Building an Accounting and Finance Team: From Zero to CFO
We are often asked by startup clients when is the right time to put together an accounting and finance department. The answer in an ideal world? As soon as possible.
As we discussed in the blog post entitled “Startup Accounting”, it’s crucial to bring on a professional accountant, usually on a contract basis for cost reasons, after your company has raised its first funding round, regardless of the amount. This is step one in building your financial team. Here at Full Stack Finance, the biggest mistake we find when we take over a company’s accounting operations is that too much time has passed and the “clean up” process is fairly significant. That also means that the “clean-up” expenditure is often more than what it would have cost to bring on an accounting pro at the time of the startup’s launch. The old cliché “don’t be penny wise but pound foolish” is very applicable here.
Whether you hire an accounting or finance professional in-house or outsource to a firm such as ours, it’s important you choose a candidate or firm that has the most experience in your particular sector and in providing financial services for startups. If your startup is in its early stages, focus on the accounting first. And, as the company grows and you have built up a level of trust and comfort with the accounting hire, you should consider bringing on a finance pro to help prepare analytical reports, projections, and dashboards for management.
Other attributes of an accounting and financial professional you should look for include:
- He/she understands the difference between cash accounting and accrual accounting (which records revenues and expenses when they are incurred, regardless of when cash is exchanged) and can prepare the company’s books and financial reports under accrual accounting;
- He/she has experience working in a dynamic high-growth company;
- He/she is able to understand the company’s business model and identify key accounting issues that need to be addressed now and as the company starts to scale;
- He/she has a core understanding of GAAP (generally accepted accounting principles); and,
- He/she can understand the analytics and data of a company and be able to translate trends and numbers into actionable recommendations for management.
Now here are the don’ts:
- Do not hire a tax accountant to manage your management accounting and financial reporting.
- Do not hire a bookkeeper who only has experience with cash accounting.
- Do not allow your co-founder or your buddy/cousin/dog sitter/etc to “help” with the accounting, unless they have direct experience providing financial services for startups or growth company accounting.
When to hire a CFO
This leads to the next point: When would be a good time for your startup to cap off the building of its finance and accounting department with the addition of the head honcho—the chief financial officer?
That would depend on the complexity of your company’s business model and its accounting operations. To help you figure out when you should hire a CFO, check out these guidelines:
- When your startup has begun generating close to $10 million in annual revenues. Here a CFO will be needed to make sure your financial reporting is accurate and thorough;
- When your company has finished raising its second round of funding (or Series B) from institutional investors. (Unlike a seed or Series A, a Series B funding refers to growth capital that targets older or more mature startups that have created a niche in their market and are ready to build out the infrastructure to support anticipated customer growth). Here a CFO would play a critical role in evaluating how the capital can be used.
- When your expenses and financial activity, which may include raising financing for your startup as well as buying and selling products or inventory, have exponentially increased; and,
- When your startup is in a period of growth and none of the founders have an aptitude for financial strategy or insight.
If you’re waiting until your company is doing $20 million or more in revenues, well…you’ve missed the boat. By holding out too long on hiring a CFO, you will have wasted valuable time for a seasoned and savvy professional to identify areas in your company where you should be focusing your attention to supercharge growth.
The CFO is an essential player for a startup that plans to go the distance. Whether it’s developing growth strategies or spearheading initiatives and investments that will generate income and increase sales, the startup CFO has a collaborative role in all phases of the business. The right CFO working in tandem with the CEO can propel a startup to new levels.
But before you go on the prowl for the perfect finance head, what exactly does a CFO do? Here are a few key responsibilities:
- Devises long-term business goals and tactics;
- Creates annual operating budgets;
- Determines funding requirements;
- Builds an effective financial model;
- Manages and forecasts cash flow needs;
- Figures out where and how to deploy capital;
- Analyzes the P&L (profit & loss) to drive growth and profitability; and,
- Understands tax requirements.
Identifying attributes of a great startup CFO
What key qualifications should your startup CFO possess?
- A CPA or CFA designation. An MBA degree is a good foundation, but the candidate might not have the growth company accounting or tax knowledge needed to harness your company’s finances;
- Fundraising experience. Do they have a background in raising venture capital funding? Do they have a large network of contacts whom they can call to solicit their interest in contributing to an equity financing round? (Equity financing is the process of raising capital in exchange for an ownership stake in your startup in the form of shares.)
- Deal flow history. Similarly, do they have a track record in sourcing and closing deals? (Deal flow is the rate of receiving investment pitches and business proposals.)
- Organizational acumen. Startups need to be nimble. So, a startup CFO should possess an understanding of how to efficiently structure an organization to maximize efficiency.
- Loose lips sink startup ships.
- They have the courage to bear the adverse setbacks and the perseverance to see it through over the long-term.
- Willingness to be the yang to the CEO’s yin. A CEO and CFO with the right chemistry will have a synergistic relationship, bringing out the best in one another. Where a CEO needs to be a visionary to succeed, a CFO should be practical and yet he/she should devise ways that can help the CEO meet his/her goals.
Whatever decision you make regarding the financial management of your startup, don’t procrastinate. Building your accounting and finance team, culminating in the hire of a CFO, can make all the difference in growing your startup to its next level and helping you fulfill your dream.
For more information on financial management for startups, click here.