This article was authored by Sirk Roh and initially posted on the Early Growth Financial Services blog site.
Early stage and small companies need CFOs with a different mindset and skills than their peers’ in large organizations. Of course, early stage CFOs can and do manage P&L and handle investor relations, but they also do a lot more. How do you know when it’s time to bring one on? And more importantly, what exactly does a startup CFO do?
Startup CFOs help to hone a startup’s business model and drive growth. They must simultaneously have a handle on the company’s cash position: answering questions like “are we spending in the right place?” and “how much cash/runway does the business have?”
In addition to:
- Managing P&L
- Modeling cash flows
- Tracking financial performance versus plan
- Helping drive discussions with 409A valuation firms (these should be done at least once a year and/or after any substantial change in a company’s valuation.)
- Supporting equity and debt negotiations
At the same time that startup CFOs are focused on cash, they need to be strategic business partners: using sound financial metrics and guidelines as tools to provide counsel and guidance that enables CEOs to make business planning decisions around, “what’s the right time to hire?” and “how should we go about acquiring customers?” This allows CEOs to keep their focus on product development and customer acquisitions. In short, startup CFOs wear multiple hats.
When you’re looking for a startup CFO, choose candidates with broad experience working with early stage companies, who can address those additional areas of focus.
When is it time to hire a startup CFO?
- Look for a CFO once you have institutional investors and/or you’ve raised more than $500,000. Investors expect to see correct, accurate, and dependable financial statements. That means GAAP, accrual based, statements.
- Once your business has started generating real revenue, it’s time to hire a CFO to make sure that your reporting is dealt with properly. Accounting rules concerning revenue recognition are not only highly specific, often requiring analysis, they are also changing.
- Your business’ complexity, financial activity, or expenses have increased.
- When you’ve reached a pain point.
So now you know when you need one, how should you go about finding a CFO for your startup?
Think through which services you need: whether it be annual valuations (if you give employees stock options), day-to-day bookkeeping, month-to-month reporting, or regular tax preparation, and then consider your hiring options:
- Hire experts for each service, making sure you weigh value versus cost. The key is to bring in experts at a reasonable cost.
- Hire a full-time or part-time CFO.
- Bring on an outsourced CFO. Outsourcing frees up your time to focus on other aspects of running your business.
Even if you’re not ready (or can’t yet afford) to take any of the above steps, there are practical things you can do now to make the eventual transition to professional management easier.
- Track all your spending so that you stay on top of your cash burn.
- Don’t commingle business and personal accounts (this can make tax preparation a nightmare and is a red flag for auditors).
- Set up a simple accounting system that can grow with you—QuickBooks and Xero are both good software solutions.
- Find a firm to help you with your day-to-day transactional accounting and bookkeeping.
Do you have questions? Let us know in the comments section below or contact Early Growth Financial Services for a free 30 minute financial consultation.
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Sirk Roh is COO for Early Growth Financial Services. He’s an accomplished finance executive focused on leading early-stage companies through strategic financial decisions. Sirk’s areas of expertise include debt and equity financings, planning/budgeting, financial analysis, cash flow management, high growth management, and cost reductions/rightsizing. Connect with Sirk at firstname.lastname@example.org.