Most startups recruit engineers and salespeople before they consider finance. That's understandable, as product and customers come first, and a bookkeeper handles receipts. The finance questions come early, though: how long is the runway, what do you tell investors about burn, is the pricing model actually profitable? Answers tend to be intuitive, and corrections are made when the situation warrants them, sometimes after a costly error. A CFO Service in the early days provides a way to ask these questions and get evidence-based answers, without the extra expense of a full-time executive on a young company's payroll. This article walks through some of the concerns of financial leadership for the early stages, and why timing may well be of the essence.
Understanding the Requirements for Startup Finance
Finance in a startup environment is not the same as in an established business: revenues may be low or inconsistent, costs may well exceed income for some time, and the strategy may change every few months. Cash is king, because the survival of the company depends on it having enough for as long as it takes to turn a profit. Founders need to know their burn rate, the length of their runway, the cost of acquiring new customers and the payback period on each one. They also need clean documentation so that investors don't have to ask for a detailed explanation of the financial model. Without these basics in place, fundraising becomes much harder: investors will ask for a model, observe discrepancies, and proceed with caution. This doesn't require a large finance team. It does require someone with an understanding of why due diligence for startups usually entails certain processes, and how to get ahead of this in advance.
Why Hiring a CFO Service Before You Raise is Important
Timing is of the essence: a founder who puts together a financial model six months ahead of a fundraising meeting will have found opportunities for improvement, while one who does so in the week beforehand has no time to adjust. Getting in early also helps to avoid unwise choices that become second nature to the business, such as sloppy bookkeeping, revenue recognition practices that don't stand up to scrutiny, or client contracts that hide important information. An experienced CFO can help set realistic expectations for hiring in line with milestones rather than aspirations, and will be able to advise on whether a discount, major client, or foray into a new market is worth the investment. They'll also be able to differentiate between expansion that creates value and expansion for its own sake, based on intimate knowledge of the pitfalls of the industry.
Getting Started Without Overspending
Most early-stage companies don't need a CFO full-time: a few hours' support per month, and more during fundraising and planning periods, is sufficient to get the job done. A CFO Service can be hired at the level required for each stage of development, supporting the founder in setting up clean accounts, a simple budget and a forecasting model in the early months, and more detailed reports for the benefit of investors in later months. The founder maintains control of the strategy, but has someone to ask about the numbers. The cost is also spread out in line with the work done, reducing the drain on the company's finances at any given moment, and providing excellent value for money in terms of the mistakes avoided. The monthly retainer is likely to be much smaller than the damage caused by one poor financial decision.
What Founders Should Ask First
Before making any commitments, ask a prospective CFO Service what they envision for the first ninety days. A good answer will include tangible outcomes such as improved bookkeeping, a budget and a forecast. Ask about experience working with startups at a similar stage and in a similar industry: a SaaS business and a hardware manufacturer will have fundamentally different approaches to cash flow management. Find out how they would handle conversations with investors, and whether they will provide their expertise over conference calls if necessary. Providers such as KingsCFO will be able to show you their approach during an introductory meeting, and you should ask to speak to more than one service to compare their answers. Trust is an important consideration, as the CFO will be privy to information about the length of the runway and the details of any fundraising discussions. Choose someone who provides objective advice, and who you can turn to for honest discussion even when the evidence isn't convenient.
Conclusion
Many young companies find themselves in hot water when the numbers are scrutinised. Finance is much easier to establish than it is to undo if problems arise later down the line. A CFO Service assures an expert eye on cash flow, strategic planning and preparations for external investment, at a price that suits a small team or solo founder. If there's likely to be a major fundraising activity or a strategic partnership within the next twelve months, get in touch with a CFO Service today. Six months' worth of preparation will deliver better results to any potential investors than any presentation slides could hope to do.
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