In 2021, there were roughly 5.4 million new businesses established in the US and over 800,000 in the UK. However, based on historical trends, it's expected that by the end of 2022, nearly 1.2 million (or almost 20%) of these businesses will have ceased operations and by the end of 2025, over half of the new businesses created in 2021 will likely have disappeared. Launching and building a successful business is a challenging task. For many entrepreneurs, the cause of their company's failure is not due to a flawed idea or product, but rather a failure to effectively manage the financial aspects of their business. This includes raising capital, managing cash flow, accurately accounting for business activity, and forecasting future performance.
Entrepreneurs are typically smart engineers who have created a revolutionary product or creative marketing professionals who have identified an underserved customer base or a market need. However, they usually lack a strong financial background, and it's essential to have effective finance and accounting support for a business to thrive. A startup usually can't afford to establish a complete finance organization with accountants, controllers, planners, and tax specialists right from the beginning. Instead, finance capabilities must develop with the business, frequently starting with part-time bookkeeping and then gradually adding new skills as the business expands.
To establish an effective finance function for a startup, the process can be divided into three stages. The following summarizes the abilities that an entrepreneurial CFO should possess to deliver at each stage.
Stage 1 is all about being ready to help the business from the start. The CFO needs to:
Develop a relationship of trust as an advisor to the CEO
For a CEO-CFO partnership to be successful, trust is essential, and this necessitates a combination of robust financial expertise and an understanding of the company's goals, strategies, and aspirations. CFOs may have to convey negative news, which is ideally accompanied by sound guidance. For the CFO to achieve this effectively, their objectives and motivations must align with those of the rest of the leadership team.
In a 2021 interview, Melanie Payne, CFO of Syniti, a rapidly expanding company specializing in enterprise data management, stated that an entrepreneurial CFO must have both speed and flexibility, "the need to move faster in how we make decisions [and] change course quickly." While this may not be a full-time role in the early growth stages, it does necessitate self-discipline, concentration, and dedication.
Implement fundamental finance processes
The primary responsibility is to master the fundamentals. On day one, it's crucial to carry out basic tasks such as gathering payments from customers, disbursing payments to suppliers and staff, and reconciling accounts with precision and punctuality. Kunwar Chadha, FCMA, CGMA, encapsulated this idea succinctly in his FM magazine article stating, "The first task was to ... report numbers accurately and make timely payments to employees and suppliers."
While some small companies may seem profitable on paper, they may lack cash reserves due to inadequate accounting practices. An efficient CFO should guarantee that cash moves smoothly through the organization from the outset. Fortunately, there are established best practices and tools that even the smallest company can utilize to manage their finances effectively from day one.
In Stage 2, the emphasis is on acquiring the essential abilities to foster growth rather than simply sustaining it. At this point, the CFO's responsibility is to:
Develop a compelling financial story for investors
During the process of fueling business growth, a CFO's input can be most valuable in raising capital. While a CEO can effectively communicate what makes the company unique, investors are more interested in the potential return on their investment rather than just an innovative idea. Hence, the CFO must be able to narrate the financial story that complements the company's vision, strategy, and product offerings to secure and retain investors. An entrepreneurial CFO can readily answer critical questions such as the required capital, its utilization plans, expected returns, and how to manage financial risks.
Build credible forecast capabilities
All businesses have limited resources, and managing growth successfully requires the optimization of scarce resources such as money, time, talent, and materials. Efficient resource allocation depends on developing precise forecasts, anticipating positive and negative variances, and taking corrective measures in a timely manner. The CFO must be able to identify relevant data, choose the most suitable tools and technologies, and create forecasts that support timely decision-making to ensure effective resource allocation.
Establish a cost-effective and scalable control and compliance framework
As a business expands, the volume and complexity of its operations escalate, leading to increased risk and new compliance obligations. An enterprising CFO takes responsibility for ensuring that heightened risk and compliance requirements do not impede the company's growth. Updating control procedures, revising materiality thresholds, and satisfying new regulatory standards are all components of a finance capability that can scale to support the growth trajectory. Over the years, this aspect has become even more significant as CFOs are increasingly expected to address broader concerns such as data protection, corporate governance, and sustainability.
By stage three, finance has grown to be able to maintain an organization that is getting bigger and more complex. The CFO needs to:
Build a talented finance team
The success of a CFO depends largely on the quality of their team. While the CFO may be capable of handling all tasks in the early stages of the business, this situation will not persist for long. An insightful finance leader must know when to expand the team and delegate tasks. Recruiting too early could lead to wasteful expenditure of valuable resources while hiring too late can impede growth by causing finance-related obstacles. Typically, the first two positions a CFO will seek to fill are a controller or chief accountant, followed by planning analyst.
A forward-looking finance leader cannot afford to be solely inward-focused or fixated on past data. The chief accountant can assume this burden by bringing extensive accounting skills to the table and ensuring accurate accounting and reporting. In contrast, a planning analyst can offer powerful support to the CFO by providing insightful forward-looking information that supports the leadership team and the board in making decisions. To balance capability and affordability as the business expands, combining internal hires with external partners can be advantageous.
Create a scalable financial ecosystem that includes advisors, partners, and service providers.
The range of options available for creating a scalable finance capability is now more extensive than ever before. In the past, startups frequently handled basic bookkeeping functions in-house and enlisted the services of a part-time professional accountant as the business expanded, which consumed the time of both parties.
However, nowadays, startups have access to a much broader set of alternatives. Self-service accounting and finance software can automate many of the basic bookkeeping functions, including payment, receipt, and account reconciliation. The emergence of cloud-based software-as-a-service solutions has made best-practice software available to businesses of any size, without the need for significant capital investments in computers, data centers, and software. Experienced accountants have also expanded their offerings to provide outsourced finance capabilities, enabling businesses to access full-service solutions.
To avoid the expense of hiring a full-time CFO, many startups are leveraging fractional CFO networks, where they can pay for access to experienced CFOs who can guide them through the growth process.
An entrepreneurial CFO brings a unique skill set to the table, with one of the key abilities being self-awareness to recognize the appropriate time for a new CFO to take over. This transition often occurs when a business plans to go public, as the requirements for a public company are vastly different from those of a private company. It is not a reflection of the startup CFO's competence, but rather an acknowledgment that new skills and experience are necessary for the company's evolution.
Companies such as Google, Netflix, and Spotify have a recurring pattern of CFO transitions as they progress from a startup to an initial public offering and beyond. By establishing a solid financial foundation, entrepreneurs can monetize their ideas, and an entrepreneurial CFO strikes a balance between creativity and discipline. This demanding yet rewarding role allows finance professionals to confront diverse challenges while shaping an organization's growth and ensuring essential tasks are completed correctly.