How to set-up the finance department in your venture
In the early days, founders usually focus heavily on product and team. This makes sense, of course, as you want to be MVP ready as quickly as possible and tackle your go-to-market strategy.
As a result, not many startups think about building solid financial infrastructure and it is often the last department to be developed. This can lead to the following fatal results:
- Sub-optimal growth strategy, since it is not maximally data-driven
- Lack of knowledge about capital needs and starting fundraising too late, especially in current market conditions
- Liquidation constraints due to mismanagement of working capital
- Lack of planned/actual comparisons to track company development
In this article, I would like to give you an overview of the different tasks and responsibilities in a comprehensive and sustainable finance unit.
Hope you enjoy!
So, let’s get started. First of all, it is important to define the different departments and to break down the department-specific tasks and responsibilities. To design this breakdown and allocation of tasks as efficiently as possible, it is essential to understand the different interdependencies inside the financial department.
A holistic finance setup can be divided into five departments, which are: Accounting, Controlling, Strategy & Planning, Fundraising and Investor Relations. These five departments are all connected by different data streams.
This diagram gives a rough overview of the respective tasks and responsibilities of the individual departments as well as the data streams in between.
Please note that not all departments have to be manned internally, some tasks (such as accounting) can be outsourced. However, it is essentiell to understand them nonetheless and stay on top of things.
Let’s dive into each department.
1. Accounting
The responsibilities of the accounting department can be summarized in two tasks: Keeping financial books and accounts up-to-date and delivering the latest financial data for controlling.
The monthly accounting consists of the preparation of relevant finance documents for tax consultants as well as the management of accounts payable and receivables (or working capital management), meaning tracking accounts payable from creditors and accounts payable from debtors.
The last task of the accounting division is the preparation of the annual financial statement, meaning the consolidation of all other outputs for the final annual statement, as well as the preparation of the annual statement for audit.
These tasks can be easily distributed to your tax accountant and do not have to be manned internally at the beginning of your journey. However, is essential to carefully look at your working capital management, since it is closely linked to your cash flow management. A good working capital management, meaning the reduction of days receiveable and the maximization of days payable, can make the difference between filing for bankruptcy and extending your runway for multiple months.
Even if you outsource accounting, make sure to look into your working capital management and its optimization.
2. Controlling
The controlling department is entrusted with two tasks: It has to inspect the accounting division’s data by performing certain sanity checks and has to further process the accounting division’s output (trial balances), present the data visually, analyze it and communicate results/learnings with all relevant stakeholders.
In summary, this means: Processing and presenting actual financials, identifying and analyzing deviations as well as forecasting future development and liquidity position.
The function of controlling in a venture evolves considerably over time and as the company grows. If, for example, the company needs external capital or a management board to be able to drive further growth, there is no way around an organized controlling function. Thus, we recommend creating certain basic structures already in the early days in order to not create a lot of reprocessing work afterwards.
Probably the most important aspect of the controlling department’s tasks is the comparison of planned/actual data and the associated deviation analyses and their communication to relevant stakeholders. There, you have the opportunity to compare your financial planning with your actual data and see where there are drastic deviations in order to implement measures at an early point in time.
Controlling offers the possibility to implement measures against plan deviations at an early stage.
3. Strategy & planning
Strategy and planning are mainly concerned with financial planning and the respective target setting. The department’s main tasks are to plan financial targets (preferably within a 5-year horizon), create the necessary measures and define relevant KPIs to measure and evaluate progress. Usually, either the CEO or CFO takes over this task and quantify the business model in their financial model.
The fundamental component for this is the creation of an integrated financial model, which consists of P&L, balance sheet and cash flow. Here, the financial development of the company is planned and value-driving factors are revealed.
The next step is to compare the current company situation with the planned development. The goal is to analyze the current company situation and to define measures that are necessary to follow the planned development.
After this, you should have KPIs at hand, which decisively tell about the development of the company and show the optimization/improvement potential of the company. The result is that you now have the adjusting screws at hand, so that the current company situation continuously adapts to the planned one.
Financial modeling is the single most effective procedure to quantitively uncover value levers of your business model.
4. Fundraising
Fundraising activities are still founder’s business in the early days — no question about it. However, it is important to understand here that fundraising, in a holistic depiction of the tasks, is a full-time commitment for several months (on average about 6 months).
The different process steps of a fundraising round look like the following:
I. Documentation
The most important, and usually the most time-consuming task. This includes pitch decks, financial modeling, investment memos, FAQs, market and competitor analysis, cap table modeling, visualization of internal processes (from tech stack to org chart), the list goes on.
II. Investor Research (Long- and shortlist)
As soon as the document preparation is advanced, the first investors can be approached. But how do you find them? How do you approach them?
Classically, investors are filtered according to their investment focus (sector/industry/phase), ticket size and fund duration.
Once you have a comprehensive list of potential investors (also known as a long list), the next step is to filter out the most promising ones.
Here, one looks more closely at the value that the VC can provide (e.g. network, operational support, certain expertise), the strategic orientation, as well as the ability to approach. It is advisable to approach the investor through common contacts and warm intros. If this is not possible, as it is in most first fundraising rounds, we recommend asking for intros with synergy-offering portfolio companies.
Talk to the least promising investors first, in order to gain valuable feedback and perfect your pitch & documentation.
III. Dataroom
The importance of a clean and complete data room is often underestimated by founders.
A clear, intuitively understandable structure offers investors a huge added value. This allows them to greatly accelerate their due diligence process, it reflects a structured way of working by the founders and builds a strong foundation for a trust-based collaboration, as it does not give the sense that unpleasant news are intended to be hidden.
Ping me on LinkedIn if you would like to see our data room structure used for fundraising rounds.
IV. Due Diligence Process and Q&A
As soon as the data room has been set up, all relevant documents have been filed and the respective investor has received approval, he starts the due diligence process.
In the process, numerous queries will arise, whether about the defensibility of the technology, certain assumptions in the financial planning, or competitors.
On a small scale, these can also be handled stress-free by the founding team. However, if several investors are in the data room at the same time, these queries can quickly become overwhelming and take up most of your time.
Often these queries will be repetitive, so the creation of an FAQs document is recommended in which such questions (repetitive questions, whether during pitches, customer calls or due diligence) are answered.
V. Term Sheet & closing
The final step is the term sheet signing and the subsequent notary appointment. Here it is worthwhile to involve a lawyer who will screen the term sheet and point out potential red flags. Check out a more detailed post about all relevant term sheet clauses in one of our LinkedIn Post.
Some of the above tasks can be outsourced to consultants and/or service providers, such as financial modeling or managing the due diligence process (setting up & answering investor queries, data room management etc.), so that founders still have time to drive the company forward operationally in addition to fundraising.
Fundraising — the most important and intensive task of every founding team.
5. Investor Relations
Cultivating investor relationships essentially pursues three goals: Creating transparency and thus trust, managing and maintaining existing investors, and securing follow-up financing.
A venture will have to implement a regular (monthly or quarterly) investor reporting at the latest when raising capital from venture capital funds.
In addition, it makes sense to create a newsletter to feed existing investors, but also investors with whom you have been in contact who have not invested but may be reactivated in the future, with good news and to create a sense for the development of the company. This will especially simplify the follow-up financing (VCs invest in lines, not dots).
A CRM tool makes it easier to keep an overview of all existing contacts and to automatically manage them.
About us:
At Trustventure, we offer entrepreneurial solutions for venture capital backed companies with “CFO-As-A-Service”. We advise high-growth ventures during fundraising rounds, transactions and the implementation of growth processes & after-investment strategies.
Feel free to contact me via LinkedIn if you have questions regarding fundraising and M&A in the venture space or are in need of some kind of support.
Thank you!
Konstantin
