Most business owners have two things in common (this is clearly not exhaustive):
I) They would prefer to spend their time focusing on growing their business.
II) They regard their business planning and finances as a burden
It’s no secret that founders, even those with a finance background, would prefer to build a product, start selling it and let the rest take care of itself. Unfortunately, the reality is less convenient and it becomes necessary to start keeping track of (among other things) when and where money is coming and going and how the business is performing.
Startups can get away with keeping an eye on their bank balance as they work through product development and initial launch, focusing on sales and achieving product market fit. Detailed tracking and forecasting however becomes increasingly important as companies gain customer traction, generate revenue and ramp up their costs in order to scale. This is also crucial as entrepreneurs look to raise capital and start reporting to their investors.
Whilst many companies enlist the help of an external accountant to prepare their financial information and file their taxes, accountants don’t provide guidance on business performance and can only give a high level snap shot of where the business has been (often available weeks or months after the fact). It’s instead up to the Company’s CFO function to put the processes in place to collect the right & most up to date data, develop and track KPIs, and make a sound business plan with relevant financial forecasts to make sure there’s enough cash to pay employees and fuel growth.
When is the right time?
All companies have unique circumstances, though in our experience a few key factors drive entrepreneurs to require Finance support:
– Multiple revenue and/or customer streams: as traction grows, it becomes increasingly complex to aggregate, track, and forecast performance across different areas. This tends to lead to a growing time burden for founders who need to chase information and spend an increasing amount of time distilling it to derive the right insights. A CFO will manage these processes, help structure and maintain datasets in one place, improve data quality, and will present and deliver performance insights to founders so they can focus on execution.
– Growing employee & cost base: with a team of 10+ and a growing vendor list, cost and cashflow management become crucial to ensure invoices are correct and able to be paid. Too often entrepreneurs are surprised by unforeseen billings and unexpected one-off costs, and this is a crucial area where CFO support can provide piece of mind and deliver cost savings.
– Investor requirements: generally once professional investors are on board and there are expectations to significantly grow (and report on) revenue and performance metrics, it becomes important to consider Finance support. A CFO will ensure the right metrics are presented and will provide guidance on how to achieve them. This further communicates to investors that there is financial & data accountability, and gives them assurance that the management team are focusing on growing the business.
What are the options?
The CFO decision need not be black or white; founders have several options at their disposal:
– Software solutions: entrepreneurs who are looking to simplify their finance processes can explore a range of tech solutions which provide some Finance functionality. These generally fall into these categories: (i) Forecasting solutions (Float, Futrli, Pointdexter, Brixx); (ii) Business intelligence (Leapfin, ChartMogul, Stitchdata, Looker); (iii) Reporting (Chartio, Visible); and (iv) Accounting software & add-ons (Xero, Quickbooks, Invoice Sherpa, Quotient, etc). Whilst all of these solutions are helpful, they tend to be specialised and need to be managed individually, so we generally see these as tools which complement CFO functions, rather than replace them.
– Hire a CFO or Finance Director: founders can bring in an experienced full-time hire though this often isn’t necessary or cost effective for startups and small businesses. According to Payscale data, the median cost for a CFO in London is £107,000 (in San Francisco or NYC, its higher). A full-time Finance Director which has less operational and/or strategic experience will cost £86,500. This is a large commitment for most, and makes sense once trading becomes large enough for the expense to be negligeable for the business.
– Flexible/ Fractional support: part time and pay-as-you-go type platforms and services are now becoming a viable and advantageous alternative for startups and small companies. These allow management teams access to experienced and tailored support and professional tools as and when they need them. This further enables access much sooner and at a fraction of the cost of a full time hire. They also provide Companies with the ability to trial this type of support with limited downside, whilst often delivering value quickly through early assessments and professional recommendations.
In the end, Founders should rely on their accounting information and bank balance as a starting point. As customers, revenue & costs and investor demands grow, hiring CFO support then becomes a calculation on the value placed on founders’ time and professional guidance to support future growth.
For more insights, visit ralston.co