Building a Startup Finance Function | CFO or FC?
If only there was a tick box exercise to inform you as to when to hire a finance leader and at what level of seniority to bring someone into the business. The reality is, each CEO will encounter a situation that is individual to them and many factors need to be considered to ensure the best decision is made.
There are core elements that will come into play and I have highlighted some of these below.
When to hire a number one in Finance?
You may have a Bookkeeper or perhaps you are currently using an outsourced accounting service provider. If your business is likely to remain consistent for the next 12months, and this solution provides you with all that you need and is at a reasonable cost then I see no reason to change anything.
However very few CEO’s look to run or have the option to run a consistent / stable business, most demand more and want to make a positive impact to drive growth. Outsourcing essentially reduces the finance function to low-level accounting — it will never advance the business. Therefore, not having this role in house robs the CEO of the opportunity to discover critical knowledge that will radically improve their company: trends, opportunities, possible threats to the business. These insights, when acted on, can make the difference between building a middling vs standout business.
To do this they need strong financial support and preferably they need full time access to this individual as things change very quickly. Therefore, depending on the business performance you should consider what options you have. Firstly, let’s consider what a CFO really is…
What is a CFO?
Many CEOs think the CFO is a utility position. It’s easy to see the CFO as a glorified “scorekeeper” reporting arrears on things like revenue, expenses, profit/losses, and cash flow/burn. However, this work is actually a very small part of a CFO’s larger value: A good CFO doesn’t just keep the “score” — he or she puts points on the board. If hired and managed properly, they can become a superstar on the executive team.
Like the CEO, CFOs have a company-wide view on the business. They operate in the middle of all the data flows in and around the business. A good CFO uses this vantage point to make a good company great, leading a high-quality finance organisation that manages critical responsibilities for the company. They do this by informing important strategic and operational decisions; finding new insights to improve business performance; and ideally being a confidant to the CEO. The CFO is also quite often the public face of the company to its investment community along with the CEO.
Do I need a CFO?
Here are a few key questions that early-stage organisations grapple with when figuring this out, along with my thoughts…
A company should be well on its way to maturity before looking for a high-powered, experienced CFO. In the early stages, you need finance professionals that are willing to roll up their sleeves and get their hands dirty, tackling unsexy tasks like mapping out and building out the core financial plumbing of the business or managing audits. Most highly experienced CFOs will not have done activities like these in years and would rather focus on making a strategic impact to the business. There is no doubting they could dive back into this hands-on work, but you would be overpaying for the privilege when you could identify individuals who are currently undertaking similar work at 50% of the cost.
Thus, a high growth business that is well on its way to maturity will build a team below a CFO to allow them to make the impact that their salary and experience deserves. It is worth noting that a strategic CFO doesn’t need to be full time and it is impressive the impact that a Part-Time CFO can make with the correct hands-on support below them.
If not a CFO, then what?
Aside from the budget available to hire, this is where the background of the CEO and the rest of the senior leadership team will play a major factor to the level of finance that you need to bring on board. If the CEO has previously been a CFO or has strong analytical and strategical skills gained from previous experience within corporate development, private equity or investment banking then a more hands-on Financial Controller or Head of Finance profile could be more suitable.
This enables the CEO to have the support required across all areas of “scorekeeping” to give them enough time to analyse the data to ultimately make those key strategic and operational decisions. Make the correct choice in the Financial Controller you hire, and they will develop the skills and confidence to step up into a more prominent strategic influencer to the CEO. A superstar Financial Controller will be a future FD or CFO but as a warning they will be learning everything for the first time as they step up so they will need external support. Also, a superstar Financial Controller will demand more from a salary and long-term opportunity perspective than an average Financial Controller, and you may still need to hire a CFO above a superstar Financial Controller if the benefits to the business outweigh it.
What should we look for in a Financial Controller or Head of Finance?
What is most important in sequencing the finance function? First, you need someone who can adeptly handle the control function — this is the only way to know the score and assess how the business is going. But financial planning is also critical as it enhances the company’s understanding of its business and helps to improve it. So, I recommend starting with one top person who can manage both roles well. Then, you can add in dedicated people for the other roles as the business becomes more complex, and as the company grows to a sufficient size where the leverage from doing these functions well will cover the cost of the incremental headcount.
Remember…
A good finance executive almost always pays for themselves immediately, whether it’s through a better fundraise, optimised spending and cash flow, or more revenue due to key insights. We constantly hear from CEOs who finally hire a great CFO that they wish they had done it sooner. When a CEO hires the right person and empowers them to do their job well, great things ensue — profitability improves, fundraising gets easier, financial processes gets tighter, resource allocation gets more strategic, forecasting improves… the business, simply put, gets much better and stronger, sooner.
Written by Andrew Waters | Co-Founder @ Zanda
As an expert in partnering with early-stage tech start-ups, feel free to reach out to us if you require advice or are keen to hire that first or even second person for your finance function. Dav.masaon@zandasearch.com or Andrew.waters@zandasearch.com
