Why you need a CFO now! ‒ Part 1
When they think about hiring a CFO, entrepreneurs in early stage often don’t know where to start and how much time it is going to take, even though they sense it may be necessary. A big part of the problem lies in the fact that many people don’t know what the job of a CFO is, especially in early stage ventures.
What does a CFO really do in a startup and why do you need one early on?
To answer this, the Partech team recently organized a half-day of workshops with CFOs and CEOs around the role of the CFO for early stage businesses.
At Partech we have always believed that a good CFO ‒ or senior finance professional ‒ is vital for a company, even from its early days. We are happy to share 12 key learnings from these workshops, completed with insights from our experience.
This article is split in two parts, starting now with 7 tips for CEOs hiring a CFO, and continuing in the following weeks with 5 tips for CFOs joining a startup.
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Part 1: 7 tips for CEOs hiring a CFO
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#1 When should you hire a CFO? If you ask yourself this question, the time is now!
If you as a CEO have financial skills and feel it is worth your own time, you can start doing this job yourself for a while before recruiting a finance resource. If not, don’t wait! Hire a finance professional as soon as you have enough cash flowing in the company to afford one!
From €1m in annual revenue and/or Series A, you should probably have a finance resource anyway. At the beginning, it doesn’t have to be a CFO strictly speaking: a more junior finance person such as a financial controller, an analyst or a FP&A (Financial Planning & Analysis) professional can be the right fit.
When is it time to hire a more senior finance resource, i.e. a Head of Finance or a CFO? Most people we have talked to ‒ including the participants in our workshops ‒ converge on one or more of these milestones:
· Annual revenue or ARR > €/$10m;
· 50+ employees, which implies a larger and more complex organization, hence more sophisticated processes;
· Series B funding, which compels you to give investors an accurate picture of the company’s performance;
· Business becoming too complex for the founding team or a junior finance team to handle alone, e.g. developing several products, expanding to new geographies, cash management becoming critical and not straightforward due to working capital needs, etc.;
· The recruitment of a VP Sales, often associated with the need to scale and improve sales performance;
· And last, from our perspective as an investor, if you cannot answer a finance question within 24 hours, it is probably a sign that you could use a CFO!
Once you know when, the question is which profile, experience and seniority do you need for your finance person?
#2 A CFO doesn’t do the same job as a financial analyst
First, what’s the job of a financial controller or analyst? It is to utilize both quantitative and qualitative analysis of all operational aspects of a company in order to evaluate its performance and progress towards its goals, and to map out future objectives. In effect, this means:
· Preparing and analyzing management accounts including revenues and margins, profit & loss and cash flow statements;
· Building and updating business plans, budgets and forecasts;
· Setting up reports, KPIs and dashboards to help you drive the business;
· Taking care of the reporting to your shareholders.
Besides technical financial and analytical skills, financial analysts should have the ability to understand business drivers, strategy and processes, talk to every stakeholder and explain the numbers with simple words (and vice versa). These skills will determine their scalability.
In terms of experience, financial controllers and analysts may have served 2–5 years in financial jobs. Financial auditing provides good training and experience for these jobs, be it at an audit firm or as a corporate internal auditor.
As your company grows, some additional skills will be needed:
· Ability to step back from daily work and see the bigger picture: financial analysis can be extremely demanding intellectually and time-consuming, increasingly so as the amount of available data grows; so a CFO must be able to synthesize the data and know how to use it to make decisions.
· Management skills: not everyone has the ability or will to delegate part of their work and manage people. For those interested in management, these skills can be developed with some coaching. But some finance people just prefer to be experts and can thus be great assets for the company.
· Multitasking: this is both the ability to perform multiple tasks at a time or to quickly switch from one topic to another, and the readiness to take on additional responsibilities such as cash management, seeking financing, managing Legal or HR, etc.
A finance manager with 6–10+ years of experience, including a few years as an analyst in a small business or at the subsidiary of a group, is worth considering if you are looking for someone more senior than an analyst, ideally with experience of managing a small team.
Now what else is a CFO or finance manager going to do that a more junior resource cannot do? Mostly this:
· Set up accounting from scratch or build the relation with your accounting firm; this is critical since it will determine the quality and accuracy of the financial data that will help you make the right decisions;
· Establish key business processes such as order-to-cash (from invoicing to recognizing revenue and collecting cash), purchase-to-pay (from signing a contract with a supplier to ordering and paying the supplier), HR and payroll, etc.;
· Design or implement IT systems for finance and other functions, such as an accounting system, an invoicing solution, a payment platform, an expense management software or an ERP; to do so, the CFO might even manage IT resources;
· Manage the finance team and potentially other people you can’t manage directly because they are not directly doing business, e.g. Legal and HR staff;
· Help you seek new financing, not only equity but also debt, bank loans, government grants and tax credits;
· And most importantly, act as a real business partner who understands strategy, helps you make the right decisions, on whom you can rely for board meetings or in front of future investors.
#3 Diversity of experience adds value
Considering the skillset needed, recruiting a CFO might seem like looking for a needle in a haystack. So where and how do you find the right one?
The most straightforward answer is to look for someone with startup experience, ideally in a similar space. This is what many early stage businesses tend to do. As a matter of fact, it may be the best way to learn about the specifics of the “ecosystem”, its players (entrepreneurs, VCs, M&A advisors, consultants…) and ways of working (e.g. multitasking or agile working).
Others prefer the more classic career path of a CFO with experience at one of the Big Four audit firms and/or in large enterprises / corporates, which can provide good technical skills, an understanding of complex processes, the ability to utilize large sets of data and management skills. The CFO of a portfolio company in the identity verification space spent 6 years in Transaction Services at PwC then 2 years at a leading UK-based fintech; such an experience, both from the outside / auditor’s point of view and as an insider in a startup, has given her a complete range of skills, from auditing and hands-on analysis to M&A, before taking her current CFO role.
As an example of a successful move from corporate to startup, one of our speakers spent 5 years as a financial controller and in corporate finance at a leading beauty industry group before joining a startup in the travel and leisure industry. His experience was instrumental in educating the team on performance culture and KPI monitoring.
Also, an experience in consulting can teach how to work fast, think top-down, manage projects and switch from an engagement to another. After 6+ years at a strategy consultancy with a focus on private equity and digital business, one participant used her analytical thinking and management skills learnt as a consultant to build the CFO role and the finance team, organize the data and structure processes in a fast-growing service company.
Some of the main strengths of a CFO are more driven by personality than experience, such as the ability to raise questions and solve problems, to be both hands-on and big-picture-oriented, and to be able to work in a team.
Like for other management jobs, finance people with more diverse experiences (e.g. from audit firm to startup, or from corporate to startup) tend to succeed best in fast-moving ventures. A good illustration of this is a CFO who held several senior finance roles in the construction industry for 20+ years before switching to the startup world, first in the food supply chain sector, then as the CFO of a portfolio company in the travel industry.
On the same note, a CFO whose previous experience was with a large player of the media industry, did a “road trip” of startups, visiting his peers before joining as a CFO himself, to learn what others do in the same job and the best practices. Definitely a great idea to complete one’s experience!
#4 It’s a great investment!
In Europe, the annual base salary (1) for a controller or an analyst with 2–5 years of experience usually is in a range of €40–60k (2), depending on their experience, education and skills (e.g. languages, financial systems, auditing, processes, coding…). A more senior finance manager, with 6–10+ years of experience, is paid €60–90k. In both cases, pay packages may include a variable portion of 5–20% of base salary.
The table below (3) shows the compensation range and averages for CFOs of VC-backed companies:
As a rule of thumb, the base salary for a CFO is about twice as much as for a financial analyst.
In addition to the cash portion of compensation, it is a good thing to offer a CFO an equity-based incentive. Startup CFOs in Europe most often get the equivalent of 0.5%-1% of ownership in stock options.
For an early stage business, those costs may not be affordable; so an outsourced CFO may be the best option.
#5 Consider the part-time CFO option
A part-time CFO (aka outsourced CFO or shared CFO) can be a good option for a startup, even at a very early stage, and even before hiring a junior finance resource. It may be a single person or a team of finance people with expertise in several domains such as analysis, controlling, processes, financial systems, and ideally accounting.
In a startup, the role of an outsourced CFO often includes:
· Managing the relation with accounting or doing it with their own team if it is a full-stack financial services firm; one way or another, the goal is to make sure you get the right financial data from the accounting firm;
· Organizing data flows from various sources (sales, marketing, tech, payroll, etc.);
· Setting up relevant KPIs, financial analysis, reporting and controlling;
· Implementing financial processes, methodologies and best practices.
Why could it be a better option than a full time CFO?
· It costs a fraction of the cost of a full-time internal CFO or finance team. At this stage, 2–3 days per month could be enough, at a cost per day of around €/$1,000 on average (ranging from €/$800 to €/$1500+), hence €/$2–3k a month. This is about half the cost of a full-time junior controller / analyst, but with the experience of a seasoned CFO, or with the full range of expertise of a finance team.
· It’s more flexible: in early stage you may not always need a CFO 5 days a week every week, but sometimes you may; part-time CFOs can accommodate that.
· The recruitment process is easier and less time-consuming: like for a full-time CFO, you will want to find the right match at the first shot, but the commitment is still not as big as for a permanent position. Besides, there is a limited number of well-known players on the market, which makes reference checks easier. While hiring a CFO can take more than 6 months, finding a part-time CFO is more a matter of weeks.
· You can benefit from a higher level of expertise and experience because they have had more diverse engagements, hence can provide you with a more complete and balanced perspective.
An outsourced CFO can be a good choice in transition or fundraising times. For instance, a CEO willing to manage finance directly mostly needs an expert on her / his side to help her / him get accurate data and comply with accounting rules and regulations. In the context of a fundraising process, a part-time CFO can also be of great help momentarily to make your data straight and provide accurate metrics to potential investors.
To that extent, a part-time CFO can do an excellent job. However, their engagement is by nature limited in time, so if you want to make one a real business partner, you will need to hire her / him.
In a scaling business, a standalone part-time CFO may not be sufficient and you might need a full-stack outsourced finance firm which offers all important roles of finance including a CFO, but also controllers, analysts, sometimes accountants (though this is more common practice in North America than in Europe) and tax experts. The monthly cost of a full-stack finance firm is around €/$10–20k per month, which is equivalent to the cost of a full-time CFO alone.
#6 The benefits outweigh the cost by far
So let’s now have a look at the benefits. Though they are hard to quantify, it is (sadly) easier to measure the damage than can be caused by the lack of a CFO.
First, consider a B2B software business that has just landed large corporate customers. Not only are sales cycles long but collecting cash is also a challenge. Large firms have internal approval processes for purchase orders, invoices and payments, which can be quite cumbersome and lengthy. If you don’t have the right people and organization to deal with it, you may lose weeks if not months of cash. A CFO must identify the risks related to this type of clients, build a debtors monitoring and cash collection process, with periodic reminders and potentially late payment penalties; in some instances she / he may decide to use outsourced collection services, or factoring to transfer the credit risk to a third party and be paid upfront.
Second, the case of companies with working-capital intensive business models due to their manufacturing cycles (e.g. hardware technology) or inventory management (e.g. consumer goods retail or marketplace). For hardware products, manufacturing often has to be ordered weeks or months in advance and partly paid upfront to third party manufacturers, then shipping can take a few more weeks, before your company can actually start selling the product. In addition to a longer time to market, it creates significant working capital requirement.
With consumer products, unless you business model is a pure marketplace, you need to manage inventory to deal with the lag between supply and demand. Building inventory implies cash payments, while you won’t collect cash until you sell the product.
In both cases, managing working capital calls for expertise, for which you need finance people to a) properly analyze the business model, assess the growth path and the path to profitability effectively, b) make accurate cash forecasts to anticipate issues, c) monitor the relevant KPIs needed to be alerted in time and d) get financing. Otherwise you may rapidly lose control and end up winding down.
Another time when having senior finance staff is essential is during fundraising. Before a fundraising process, a CFO or a senior finance team will ensure the company has the proper dataset and KPIs ready. During the process, it will give much credibility in front of potential investors. Conversely, raising funds without a strong finance team can get really tricky. Some fundraising processes become very painful because of subpar financials and business plans, or due diligence questions left unanswered or answered too late, which may raise doubts and discourage investors.
One last example is about raising debt, government grants or tax credits. To negotiate a good bank loan, you will need someone to talk to bankers and benchmark loan offers, taking into account not only interest rates but also all other criteria and covenants. Government grants and tax credits are often so complex that dealing with them on your own can take much time and lead to errors, hence adjustments by the tax administration. You’d better have a senior finance person look into it thoroughly upon her / his arrival, perhaps with help from a specialized consultant. One of our guest CEOs, having struggled with government financing before, set it as a priority for the new CFO, who effectively secured a grant of €1 million 4 weeks after getting on board.
#7 Make the CFO a business partner or a sparring partner for the CEO
Beyond the financial aspects of her / his job, ultimately your CFO should become your business partner. In practice:
· Setting up the relationship with a customer or a new partnership, by assessing its value, answering a RFP or promoting your company before a prospect;
· Coordinating and motivating the team around common objectives and budgets;
· In board meetings, supporting you and presenting the company’s performance and plans before your shareholders;
· Evaluating strategic options and helping you make the right decisions in M&A processes or when considering external growth opportunities;
· Taking over other management tasks such as Legal or HR management.
In all these roles, the CFO’s broad view on the company’s performance makes her / him well-placed and credible to present a rational and unbiased picture of your company.
It also puts her / him in the right position to express different opinions from yours based on facts and data. It makes the CFO a sparring partner or even a counter-power who is capable of challenging the CEO and the management team, which will help you make better decisions and anticipate questions from the board, new investors, customers or other parties.
To recap, if you are a founder or a CEO:
· Hire a finance resource a soon as you reach some of the milestones above,
· but not necessarily a CFO immediately,
· and think about the outsourced / part-time option.
· Hiring is hard as always, but there are many relevant profiles and experiences.
· When evaluating the cost of a CFO, consider what it could cost you not to have one.
· Finally, make your CFO a real business partner, as this is why they are most valuable.
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We would love to hear what you think about this! Feel free to comment and share your own experience.
And if you liked this post, stay tuned for the 2nd part in the following weeks, from the CFO point of view.
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Notes and references:
(1) Annual gross salary, before social charges and taxes paid by the employer.
(2) Sources: Robert Walters “2019 Salary Survey” and Robert Half “2020 Salary Guide”.
(3) “2019 VCES Technology Report”, a subset of Option Impact by Shareworks, the leading provider of pre-IPO compensation data. Option Impact partners with over 180 top-tier investors and over 3600 private companies to produce the world’s largest corporate-sourced compensation database specific to private, venture-backed companies. To learn more, please email Option Impact at compensation@shareworks.com.
