You run a modern business where cloud software automates accounting, invoicing, taxes, and other finances. You forecast, run reports, and model a million other financial circumstances with a few mouse clicks. So what does a startup CFO do that you can’t?
The sooner you hire a quality CFO, the more useful your forecasts, reports, and models will become. The old-fashioned “holder of the purse strings” CFO is a dying breed. The modern startup CFO is a strategic business partner who adds value to your business during all stages.
So, what does a CFO do, and when does your startup need to hire one?
What does a startup CFO do?
The CFO role has evolved significantly over the past few years to encompass HR, legal, and even IT functions. CFOs play an active role in guiding company strategy and overseeing compliance.
To fulfill these critical company roles, CFOs must understand their business’s past performance, present condition, and future potential.
At regular intervals, typically quarterly, you owe your shareholders reports regarding your company’s financial performance.
CFOs are best positioned to lead financial reporting. Not only do CFOs understand the plethora of financial terms that make up your income statement and balance sheets, but they can also make adjustments to benefit the company and ensure that reporting complies with applicable laws and accounting practices.
Reporting aside, calculating taxes requires a look into the past. CFOs are equipped to look at your revenue and the expenses made to generate that revenue and to determine your business’s tax burden. While automated software simplifies tax calculations and payments, CFOs can dig into the nuances of tax law and look for opportunities to save based on the unique circumstances of your business.
Planning for the future also requires a look at the past. A strategic CFO can chart your financial performance over the last quarter, year, or multiple years and look for opportunities to improve financial metrics. Maybe your inventory approach needs improvement. Perhaps your freight costs have disproportionately increased over the years. Good startup CFOs dig into the details of your business’s past to help you succeed in the future.
When asking yourself how should we spend our money?, consider that a CFO is a great check against the intuition of a driven and sales-minded founder.
A CFO can also help implement checks and balances from a business structure perspective. For example: To help your sales reps close deals, assume you want to allow customers to buy on credit.
Who in your business will determine which customers are creditworthy? Further, what rules will you use to establish credit limits? And who will own this credit-issuing function?
If the credit reps report to any team that drives sales, or even to you (the CEO), a conflict of interest will likely arise. The goal of the sales team is to increase sales, potentially at any cost. If credit is determined by sales reps or a credit rep that reports into the sales department, your business could end up issuing credit to customers who can’t pay it back.
Is this the right way to roll out a credit strategy? No.
Whereas the CEO looks at credit from a sales-driving strategy, the CFO looks at credit from a risk perspective. Any product sold on credit is a risk to the company until that credit is paid off.
The CFO’s role complements the CEO’s when it comes to the structure of your business. Collaboratively, the two executives can help balance goal achievement with risk management.
What does the next year, two years, or five years hold for your company?
These are daunting questions for a founder. They are also questions a CFO can help answer.
After a CFO digs into past performance and helps structure your business for present success, they can use all this data to help plan for the future.
Forecasting is a critical element in planning for the future growth of your business. And while forecasting is always a guessing game, you don’t need to rely on intuition when you have a data-driven CFO to develop meaningful forecasts.
CFOs dig into historical financial data to uncover trends over time and help your business make meaningful forecasts. Additionally, your CFO can adjust those forecasts according to expected returns on current business restructuring and investments.
A CFO will also help you implement and execute a financial strategy that will help your business achieve and exceed its future goals.
For example: Do you have runway to keep your business funded over the next year? If not, what’s the best way to extend that runway? It may be raising additional equity rounds. It may be taking out loans. You may be able to extend your runaway by adjusting the current business (e.g., increasing margins or lowering costs).
A CFO can help you weigh your options and choose a financial strategy that best meets your business needs over the long term.
In this kind of strategic role, a startup CFO can act not only as a counterbalance but also as a creative thinker who looks to unlock the full potential of your business at all stages.
What does a CFO do in a startup?
It’s common to associate the term CFO with large, established enterprises. However, CFOs have played critical roles in successfully moving businesses from early-stage startup to growing success.
For the 180 so-called “unicorns” of the startup world, of those that scaled from zero to valuations exceeding $1 billion, 71% had CFOs as of April 2017. That’s more than a commonality among these success stories. So, what does a startup CFO do?
Startup CFOs help plan
When a startup is young and scrappy, trying to grow the business at any expense, it’s easy for things to fall apart. Flying by the seat of your pants is not a sustainable strategy. At some point, sooner rather than later, startups need a guiding hand.
That supervision doesn’t mean founders aren’t responsible or capable of growing a business. The role the CFO plays in this scenario is a planning role. In other words, the CFO is able to take a step back from the day-to-day rush of business and determine the following:
- Here’s where we are today.
- Here’s where we want to be.
- Here are the four, five, six steps we need to take to reach that goal.
Startup CFOs help scale
No startup wants to keep the “startup” tag forever. There’s always an exit strategy driving the founder and the team forward. It may be to go public, to sell to a bigger company, or to create a self-sustaining private enterprise.
Regardless of the goal, a startup must scale before it can achieve its exit strategy.
The requirements to scale vary greatly from startup to startup. It may require capital investments. It may require more people. It may require monetizing a currently free product or service.
Startup CFOs play a crucial role in determining how to scale and add business infrastructure to really great ideas, products, and services. If you don’t have a business infrastructure that enables you to extract value from the product or service, it doesn’t matter how wonderful your product or service is or how many people use it.
A CFO can help identify the needed business elements to capture that value and scale the business into an attractive investment for shareholders or acquirers.
Startup CFOs help fundraise
Most startups need to fundraise at least once before they reach their goals, and a CFO is an invaluable asset during the fundraising process — they speak the language of the people with money.
Whether you want to raise money from equity shareholders or take out a loan from a bank, CFOs know what investors and lenders want to hear. Investors want to know how their investment will turn into more money. Lenders want reassurance that their money will be repaid, with the applicable interest. CFOs can provide sound financial models that lend comfort to those interested parties.
You, the founder, provide passionate pitches related to the functionality and high-level value of your product or service to the world. A CFO translates your pitch into a financial story that helps shareholders and lenders make their decisions.
When do you need a startup CFO?
Hiring a CFO can be a tough decision for new, cash-strapped businesses. However, CFOs play a valuable role in scaling businesses. In particular, there are three situations where a CFO can be especially helpful in growing your business.
When looking at the past isn’t enough
Whether you fully automate your finances through software or you use an accountant or bookkeeper to balance your books, at some point you need someone overseeing your finances who isn’t looking only backward.
A CFO must look at your financial history, as mentioned earlier. However, they can also dig further into that history to help guide your business forward. A CFO helps you determine whether your products or services are priced correctly. You may actually need to cut off certain customers if they don’t pay you on time. As your business grows, you may need to opt for a different tax structure. If you are starting to hire more employees, a CFO can help you determine the right benefits to balance recruiting and retention against the cost of these packages.
If your business is starting to face these types of questions, an accountant or bookkeeper isn’t enough.
When you aren’t sure where to take your business next
Have you gained traction with your users but are unsure how to improve your margins? Have you maxed out your user base and are now wondering what else to offer?
These are major questions that will likely require your business to pivot from its current path. You don’t want to make decisions of this magnitude without the assistance of a trusted partner. A CFO is a perfect colleague to fill this partnership role.
Whatever you’re thinking about the next stage of your business, the CFO can both challenge your assumptions and ensure that the financial infrastructure is in place to take those next steps.
If you’re considering a significant business shift, a CFO is essential to transitioning to the next phase of your business.
When you have historical, actionable data
If your products are developed, you’ve been selling for a while, and you can look back at some business history, a CFO would be a good hire.
A CFO can sift through the history of your sales, purchasing, customer behavior, logistics spend, marketing efforts, and more. In each segment, the CFO can see where spend has paid off and where it needs to be improved.
As CEO, you can’t afford to spend time in the financial weeds. You need to drive the business forward with big-picture activities. Even if you understand these financial nuances, spending time with them can distract you from growing your business. If you have historical data to rummage through, it’s time to bring a CFO on board.
Conclusion: The role of the CFO is changing
As the role of CFO evolves to incorporate more responsibilities throughout the business, he or she also takes on a great deal more risk than ever before. By sending legal and financial information with a secure document-sharing solution like DocSend, CFOs can maintain the level of security and compliance they need to manage all of their responsibilities effectively.