The decision to hire a full-time CFO for a young company is a topic of much discussion and debate. The central issue is the balance between the cost of an experienced CFO at such an early stage, and the benefits they bring in terms of growth, strategy, fundraising, and operations. Using elements from Maslow’s Hierarchy of Needs and applying them to this situation offers a unique perspective on how startups can approach this decision and weigh the pros and cons.
Do I Really Need a CFO?
The worth of a CFO for a young company is a matter of much debate. Some believe that they are unnecessary expenditures and a small, skilled financial team can suffice for the business’s needs. Conversely, CFOs bring a deeper and more strategic financial viewpoint that can assist companies in planning for the future and enhancing their current operations.
The challenge lies in the fact that while CFOs offer significantly more value than a less senior financial team, they also come with a high cost. To overcome this predicament, companies must first understand the roles, needs, and paths they will likely encounter. Most successful businesses eventually outgrow their initial accounting staff and require more depth in the financial department as the number of financial functions increase. By anticipating their future needs in advance, businesses can mitigate their risks and acquire what they need when they need it, without overcommitting financially.
The true question might not be how long a business can survive without a CFO, but rather, how soon they will start to reap the benefits of an experienced financial leader. Evaluating a company’s position on the “hierarchy of needs” is a great way to determine if they need to hire a CFO. By using this analysis, businesses can identify their current needs and plan for their next steps, as well as the best options for hiring a CFO that addresses their current needs.
Hierarchy of Needs
The simpler the needs, the less advanced the skills required to fulfill them. As the needs advance, so do the skills and the knowledge necessary to meet those needs. The basic needs can be met with technical training, but the more complex needs require a strategic component that is best addressed by someone with extensive experience. The rate at which a business’s needs grow varies based on factors such as industry, market potential, goals, and resources. One need cannot be fulfilled if a preceding need has not been met.
Level 1: Transactions
The most fundamental need of a business is the ability to transact. By transact, I mean the buying and selling of goods and services, as well as entering into contracts.
Conducting basic transactions requires basic record-keeping, what I refer to as checkbook accounting. This task can be performed by anyone in the business and does not require any accounting or financial expertise. It generally involves only recording transactions in a checkbook and using the difference in opening and closing balances to assess the business’s success and financial well-being.
The benefits of checkbook accounting are clear. It is cost-effective and requires minimal effort. It can be completed quickly and does not require a specialized resource. As a result, newly established businesses are likely to rely on this method, which makes sense. However, even with basic transactions, many businesses find themselves in a precarious position because they have conducted these transactions without advancing from checkbook accounting to proper accounting methods.
A startup may be able to survive with this approach for a short time, but it is not a sustainable solution and will not work for a business that aims to survive, let alone flourish.
Level 2: Record Keeping
Accurate record keeping is the next step in the financial hierarchy of needs for a business. This can be done by either an in-house bookkeeper or an accountant, depending on the complexity of the transactions. However, an owner should consider the opportunity cost of performing this task themselves.
A bookkeeper’s responsibility is to record all transactions from sources such as bank statements and inventory. They typically report to an external accountant or the business owner. Outsourcing bookkeeping services offers more flexibility but requires effective communication and review.
While both a bookkeeper and an accountant record transactions and activities, an accountant has higher professional standards and training to ensure that all financial activity has been properly recorded. Accountants prepare financial statements in compliance with GAAP and meet the stringent reporting requirements for businesses seeking external financing.
For businesses that want added oversight without significant cost, periodic reviews by an external resource, such as a retained fractional CFO or tax preparer, can be a wise choice, especially if the leadership lacks accounting experience.
Thanks to advancements in technology, capturing transactions has become more efficient and cost-effective in recent years. The manual data entry process has been replaced by software and IT resources, reducing the cost structure for businesses.
Level 3: Trusted Reporting
Once transactions are accurately recorded, a business can begin presenting reports on business operations. This level of reporting goes beyond just recording transactions, and instead focuses on presenting information related to specific business departments or tasks, such as sales revenue or customer service.
Thanks to advancements in FinTech solutions, robust and cost-effective reporting is now possible. Many business schools have adapted their curriculum to include courses on FinTech solutions, recognizing its importance in the business world.
However, it’s important to determine the intended use of the reports before implementing a reporting system. While accuracy is always essential, the approach and level of review needed for internal reporting may differ from that of external reporting. The way in which the activity was recorded will affect the presentation of the reports, but it’s important to remember that the quality of the input will determine the quality of the output.
The main goal of reporting is to communicate the relevant information to the appropriate audience. If the bookkeeper or accountant can fulfill this role, they are done. But if not, the business will need someone who can effectively communicate the accounting information.
Often businesses use multiple systems as sources for their reporting at this stage, which can lead to incomplete or duplicate data. To ensure successful reporting, it’s important for the data to be thorough, accurate, and complete, especially for businesses preparing for Series A funding.
At this level of the Hierarchy of Needs, a CFO becomes more relevant. Turning transactional records into meaningful information to guide daily operations requires a deeper understanding and judgment. In many cases, businesses opt for part-time help from an external CFO.
Level 4: Financial Planning & Analysis (FP&A)
By analyzing past performance and the factors that impacted it, a business can use the information to create financial forecasts. It’s important to have an understanding of the past in order to plan for the future.
Forecasting requires a different set of tools and skills compared to recording accounting activities. Rapidly changing businesses should not neglect this step, as the faster the change, the higher the risk of not planning and the greater the need for frequent updates.
The ideal forecast should be a rolling one, projecting out 12 months at all times, especially for businesses with a seasonal trend. The forecast should include three financial statements: profit and loss, balance sheet, and cash flows. Leadership can then work with the rest of the business to ensure sufficient resources to meet goals. The finance team strives to align business resources with the plan, avoiding over or under-allocation of resources.
At this stage of the Hierarchy of Needs, a CFO is almost necessary. A part-time CFO may be sufficient, but there must be a close working relationship and collaboration with management to produce accurate and meaningful financial forecasts.
Level 5: Strategic Planning
At Level 5 of the Hierarchy of Needs, businesses strive for optimal performance from their financial management team. The ultimate goal is for the finance function to become a strategic partner, actively contributing to the company’s overall strategic planning process. This can only be achieved once the business has a clear understanding of its past performance and future goals.
Strategic vision encompasses a wide range of important decisions, including long-term pricing, scenario analysis, international expansion, and acquisitions. Through strategic partnering, the finance team integrates these new initiatives into the company’s long-term financial objectives.
Having a finance leader with extensive experience and the ability to collaborate with the business to develop a financially sound strategy is crucial at this level.
How Do I Know Which Kind of CFO Do I Need?
Hiring a startup CFO can be a challenging process due to the many variables involved. This is particularly true for founders without prior knowledge of the intricacies of a CFO’s role, responsibilities, and qualifications, who are left navigating their way through the dark, for months on end.
To make this easier, it can be a good idea to appoint an experienced advisory board member who can accurately assess your startup’s needs and match them with the right CFO qualifications, temperament, and skill/risk profile. Going it alone can lead to costly mistakes and the best CFOs aren’t cheap, so having an advisor can prevent negative outcomes.
Beyond the guidance of an advisor, the following are some of the key capabilities you should be looking for:
- Forecasting, Modeling and Analysis: A strong understanding of budgeting, forecasting, financial modeling, and return analysis is a must for an effective CFO. In addition to standard certifications such as an MBA or CPA, this skill set is crucial for any successful finance operation.
- Strategic Vision and Judgment: The CFO should be a forward-thinking and strategic individual who can work alongside the founders and board to drive growth. A track record of value-creating initiatives and a clear view of the business’s potential and execution strategies are important to look for.
- Risk Assessment and Mitigation: Startups face unpredictable challenges, and a key role of the CFO is to assess and manage risks while maintaining a focus on growth.
- Balance, Judgment, and Strong Moral Compass: A great CFO should have a growth orientation, a clear understanding of profitability drivers, and strong communication skills when it comes to numbers and analysis. These qualities are especially important during fundraising and investor reporting.
- Building and Managing Agile Infrastructure: The ability to build a lean financial organization from scratch is crucial for a startup CFO, especially in a dynamic and fast-evolving environment.
- Intellectual and Functional Dexterity: Finally, it would be ideal if the CFO is a jack-of-all-trades or generalist who can fill multiple roles within the company, depending on the startup’s stage. This will help improve the ROI of the individual and is a factor to consider when making a hiring decision.
A Crucial Turning Point
The decision to hire a full-time CFO for a startup can only be made by the company’s founder and board. The appointment of a CFO marks a crucial turning point for the company’s management, strategy, and operations.
When searching for a CFO, look for someone who can balance strategy and execution, bring direction and passion to the company, and contribute beyond their specific role as the company grows.
Good luck in your search!