One of the key areas to consider when growing a startup organisation is the finance function. As part of the evolution of a company, CEOs and founders have to carefully assess their needs regarding their infrastructure for producing financial information – which is a by-product of the financial and accounting talent.
As a CEO, you need to know how to distinguish between various finance and accounting roles, and understand when and how to employ your talent along your journey.
Like many aspects of building a company, growing your financial talent in a startup or small company is a gradual process – and one that you should start from the very beginning. While there isn’t a one-size-fits-all approach, this article will guide you on when and where specific activities should take place within the structure of your finance department.
Evolution of the finance structure
Long gone are the days when finance just reported numbers; in addition to its governance and oversight roles, the finance function increasingly provides operational and enterprise-wide support.
For more on the modern finance function, check out the basics of financial planning and analysis (FP&A) for startups and the basics of managerial accounting for startups.
The growth of a company essentially depends on people, and building a team from scratch is challenging. But because financial talent is an almost universal need for companies – as, for example, every single company needs to set up a chart of accounts – it’s possible to use different levels of talent in bite-sized pieces to provide different levels of support as the startup grows – it’s an evolutionary process.
You need to plan for this evolution. Use short-term and temporary solutions to grow your financial capabilities as your business grows. It’s possible to use a part-time bookkeeper or a virtual CFO to provide critical support as the enterprise grows — a CFO shouldn’t be your first financial hire.
As a CEO of a startup company, you are in a constant state of storytelling which dictates the transformation of you as a CEO and your company, and which helps you visualise the outcome you want.
You want to grow an organisation to support the fundamental scale-up of the business. This growth can be operational or marketing or financial – anything on the organisational chart that will need expansion in order to achieve the vision of the venture.
You need to plan for your outcome and break the plan into objectives. Don’t build more infrastructure than you need until it’s necessary. That’s to say, don’t hire a CFO when all you need is a financial controller – usually an accountant who is responsible for financial reports and payroll. However if you can afford it, a good strategy might be to hire the next level of financial talent before you really need it.
Founding and scaling a startup is hard; rarely does the entire initial team scale at the same rate as the company, and training people to grow doesn’t always work. So letting people go is part of building a great team, and executing your startup’s vision.
As a young company with limited resources, hiring the wrong people can be very costly and potentially bring your company down. So you have to be very careful with your hiring decisions, and thoughtful as it relates to cost.
To help you keep your organisation lean and agile, check our these 10 money-saving tips to grow your company with a small budget.
As the company grows in size, complexity, and finance functional maturity, so does the location of your finance activities. As your business grows, your business model evolves and your company becomes international, your finance function will likely be spread throughout different locations (business or geographical units) and likely become somewhat decentralised.
A framework for growth; timing is everything
When the time comes that it’s essential to build a permanent and solid financial infrastructure, you want to build from the bottom up. We’ve entered an era where you can rent and not buy everything, and finance talent is no exception.
As a startup operator, you need to strike a balance at different stages of growth between looking at the past (financial accounting) and looking at the future (financial planning and analysis – FP&A). You need to foresee how the different processes will work together across business units and locations, while interacting with the performance of operations (managerial accounting).
As your company grows and your clients and operations spread out geographically and become more complex, more finance staff may be placed in business units. You might choose to centralise the finance function, migrate it to shared services, or perhaps divide responsibilities between corporate and the embedded finance teams.
A conceptual roadmap
In your early days, if you can’t afford or convince top talent to join you, you will likely have to wear different function hats yourself and/or rely on third-party providers.
At the very beginning – during pre-revenue and pre-seed stage – you should only need a bookkeeper. Doing your own bookkeeping at first can help you get a good handle on the levers that drive your business, and it won’t take more than a few hours a week.
If you don’t know where to begin, check out this article covering the basics of financial accounting for startups as a good starting point.
You will need to focus on revenue generation once you begin to grow and raise a seed round of capital, so you should hire a professional bookkeeper and an accountant by then. It’s also at this point that you should hire (rent) a virtual CFO for a few hours a week, to help you lay the foundations of your business model and the finance function that will support it.
The degree of interaction with your bookkeeping and accounting service (and an expense calculation) will let you know when it’s time for more CFO support and even to formally institute a finance department with an in-house bookkeeper(s) and accountant(s).
You will need more time from your on-demand CFO to help you with historical and projected financial statements, unit economics, business model, and to raise additional capital.
And eventually, you’ll need to improve and have more control over financial processes and systems, so you’ll want to hire a controller. Hiring a full-time CFO may also happen around this time, and instituting a FP&A team soon after, depending on the nature of your startup and to further support and strengthen the performance of your operations.
Drivers & Milestones
The increasing magnitude of financial complexity, employee count, revenue, and outside funding are the main drivers of the evolution of the financial infrastructure in the startup.
There are certain milestones that mandate careful attention and consideration from the founder or entrepreneur:
- When you want to solicit ‘serious’ funding from a venture capitalist.
- When your company grows beyond 20-30 employees.
- When you have received venture funding and VCs expect regular financial reporting.
- When you achieve product-market-fit and are ready to scale.
- When your revenue numbers start to pile in the millions.
Some additional tips
- Know that as you grow your internal reporting will become more complex and sophisticated.
- You will likely need both financial and managerial accounting, and pay very careful consideration to how you will integrate your performance with your finances.
- Documenting everything from day one will save you a lot of time in the long run, this includes how you set up your chart of accounts, revenue recognition, business assumptions, etc.
- Seek support to file your taxes and do your payroll from day one – avoid doing it yourself.
- Maintain all financial files perfectly organised from day one.
The most important consideration is to be thoughtful and have a good plan to grow the financial capabilities of your startup.
The big lesson is this — grow your financial talent slowly, smoothly and with a bit of cleverness. Don’t just go out there and appoint someone the CFO because you feel like your startup should have one. Again, it’s a gradual process that begins at the beginning.
There is a big, cruel world out there which doesn’t care that you are a cute, adorable startup. Those that compete with you will intend to crush you, so you will have to grow up and learn to operate in a much more sophisticated playing field, which includes embracing the leverage a strong finance function can provide your startup to be more competitive as an organisation.
And finally, it is important to keep in mind that a company depends on people, so acknowledge that the talent you found initially may not be strong enough to grow the company in the mid to long term.Your initial team will rarely be the right mix of people to grow the company to its ultimate size, especially in less-developed entrepreneurial ecosystems like most across Europe. Many of the people you bring on right from the beginning are not going to be able to make the entire trip with you. Some make it, some don’t.