4 Reasons Startups Need a CFO

Fred Wilson, a prominent venture capitalist and blogger, said, "the CFO is largely about 'what is going to happen and how do we get there?’"(1). How can a CFO fill this role in a startup? This is an important question not only for CFOs but also for the founder, CEO, and board who hire them. 1415055_63258558

Some startup teams underestimate the value of having a CFO involved from the beginning. They are focused on building and selling a product and think they can get by with a bookkeeper until they get a lot bigger.

Some founders may recognize the need for CFO insight, but they don’t think they can afford one. As I’ve written before, a CFO doesn’t need to be full time. A startup can engage a part-time CFO for very little cost, and often that part-time CFO can get more involved as the company grows.

Here are a some ways a CFO can help a startup from the beginning know what is going to happen and how to get there:

1. Create reasonable financial projections. Notice the word “reasonable.” Founders are often blinded by optimism. This is usually a good thing because it gives them the courage to move forward with their idea. But often they need a CFO to ground them in reality.

Sometimes startups take off like a rocket with crazy margins and never look back. The reality is that most startups take several years to be profitable, if they get there at all. An experienced CFO will build a financial model with several scenarios. To humor the founder, they can show the rocket ship scenario, but they will also show the normal and worst-case scenarios so the team can plan accordingly.

2. Provide credibility for investors. Investors want to know that their investment will be carefully watched over. They will have to buy into the founder’s vision, but they will also want to know the founder has competent advisors to help carry out the vision.

They will also want to know that they will get reliable financial information on a regular basis. They will be more likely to invest and continue investing if they know an experienced and trustworthy CFO is providing this information.

3. Track and interpret data. Any bookkeeper can categorize transactions and prepare the standard financial reports. An experienced CFO can identify key metrics, create systems for tracking and reporting these metrics, and help other leaders interpret and act on the data.

4. Create scalable processes. Startups are chaotic, and to some extent this is good and necessary. A startup should rapidly experiment and adapt to lessons learned. It would be a waste of time and energy to create too many formal processes. However, as the business starts getting traction, it needs to be prepared for rapid growth. An experienced CFO can help create business processes that are efficient and scalable.

My experience 

I’ve had several experiences where I was brought in after the startup phase, and the founders have kicked themselves for not involving a CFO earlier.

I joined one company about two years after startup. Revenue grew rapidly, but they couldn’t figure out why they were struggling with cash flow. They knew what their manufacturing costs should be, but they had no system for tracking actual costs per unit produced. It took some digging into past data to find that their labor cost was double what they expected.

I put a simple system in place for tracking labor cost per unit. We cut labor cost in half after a couple of months of using that data to refine the manufacturing process. To this day we use the same tracking system, which allows us to quickly make adjustments if labor costs start to creep up again.

The CEO had said many times that they could have avoided many costly mistakes if I would have been involved from the beginning. It’s not that I’m anything special; they simply needed insight from a CFO.

Startup founders: don’t overlook the importance of involving a CFO from the beginning. You will minimize mistakes and increase your chances for success. In most situations a part-time CFO can help you get started with minimal time and cost, and often that person can grow with you until you’re ready for a full-time CFO.

Question: How has a CFO helped you in the startup stage?

(1) http://avc.com/2011/10/vp-finance-vs-cfo/