When to hire a CFO for your startup: inhouse vs outsource, what qualifications to look for?
Fast growing small businesses and startups have some advantages over their larger incumbent competitors. Having less bureaucracy and smaller management teams allow them to be more agile, make faster decisions, which means they can pivot and react more nimbly to market changes compared to larger legacy businesses that they’re competing against.
On the other hand, having only a few people on the leadership team of a startup, (which may include people who might not have had a lot of previous experience in running a company) can also mean having limited access to having the right talent, skills and expertise that a fast growing startup would need to scale and be successful. And many tech startups will have the engineering and software development skills, but one area where having an experience matters in a startup business, but is often lacking, is in the finance departments or function? And even more specifically, is that many startups have not yet hired an experienced chief financial officer (CFO) leadership position.
So according to an article published by Robert Half, Jason Flanders, the executive director for Robert Half Management Resources, stated that “startups often put off hiring a CFO until they are more established or preparing for an initial public offering (IPO). However, waiting too long to staff this critical role could be a mistake. “
In the article he went on to further state, “startups and other fast-growing companies can benefit from bringing in a CFO sooner than later because they need to get their processes in place, especially around governance and compliance.” And if a company waits too long, they could face significant obstacles that may hinder their future success, whether they are planning for an eventual IPO liquidity event or not.
What type of expertise does your startup exactly need?
So whether you are seeking a financial expert, a strategic growth advisor, an operational expert, what kind of CFO would be a fit for your company’s stage, sector or market. If you are looking to hire a fulltime inhouse CFO position, the accounting firm Indinero mentions in a blog post, mentions that there are different types of CFO expertise that you should be aware of. Such as:
- Technical expertise – which can be gained by rotating through finance function roles (controlling, treasury, audit, financial planning and analysis) highly experienced in finance for your industry, have an advanced accounting degree like an MBA in accounting or a Masters in Accounting MAcc. They can provide the financial expertise for startups or a decentralized company structure in need of either a) establishing or b) cleaning up the accounting processes.
- Operational expertise – developed through experience in areas such as operations, management, strategy, and marketing. These CFOs have an MBA degree. They are skilled in communications and leadership. They honed their management skills by shifting through business units within established and larger organizations. Indinero suggests that this type of CFO will need to exert personal influence to get things done.
- Transformational leadership – that comes from experience in diverse sectors and carries an impressive command of cost management. These CFOs are uniquely capable and successful at achieving aggressive growth goals or managing operating costs with scarce resources.
CFOs with experience in dramatic growth or reshaping of a company portfolio will have a keen strategic mind, proficiency with M&A or divestiture programs, and a healthy network to support their independent decision-making style.
What are your startup’s current accounting and finance capabilities?
The Indinero article suggests that If you don’t know your company’s current finance function capabilities, creating a CFO job description is a helpful way to identify the gaps your new CFO will need to address.
A startup founder CEO who is experiencing rapid growth, seeking to raise VC funding, thinking about going public, or planning to get acquired in an M&A exit needs a CFO with accounting process expertise or has successfully reshaped a company portfolio. Make room for vision and aspirational goals for this critical role.
Look for a CFO that knows (your) business
CEOs aren’t speaking accounting when they talk about business. A CFO gives quantifiable results to their ‘what if’ scenarios. If you are a startup it might help to find someone with startup experience. The CFO is the second most crucial executive in your organization, and what they know about your business is critical to its success. As an example, over the past year the Covid-19 shutdown pandemic has brought a ton of consumer behavioral changes, ecommerce as well as accelerating the need for businesses to digitally transform. And just recently the GameStop retail trading frenzy, has brought a large shakeup at the company, with an activist investor Chewy co-founder Ryan Cohen who (disclosed a nearly 10% stake) forcing the current GameStop CFO Jim Bell to resign, and making a push for GameStop to reduce its reliance on physical retail and focus on e-commerce. A shift from selling physical video game copies to digital downloads. According to reporting from the WSJ, to meet this transformation, GameStop announced several changes such hiring Matt Francis, a former Amazon.com Inc. executive, who took on the newly created role of chief technology office (CTO). On March GameStop issued a corporate governance update, which said it launched its search for a new CFO, and plans to appoint its Chief Accounting Officer Diana Jajeh as interim finance head if it hasn’t found a replacement when Mr. Bell leaves. The company is seeking a CFO with a background in e-commerce or technology who could develop strategies in areas such as capital allocation priorities, financing, digital capabilities, organizational footprint, and personnel.
(image credit; EG Partners)
The number of ways CFOs can help startups and fast-growing companies
From pre-IPO companies, to structure, to budgeting, to cash flow management and running their operations. lets dive in a little deeper.
Annual Budgeting and Forecasting
They can create accurate budgets and forecasts built for you. A CFO can analyze your business drivers to build personal forecasts for:
- Employee expenses
- Non-employee expenses, and more
Managing cash flow
A capital funding runway or managing the cash burn rate — is having the appropriate amount of money in place for the company to “take off” — constitutes a major challenge for most startups. When costs are high, and revenues are low to nil, companies can easily blow through all their initial capital before they establish a “product market fit” presence.
A CFO can manage expenditures, prevent costs from getting out of hand, and help ensure that the company stays solvent during its challenging early years. Also can Manage your debt obligations, and ensure the ability to invest in new projects.
Identify opportunities to improve margins through granular analysis of channels, service lines, products, and more.
Preparing for the ‘ups and downs’
The pressures of short-term survival are so intense that startups often forget about long-term issues such as managing debt and investing proceeds.
Trained to think ahead, a CFO can develop and implement strategies from how to deal with rough financial periods to the best ways to handle explosive growth.
The Robert Half article suggests that a CFO who has “been there and seen it all” — from the pre-IPO phase through the IPO process, to major change events like mergers and acquisitions — can offer invaluable knowledge to a startup operation.
Also it helps to look for CFOs with “turnaround” experience. Have they seen a business fail, or almost fail, and helped implement processes or change management strategies to get it back on track? That is valuable experience.
Building an efficient infrastructure
Financial system scalability is another area where the CFO can help a startup company to build a strong foundation that will support the business as it grows. And that growth can sometimes happen overnight.
During the Covid-19 pandemic there were some SAAS software companies that saw immense growth and user adoption, did they have the financial systems in place to handle that increased demand? If not, they risk losing momentum and customers — while potentially gaining some negative press. Establish the financial infrastructure and hygiene that’s poised for growth and impresses investors, from billing to expense reimbursement.
An experienced finance leader can institute scalability in many areas, from payment processing and payroll to human resources and enterprise accounting systems.
Developing data-driven strategies
According to a recent article from Gartner, “CFOs are entering a period of significant transformation for finance, with new technologies readily available to help drive efficiencies and insights into business performance,” says Alex Bant, Chief of Research and Practice Vice President, of Gartner.
Financial data is a valuable source of insights that can help inform cost accounting, shed light on consumer behavior and much more. Thanks to powerful tools that enable faster and easier data analytics, the role of the CFO is expanding to include being a business strategy adviser.
A CFO for a startup can oversee data collection and then help make sense of the available information, generating the kind of data-driven insights that all modern businesses need to compete.
According to the Gartner research, among the key initiatives for CFOs to accelerate the digital enterprise (business and operating models):
- Align digital strategies and business outcomes
- Design flexible planning and budgeting that can properly weigh the cost and value of digital initiatives in resource allocation decisions
- Rethink how to measure the performance of digital investments, which may fall outside the scope of traditional capital budgeting methods
Guiding the funding stages
Unless you are a serial entrepreneur or have personal wealth, at some you need investor capital (other people’s money) to take your startup to the next level of scale.
This process usually involves going to VC firms and trying to secure Series A funding.
The CFO plays a vital role in this step by managing the due diligence and financial planning required to attract investors. The CFO can also help spend that money wisely so that the new capital will have the greatest impact.
Preparing the company for the next stage of growth
As the Robert Half article points out “startup is only a startup for a limited time.” Assuming that the business doesn’t fail, one of three things will happen next: The private company matures, issues an IPO or gets bought out.
What’s more, entities do not remain the same forever, such as when a private company decides to go public at a later date or merges with another firm. Part of a CFO’s role as a long-term strategist is to prepare for these eventualities and ensure a smooth transition. Other duties can include preparing the company with defensible financials and a logical strategy before an interested party comes calling.
Because startup and scale-up companies are evolving so rapidly, it can make good business sense for these firms to use a flexible staffing strategy — taking care not to over-hire or get bogged down in protracted searches for specialized talent. CFOs can help on this front, too.
Many finance executives today, at companies of all sizes, rely on a flexible labor force that includes full-time employees who are focused on critical initiatives; interim and project-based professionals who help to support them, usually for a finite period; and other specialized resources that can provide additional capabilities and perform high-value work on an as-needed basis.
When is it time to hire a CFO or outsource CFO services for a startup?
(image credit: KPMG)
According to Sebastian Janus, an interim CFO, who posted about this on Linkedin, he stated ‘for most successful startups, hiring a CFO becomes a priority when investors begin to embrace more significant funding. Positive progress creates good problems to solve—the startup has matured enough that it needs more formalized roles, responsibilities and operations to keep moving forward.”
The role of startup CFOs goes well beyond managing the company’s finances. They are responsible for the path of growth, form new relationships, drive measurable value, and establish core financial processes and reporting requirements. In the beginning, most of the startups hire an external CPA firm, who will help take ownership of all numbers. The CEO or COO often just checks the P&L of last month to make sure the company still has enough money and that the losses are not “too” big. Mr Janus also points out that a “start-up CFO influences the rest of the C-suite by driving the metrics and presentation of results. They hold the management team accountable with facts.” CFOs need to be able to balance the role of being the CEO’s ‘enforcer’ against being a trusted advisor to the rest of the C-suite.
Outsourced, Part time, Fractional or Interim CFO vs Full Time CFO
Often, startup founders understand the need to have an experienced financial leader on the senior team, but they worry they can’t afford one. However, the reality is they can’t afford not to have one. Still, when companies are running lean, they can struggle to stretch budgets further. By bringing in an experienced finance professional on a consulting basis, they can solve the affordability issue. I wrote an article a few years ago about this subject titled “Why Your Small Business Should Rent a CFO Instead of Hiring One”. Which means you can consult with an experienced finance management consultant on a part-time, on-demand, contract, fractional or interim basis, which can be a cost effective solution when a startup business needs access to a CFO’s planning and investment expertise but isn’t quite ready to staff the position with a full-time hire.
As the Robert Half article also points out, that sometimes startup company ventures are moving so fast that they may not even have the time to launch a search for a full-time hire. Plus, if they rush the process, they could end up making a bad hire that is costly and undermines productivity. A CFO can be instrumental in controlling costs, planning, forecasting, investment structuring and advising many other business decisions.
If you are a San Diego or California based startup business that is ready to consider hiring an interim or part-time CFO, or have a project to discuss, Thomas Huckabee CPA can show you what the ROI looks like for your company. Don’t hesitate to contact us with any questions or for a free consultation.