Starting a company requires you to make many strategic decisions, including when to hire your first VP of Finance or CFO. This guide will not only help you understand the best time to fill that position but will also give you valuable insight into what the role should bring to the table.
1. The Function of a CFO Has Changed
The role of the CFO – or the chief financial officer – has changed significantly over time. Today’s business environment has made this job more challenging, and simply being a good accountant is no longer good enough.
Although the finance department within your startup is still required to track and report financial data, manage budgets, and develop forecasts, they must also make strategic decisions across the organization to support growth.
The emergence of real-time data has added pressure to the CFO role, requiring them to be more collaborative and make some operational decisions that will directly impact the finances of the company.
In other words, a modern CFO is a strategic business partner who can provide financial insights that drive operation decision-making. Since the chief financial officer is not completely focused on the business operations, they can give you a different perspective.
The reports that the CFO develops will help you decide which areas of the firm to invest in - as well as what moves to make each day. It is a collaborative role too, with impacts across all aspects of the organization!
2. CFOs are Different from VPs of Finance
You may be wondering, how is a CFO different from a VP of Finance?
This is a great question that should be addressed so that you understand the value of onboarding a true CFO. A VP of Finance can help you for a little while, but once you want to scale and grow your business it will not be enough. A CFO looks into the future and drives your startup in the right direction.
One of the major distinctions between a VP of Finance and a CFO is where within the timeline they are looking. Where a VP of Finance focuses on reporting what happened in the past, the CFO looks to the future and creates strategies to help you achieve your goals.
Both of these roles are essential to the success of your startup, and they complement each other to ensure that you have all the information you need to make appropriate financial decisions.
Let’s review some of the basic responsibilities of each role:
VP of Finance
A VP of Finance handles the basic financial reporting for your organization, such as balance sheets and profit and loss statements. They may process payroll, complete bank reconciliations, or prepare monthly activity reports.
Chief Financial Officer
The CFO spends much less time on financial reporting, and more time advising the board of directors and other executives like the CEO. He or she will deliver information to stakeholders about overall cash flow management, business strategy, and sales reporting and forecasting.
3. The Benefits of Adding a CFO to your Team
There are many benefits to hiring a CFO and incorporating that skill set into your team. For example, they can help you manage your expenses, implement best practices, and set your organization up for success.
Managing Your Expenses
One of the main reasons founders are hesitant to bring on a CFO is that they are worried about justifying certain expenses. However, having a professional analyze the data behind your spending is an essential key to success.
When you have a CFO that uses data to make decisions about spending, your startup will be more likely to anticipate challenges and take advantage of opportunities - ultimately leading to greater success.
Think of yourself and the other founders as the person driving the vehicle - your CFO as your GPS and dashboard. You are the one who makes decisions about the vision and destination for your company, but the CFO is simply telling you the best and smartest way to get there.
For instance, the CFO will provide you with insights into metrics like customer acquisition cost, profit margin, MRR, staffing costs, and more. Understanding these expenses will help you better allocate your spending budget in the future.
Implementing Best Practices
Hiring a CFO also allows you to implement industry best practices. They can do this early on so that you are prepared to scale and grow your business.
A CFO can help you develop a strategy for releasing products into the market, establishing your cash flow position, securing lines of credit, and organizing your reporting processes.
When you add this role early on, you can build a foundation that focuses on financial reporting based on data and best practices. The worst thing to do is to let a bookkeeper handle all of your finances until you get to the point where the business is too large to manage it that way. When that happens, you are stuck without any sophisticated systems or processes in place to support an organization at a higher level.
Instead, a CFO will help you incorporate the right tools and technology into the firm so that you can prepare for growth in the future. It will also prevent you from making silly mistakes like having unaccounted inventory, misusing corporate assets, or making late payments to vendors.
Setting Your Organization Up for Success
Another benefit to hiring a CFO is that they are a true business partner: another person that is invested in the growth of the firm and its success.
They can do things like work on your pricing strategy to drive revenue and generate more sales - or help you assess a partnering or acquisition opportunity with another organization. A CFO can enhance your cash management strategy relating to payment terms and accounts receivable, and they can also play a valuable role in securing financing.
By having a CFO on your team, you can demonstrate to investors that you have a professional managing your finances. They can answer all of their questions and put their minds at ease with how you will be spending the seed financing.
When you put together all of these different benefits, the right CFO truly sets up your organization for success in the future.
4. When to Hire a CFO
So, when should you hire A CFO?
This answer will vary depending on your business environment and what your current level of financial expertise is. If the business environment is changing rapidly, partnering with the CFO can help you prepare for any adjustments you will need to make in the future.
Similarly, if you find yourself spending too much time managing the finance of the startup, it might be best to hire a VP of Finance so that you can spend time driving the company instead. The same thing goes if your operations are complex - in this case, you want somebody with skill and experience to help you properly develop reports and create strategies.
Another key consideration that will help you answer this question is whether you plan to seek outside investment and at what stage you find yourself. If you plan to obtain additional investments through a Series A or Series B offering, you will likely want a finance position in place as early as possible. Seed funding alone, though, may not require one.
Let’s break the requirements of each of those down a bit further:
If you are still in the seed financing stage, you may not need a CFO just yet. At this point, what's most important is having engineers and designers that can develop and commercialize your products.
It might be too soon if you are still trying to find a product-market fit since at this point the financial reporting requirements are not as intensive.
When you start to consider Series A financing, the growth of your company will start to accelerate - and so will the complexity of your financials. At this point, you should look to hire a VP of finance. This person is not quite a CFO, and in a large company would often be referred to as a financial controller.
Your VP of finance should understand your business type and be a qualified accountant. You want them to have a working knowledge of accounting concepts such as working capital or operating leverage. These items are key since at this point you want to have stronger control over how cash is flowing in and out of your business.
This person won’t need to know everything about go-to-market strategies like a CFO would, but potentially could grow into that role.
Around this point, the role of finance becomes more about gaining efficiencies in finance metrics. You should start to measure, and think about what the next stage will look like and what is needed to bring you there.
At this point, you might want to start talking to potential CFO candidates, or at least evaluate whether your VP of Finance is capable of becoming your CFO. However, hiring a CFO at this stage is unlikely, since most great CFOs will require a higher degree of growth (around 20-30 ARR) before committing.
Series C and beyond
At this point, you will want to commit to hiring a CFO. You will want someone at the head of your finance function that can process and communicate all the data and BI. This person will need to both understand the numbers, as well as to distill that data and communicate it to the rest of the business.
Thus, at this point, you will want someone that can create a clear strategy based on the data. Likewise, as you are heading towards a liquidity event (think of M&A, IPOs, etc.) you will want to have someone aboard that has been there before, which requires an understanding of the VC, PE, and broader financial environments. You will find this in a quality CFO.
As you can see, hiring a CFO can provide many benefits to your startup – including positioning it for success in the future.