Growing Your Startup’s Finance Team
Taylor Davidson recently wrote a great article on FP&A roles for growing companies. It got me thinking about my own experiences working in–and with–startups, specifically, the best way founders and executives should be investing in the finance and accounting function of their company as they scale from an idea on a napkin, to Series A, and beyond.
I have a deeply held core belief that your company is only as good as the people you hire. A good team can take a mediocre product and make an incredibly successful company. On the flip side, you could have the best product or technology in the world and if you hire a mediocre team, your company will fail.
Assembling the right team–and adjusting it as you grow–is the single most important job of a CEO and founder. And whether you like it or not, at the end of the day your company comes down to finances. Do you generate enough value to bring in more money than it takes to deliver your product or service? It’s a pretty simple question that we often lose sight of.
Having a strong finance team from the get-go is one of the best ways to ensure you don’t get lost in the glamor, prestige, and enchantment of entrepreneurship (as well as some of the anxiety, stress, and pressure).
But let’s be real here, good finance hires are ridiculously expensive, and as a startup your resources are limited. So how do you best allocate resources to your finance team to make sure you are successful? Here are my thoughts:
Roles and Responsibilities
First, let’s agree on some general definitions. What is finance vs. accounting vs. bookkeeping? “Finance” is an umbrella term, but generally (and for the purposes of our discussion) “Finance” tends to mean executive level strategy, whereas “Accounting” is more operational & tactical, and “Bookkeeping” is the most basic form of expense and revenue categorization.
The following are some general titles of folks you may hire, either internally or outsourced, from the most basic/tactical to the most complex/strategic:
Bookkeeper / AP & AR specialist; Staff Accountant; Senior Accountant; Controller / Accounting Manager; FP&A Manager / Head of Finance; CFO
Compensation can vary wildly by company, stage, and industry. Duties can also vary, some staff accountants will handle very complex items, some controllers may handle very low-level tasking if they are the only full-time accounting member.
General Duties and Compensation by Role
Tax Accounting vs Managerial Accounting
One thing I hear quite frequently from founders is: “I don’t think I need help on the finance side, I have an accountant.” 90% of the time, it means they have someone who they talk to twice a year, who files their taxes for them, usually after making a giant year end journal entry on 12/31 to fix everything that is incorrect about their books. This may work for small businesses, but as a high-growth startup you need more frequent engagement than this.
This is also not to say that Tax Accounting is easy, it is incredibly complex, and tax law in the US over the past decade (especially when it comes to tech startups) has been the wild west. Section 174 anyone?
You need someone doing your company’s taxes who knows what they are doing, and generally startup founders will screw this up by going cheap early on. Pay the money for a large firm to do your taxes. I don’t mean Big 4, but if you are a tech startup, and your accounting firm has under 5 people in it, in my experience, they are going to screw stuff up. If you run a small business, the 1–5 person accounting firm can be a really good fit.
The Stages of Growth
Stage: Inception & setup
~Year: 0
~Funding: < $500k
Team: Outsourced consultant
One of the single most important things you can do early on is invest in the correct set up of your company’s financial tech stack. You can spend $2k-$5k early on to set things up correctly and efficiently so that you don’t have to pay $20k-$30k in a year or two just to untangle the messes made early on by poor accounting practices (also, many of these tools have discounts to the other complimentary tools, so if you sign up for one you can can discounts on others). Plus, by setting things up with a few basic FinTech applications you can automate or semi-automate many basic accounting & financial tasks, saving hundreds of hours (and thousands of dollars) each year on accounting & finance work.
QuickBooks Online:
- Use Advanced Settings to set up your Chart of Accounts properly with the right account codes and detail type so revenue, direct costs, gross profit, expenses, net operating income, and net income are all accurate and displayed in a way that makes it easy to run high-level reports for executives and other stakeholders
- Utilize customers, vendors, classes, and locations to be able to segment revenue and expenses appropriately and run reports directly out of the system that give leaders in your organization the information they need
- Connect your bank accounts and credit cards directly and make use of the rule feature to auto-categorize common or recurring transactions, alleviating routine bookkeeping work
- For invoicing use QBO Payments, Melio, or banking solution that provides an easy ACH solution if you are a B2B company. Use Stripe, Square, Shopify, or another QBO-integratable solution for B2C (QBO payments can also work well here).
Gusto HRIS / Payroll
- Use Gusto to map salaries, payroll taxes, healthcare costs and other fringe benefits to the right labor account, balance sheet liability account, and department with the QBO integration and departmental mapping. Gusto also has an integration with CorpNet to make new state registration for remote employees a breeze, as well as an integration with Next Insurance to make worker’s comp seamless.
- Rippling is another good alternative.
Expense Management Software
- Consider using Brex, Airbase, or Ramp to make bill pay, corporate cards, and expense management a breeze. All three allow employees to categorize their own expenses and integrate with QuickBooks online–again, saving tons of time on bookkeeping and accounting spend.
Stage: Pre-Seed
~Year: 0–2
~Funding: < $2M
Team: Outsourced bookkeeper
By the time you are raising a Series A, it’s a guaranteed requirement that your books need to be GAAP compliant, and therefore it’s important that you understand the difference between accrual and cash-based accounting. Specifically, things like deferred revenue, prepaid expenses, payroll liabilities, and assets & accumulated depreciation are often important concepts that tech founders can have a tenuous grasp on.
All that being said, in the beginning, you probably have a very limited amount of revenue (if any) and minimal activity. Therefore it’s in your best interest as a founder to outsource to a bookkeeper who will, at a minimum, keep things GAAP compliant while categorizing transactions to the right account, paying bills, making invoices and purchase orders, and ideally telling the team which payments need to be chased down. Again, if you have set up rules in QBO and push some categorization and receipt capture onto your employees by using an expense management tool during your infrastructure setup, these costs should be minimal. Using automated features like invoice reminders and recurring AP/AR reports are important so no one is wasting time sending emails and reports manually.
At the end of the day, you need to make sure things are categorized appropriately so you can understand what is driving major expenditures. Ideally you are closing your books once a month and reviewing, but at minimum this needs to happen quarterly. Given the likely minor level of activity at this stage this close process should be easy enough to understand by reviewing P&L and Balance sheet and making sure the way your bookkeeper has categorized things matches up to your expectations.
Stage: Seed
~Year: 2–4
~Funding: < $8M
Team: Internal bookkeeper, Outsourced accounting firm, FP&A consultant
The first full-time hire outside the exec team that usually gets involved in finance and accounting function is an admin/operations hire–either an exec admin or an operations coordinator who can handle the basic categorization of expenses and revenue, while creating invoices, purchase orders, paying bills, and chasing down customers for receivables as part of their overall job duties (which may be very broad). This admin hire is a utility player who is taking care of multiple tasks that will be full-time functions later on as your company grows (staff accountant, AP specialist, AR specialist, HR generalist, exec admin). An outsourced bookkeeper will always have to work with the team to understand how things should be categorized (customer/vendor, account, department etc.), so the first thing that makes sense to bring in-house is the bookkeeping function (as a portion of the duties, still not a full-time role), since you are spending time on it anyway–provided you have an accounting professional reviewing the work on a regular cadence.
Once you’ve taken money from investors, angel or otherwise, it’s best practice to start sending out quarterly financial statements, even if it isn’t required by an investor rights agreement. This is a perfect time to ensure you have the right outsourced accounting talent and start standard quarterly reporting (Balance Sheet, P&L, Cash Flow Statement) to board & investors.
This is also a really good time to invest in a FP&A / strategic finance consultant. They are expensive ($200-$300 / hr), but with a few hours a month (or even a quarter) they can help you get a solid grasp one your forecasted Cash Flow and P&L, go through an annual budgeting exercise, and run through scenario planning to help the executive team make big decisions like hiring, CAPEX purchases, and go-to-market strategy.
You should be updating a 12–18 month rolling forecast for cash flow and P&L each at least once a quarter, and likely reviewing 2–3 key scenarios (usually best case, base case, downside) with your finance and exec team. It is likely there will be a large margin of error early on because things like a single hire or a single awarded contract can have a big impact on expenses and revenue. That’s ok, and is to be expected. The point here is to get in the practice of looking to the future, understanding what paths are in front of you, and proactively make the best decisions you can with the data you have, rather than constantly making reactionary decisions as each time there is a fire. This is what most founders do, and it can lead to burnout and poor decision making.
In my experience, it is important — especially if you don’t have a background in business & finance — that your finance team uses graphics. As a non-accountant who works with a ton of tech founders I can tell you: A graph is worth 1,000 financial statements
Stage: Series A
~Year: 4–6
~Funding: < $20M
Team: Internal bookkeeper, outsourced accounting firm, internal FP&A hire and/or potential continued FP&A consulting
Getting to a Series A is a huge milestone. The numbers vary greatly depending on definitions, methodology, and time period analyzed, but roughly 70%-90% of startups that are able to raise Seed funding fail to raise Series A funding. [1] [2] [3]
While it is an exciting milestone, as a CEO and/or founder the pressure to perform increases dramatically the moment that Series A money hits the bank. As the depth of your duties grow as CEO, it can be hard to find time to dedicate to finance, when product, marketing, engineering, and sales are rapidly increasing in size and complexity. If the company does not have a COO, (and the company is not intensely manufacturing heavy), post-Series A can be a good time to hire a Director / Head / VP of Finance. If there is a CEO, a COO, and an outsourced finance team, then a Head of Finance may be too much of an overlap in G&A spend.
If desired, the Head of Finance can take over the strategic finance duties from the CEO, either alone, or with the assistance of an existing Financial consultant. As the executive team grows, having a point person within the company that can coordinate with department heads across all the functions to help them budget and hold them accountable to variance becomes a key position that can be done more efficiently in-house than with an outsourced partner.
That being said, the finance head (whatever their title) is an expensive G&A hire that is usually not revenue-generating, so some serious cost-benefit analysis needs to go into this decision. As an example, at a $150k base salary and a 30% Fringe & benefits rate, you’re looking at $195k total cost, less any performance bonuses and incentives. At $300/hr, a financial consultant could do 650 hours annually, or 12.5 hours a week for the same total cost. And at this stage the complexity is rarely so large that much more than that of true financial strategy needed.
Stage: Series B to exit
~Years: 5+
~Funding: > $20M
Team: Internal finance and accounting, Full-time CFO or boutique firm hired
Eventually as your company’s size and complexity grows it will make financial sense to bring most, if not all, of your accounting and finance in-house and potentially switch to larger ERP systems (SAP, NetSuite, Oracle) that are more robust than basic out-of-the box software, but costs tens of thousands of dollars to set up initially and a good chunk of change to maintain on an annual basis. Oftentimes exit planning can be a trigger event to bring on a full-time CFO who can prepare the company for acquisition or IPO. Some boutique CFO firms also specialize in this (usually by industry).
There is so much variance at this point between industries and even companies within the same industry that any sort of generalization here can be a disservice; however, once common theme is that Accounting and Finance are often two separate branches that report to the CFO. One branch may be led by the Head of Finance you hired earlier who may have a small FP&A team under them. The other branch is the pure accounting function, which may still be outsourced prior to the CFO hire, or may be run by an internal Controller or Accounting Manager. It’s a strong likelihood the CFO may want to build out their own team of folks who have taken companies to exit.
Final Thoughts
Most startup founders and executives are familiar with the concept of tech debt, i.e. “Just duct tape it now, we’ll fix it later when we have money.” Used correctly, this can be a viable strategy: get to the MVP and show product market fit first, get investment, then pay the money for top-level developers to erase the technical debt you have accrued over the years (i.e. rebuild your whole product from the ground up) so your technology can scale.
Just like technical debt, “Financial Operations Debt” is something I see often (and help clear). Unlike technical debt however, the cost to avoid FinOps Debt is not hundreds of thousands of dollars a year. A few key tools, some best practices, and consultants who know what they are doing can help you scale your business smoothly, (well smoother…) and save you tens of thousands–if not hundreds of thousands–of dollars in your first few years of business.
Plus, having an expert show you the data you need in order to make the best decisions for your company will not only help make your company better, but it will reduce the weight of executive decision making, and probably countless hours of your time spent in spreadsheets, while helping you sleep better. Which ultimately makes you a better and more effective leader.
If you are a startup somewhere between inception and Series A, and you have any concerns about your admin tech stack, accounting & finance, or operations, we’ve been there and we’re here to help.
Our team has:
- Held leadership roles in startups from inception to pre-IPO
- Led companies through their first audits
- Managed due-diligence and fundraising for multiple Series A rounds
- 25+ years combined experience helping startups manage non-dilutive federal funding from DoD, NSF, NIH, DOE, and more.
Whether you are just starting out, or are looking to overhaul and streamline your financial operations, we can help. Shoot us an email at info@donnelly-boland.com
