Do I actually need a CFO? And if not now, when?
We hear this question a lot from the many entrepreneurs we meet
New companies rarely materialize with an experienced, full-time Chief Financial Officer as part of the initial core team. Yet, founders agree that this role is integral to their business. Many early-stage growth ventures hold off on adding a CFO because they allocate capital to other growth efforts — such as product development, sales, and marketing.
That is a strong approach, depending on the company’s needs. However, it is equally important to have a strong sense of the right timing for hiring a full-time CFO.
To help improve that sense of timing, it obviously helps to understand what the right CFO can bring to your company. You can only glean so much information from the title. Beyond managing finances, what does a CFO really do?
We can look at this from two perspectives: (1) the big picture and (2) the day-to-day role.
From a 30,000 foot perspective, CFOs
manage a company’s resources and
identify & assess risks
to achieve milestones or objectives or goals
within the needed time.
In many ways, the CFO can be thought of as an organization’s “project manager,” leading the way around these four key areas: goals, resources, risks, and time.
Common milestones for startups include launching their Minimum Value Product (MVP) or acquiring five paying customers, getting to 500 distribution points for your products, hitting an MRR number to achieve a desired valuation, or proving out your CAC/LTV metrics.
Later stage startups may focus on achieving a target unit economics, proving out a growth trajectory, or launching a desired set of features/functions to the product.
The CFO helps:
When we refer to resources, it most typically means cash (or capital) — particularly, a company’s sources and uses of cash. However, resources can also involve other things such as the right talent, the right equipment, and more. For now, it’s easiest to think of it mainly as cash resources.
The CFO helps companies continuously monitor what cash is coming in and going out. They are responsible for making sure there are enough resources to achieve the desired milestone(s). These responsibilities include:
Risks can generally be categorized as insurable or uninsurable, but we’ll focus on the latter since these are more nuanced and complex, and mitigating these risks is part of the CFO’s expertise. For example, customer concentration risk is a typical example for early-stage growth companies, which are likely to be still building out a customer base, so a sizable percentage of revenue may be derived from one or two customers. This is a very significant but often understandable risk in the early stage. However, a CFO may keep a keen eye on customer concentration because its impact could spell disaster if the company loses one major client. It could also create fundraising risk even if the desired MRR target is achieved.
Lastly, there is the time element. The CFO continuously assesses “do we have enough time to achieve our milestones?” and “are things taking us longer than we thought?”
This oversight is an extremely fluid process. CFOs regularly monitor and report out on a company’s progress and trajectory based on operating results. As opportunities and hurdles take shape, CFOs proactively address them to ensure the company stays the course. CFOs, in essence, are reporting, analyzing, and forecasting as an “early warning detection system” for the business.
To connect the dots, CFOs help companies (1) target realistic goals, (2) account for resource needs, (3) mitigate risks, and (4) monitor the trajectory of operations so that adjustments can be made as needed. Ultimately, this allows a company to get to where management and stakeholders want it to go.
From a practical, day-to-day perspective, AVL has developed the 7 Functions of FinanceTM as a framework to assess and evaluate how an organization is executing across all of the key finance & accounting areas that a CFO leads/manages within the organization.
The CFO maintains oversight of the accounting team to ensure that the team sends the bills, collects the cash, manages the inventory, pays the bills, runs payroll, etc. Essentially, the CFO ensures that everything is captured and categorized effectively because of “garbage-in garbage-out” in terms of analysis.
Controllership is more specifically focused on the accounting processes, systems, and rules. As you may have personally experienced, many esoteric technical accounting rules (also known as “GAAP”) are managed within the Controllership function. Controllership also ensures that there are strong controls and systems in the business to ensure quality and scalability. While this work is often led by the, you guessed it, Controller, the CFO plays a significant role in the pace and priority of these investments of time and resources.
When people think about the CFO, they think of the financial reports that the CFOs publish. However, the function of reporting extends far beyond these reports and gets much more complex and challenging. The CFO helps ensure the business can produce clear, concise, and granular reporting to help the leaders in the business make strong operational, growth, and investment decisions. Reporting on data such as product profitability, client profitability, client retention, sales effectiveness, and resource utilization, to name only a fraction, represent examples of Managerial Reporting. The CFO is also responsible for creating the pace & cadence for these reports to keep up with the pace of the business.
FP&A is all about looking forward into the future. This includes items like cash flow forecasts, annual budgets, quarterly reforecasts, and pro-forma financial models. The CFOs role is to gather, filter, and assemble information inputs from throughout the business. The CFO pulls information from marketing, sales, R&D, HR, etc., to help shape the picture of where the company is headed and determine whether all of these areas are aligned.
And the CFOs own all of the really fun stuff like ensuring taxes (of all kinds like income, sales, use, property, payroll) are accurate, filed, and compliant. And for some companies, audits are part of the compliance requirements as well. There are many more compliance areas, including governmental regulatory filings, state “doing business” filings, and 409A valuations, that the CFO takes full ownership of to ensure that the business remains above board.
Depending on the company’s sophistication, corporate finance can be looked at fairly narrowly or have far-reaching requirements. At its core, corporate finance is often about making sure the right capital is available for the company to execute its plan. This can be all sorts of equity and debt sources. However, corporate finance also covers mergers & acquisitions (M&A), joint ventures, investment opportunities, cash management strategies, and more. The CFO is responsible for evaluating the cost/benefit equation for acquiring and deploying capital for the business and optimizing capital for the business.
Lastly, there’s a pretty large “catch-all” of other stuff that CFOs often help lead within organizations. These responsibilities include ensuring the company has the right contracts and agreements to protect its business interests; risk mitigation strategies; acquiring insurance to help the business avoid the unforeseen; building strong governance processes; and creating a strong ‘paper trail’ for the business from a corporate perspective to document where needed. Basically, a giant business CYA folder...
With a CFO under your employ, you gain access to strategic and personalized insights and an expert that will help your company manage the financial challenges of growing a business. However, your needs may not yet warrant a full-time CFO at this point in its journey.
That’s why many companies turn to fractional CFO services — in other words, a flexible long-term solution without the full-time payroll costs.
Is a fractional CFO better for your business? Connect with us today.