, CFOs can help companies respond quickly and adeptly to major changes.

My company’s financial needs are growing

One way of assessing a startup’s financial state is to review the “Financial Hierarchy of Needs”.

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This is a twist on Maslow’s Hierarchy of Needs, a theory and method in psychology of assessing any given individual’s emotional or personal needs. The higher a person falls on the pyramid, the more mature they are, or “actualized”, which in this case is a way of saying that they’re achieving their full potential.

Where does your startup fall on the pyramid? If you are just beginning your journey, you’ll most likely fall somewhere between “transacting” and “record-keeping”. Your focus is on making sales and trying to develop a minimum viable product (MVP).

The more you progress, however, the greater your financial needs will grow. By the time you reach a point where you require “trusted reporting”, you should already have a relationship with trusted financial advisors and accountants. The person in your chief finance role doesn’t have to be a CFO yet. You could choose between hiring a team of accountants, an interim CFO, a controller (a person mainly tasked with compliance and bookkeeping, or leading a finance team), or even outsourcing.

An in-house CFO becomes most relevant at the two uppermost stages, when a startup needs to begin looking towards the future. A CFO with a great vision can lead a company to its Series A funding rounds and beyond.

My business is very complex

You won’t need a dedicated finance executive if you’re selling a handful of high-value products each year—there are plenty of automated tools that can help you track and record these sales. But the situation gets tricky when you’re dealing with hundreds of invoices, clients, or vendors each month.

Companies need to constantly balance their need for profit with their customers’ satisfaction. A chief financial officer will be in charge of analyzing the data and leading key initiatives and introducing adjustments that can ensure business longevity.

I’m not sure what to do next in terms of finances

Most companies moving in the startup space usually have plans to raise funds from investors. Would you be able to reach your series A funding round without a CFO?

If in doubt, it’s a good idea to begin looking for a CFO who can map out a gameplan leading up to that eventual funding round. If you regularly find yourself baffled by finances, overwhelmed during reporting periods, or confused about concepts (like cash flow, expenditures, burn rate, or profit and loss), these are signs that your startup is ready for a CFO.

In the meantime, what can I do?

Perhaps you don’t feel that you’re ready to make such a big hiring decision yet. That’s completely normal. In the meantime, there are a number of steps you can take to lessen your burden.

Track all of your expenses.

Solid expense management doesn’t just make bookkeeping easier. They’re crucial in ensuring that you obtain the maximum amount of tax deductions. You may choose to use a simple online spreadsheet, but if you have a growing team, automated company spending cards may be a great option.

These cards record and categorize transactions instantaneously, offering you incredible visibility and transparency over where your funds are going. This saves you time and effort during each mandatory reporting period.

Build a budget earlier—and stick to it

You can’t recognize overspending if you don’t have a budget. Consult with your tech, product, and marketing teams to estimate how much you’ll need over the next year, and make sure everyone does their best to stay within limits.

Considering poor cash flow and mismanaged company spending is the reason 80% of startups fail, it’s important to be lean with your spending and cut costs wherever possible (while still delivering the greatest quality). It’s the conundrum all businesses face: how can you create more value while reducing your use of funds?

The bottom line is this: if you simply need someone to help track finances or balance the books, an accountant or controller will suffice. But if you envision a long, tough road ahead with major changes and are ready for more strategic direction, a supportive, experienced CFO is your best bet.

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