The idea that a startup can go without a CFO for as long as possible has taken root in recent years, with the likes of Pinterest delaying it way past the point traditional organizations would have previously appointed someone. The appointment can, however, be a defining moment in a young company’s trajectory, and while some may have been successful without anyone to take the lead on finance, for the majority this will not be the case.
Startups need to ensure they have someone in place with the right attributes to guide them through the initial stages of rapid growth, to evaluate and mitigate against any risks that could arise, and structure the company so that once it has stopped growing it is financially stable. In many startups, founders take responsibility for the financial management. If a business grows quickly though, the financial demands - cash planning, review of pricing, the structure of commercial deals, and so forth - will quickly outstrip their capabilities. The processes that once worked so smoothly begin to fail, with supplier payments falling behind and banks demanding repayment. By hiring a CFO or someone similar, you have someone to take the reins and focus exclusively on these tasks. A startup can thereby better manage growth and monitor the kind of financial risks that founders, who are often concentrated so keenly on the idea and the demand, will miss. CFOs are also vital because of the reassurance they provide to investors. Investors are more often than not going to be guided more by the numbers rather than the product, and will look to the CFO to present a sound financial model and keep them updated on progress so they can be sure their money is being spent wisely and they will see a return.
The skills required of a startup CFO are different to those at larger organizations, though it is true they often overlap. Startups often demand more variation from their CFO than their larger counterparts, whether this sees them be a risk mitigator, a strategic advisor, or a business development leader.
Firstly, a CFO has to understand what it is a startup needs. It needs clear, concise, and easily digestible information tailored to different users. Many of the people who need access to financial information in SMEs - more so than in larger businesses - will not be accountants. They will be creatives and product owners. These people don’t want to hammered with technical information. It is important to remember to KISS - Keep It Simple Stupid. This isn’t to imply that anyone in a startup is stupid, simply that decisions need to be made so fast and the likely small size of the team will mean that many are already covering several different positions anyway. Similarly, the information needs to be summarized in such a way that is quick and digestible, with detail only where required.
In the initial stages of a startup, it is also vital that there is sufficient cash to hand relative to burn. Without it, the company is under imminent threat of going under. When a company is operating at a loss, having a year’s worth of cash on hand relative to net burn should be a sufficient cushion if tied to realistic future funding plans. Startup CFOs need to be hyper-aware also of net and gross burn, the amount of cash relative to net burn, debt-levels and the maturity of that debt, and how much funding has been raised to date.
This is also why the forecasting process is so important, and why it needs to be even more flexible in a startup. Technology now enables rolling forecasts at companies of all sizes, even those without tremendous resources. By using rolling forecasts, managers are able to concentrate on the medium-term outlook, and act to close gaps against benchmarks as they arise, as opposed to a target set earlier in the year that is potentially outdated. Furthermore, should a company see a sudden surge, or decline, in demand for a product mid-year, a rolling forecast means they can reallocate funds from the segments of his business not performing as well to those that are. At the onset of operations, they need to ensure their finance team is closely tracking all the different KPIs determined in these forecasts on a daily, weekly, monthly, quarterly, and yearly basis. Too often in startups, excuses are made as to why this cannot be done, but it is vital that they are reviewed and discussed constantly and excuses cannot be accepted.
Risk mitigation is probably the main area of concern for a startup CFO, particularly during a period of rapid growth. Continual assessment needs to be carried out with a vigilant approach taken that sees every financial regulation upheld. Whilst in the early stages of development, a company's future can be destroyed by one mistake and it's imperative that the CFO guards against this. Key business decisions and initiatives must also be evaluated from a ‘what if?’ risk perspective. This is particularly important in innovative companies to ensure that creative minds do not get too carried away. They also need to be sure not to stifle them and prevent the company from missing out on potentially profitable opportunities.
Finally, it is essential to structure the company for scale. Matt Armstrong, FP&A Director at Expedia, says ‘Ensure that enough investment in a scalable infrastructure can support the necessary growth – i.e. IT for a set of B2C systems, sales/account managers in the right regions for B2B business development, and over-indexing on shared services. Having the appropriate infrastructure allows for the company to manage this growth without being cogs in the wheel when orders are bursting the company at the seams!’
Being a CFO in a startup is not easy. It involves dealing with a different and smaller group of people than at large organizations - one that is usually far more passionate. The founders will often think they are going to be millionaires and that they have the next big idea. This is part of what helps them be successful, but it also makes them reluctant to listen when someone comes in and tells them they need to prepare financially for the prospect that they are not going to be. Equally, the CFO can’t just be the brakes, destroyer of dreams. They must proactive in taking part in every and any role across the organization and try to drive growth wherever possible. Even with all these challenges though, being at the heart of a growing company and having your decisions make a demonstrable impact in a way that may not be so immediately obvious greatly escalates it in terms of job satisfaction, and for many, it makes it more than worthwhile.