QUESTION:
I’m bootstrapping my startup. Is it worth hiring a temp CFO pre-funding? What would a CFO do for me at this point? My business is pretty simple right now.
ANSWER:
Soody Tronson
by Soody Tronson, Founder of Soody Tronson Law Group
The role of a CFO, is more than performance of accounting function. There are a few good organizations that provide part-time CFO’s for startups (e.g., www.cfos2go.com). Some top level reasons, even for a pre-funding start up, will be prospective planning, a solid business plan and financials, review of what compensation plans/criteria/consequences best fit the particular business objectives.
Often, strategic planning upfront (whether financials, intellectual property, clinical trial, etc.) is well worth the effort and minimizes avoidable costs/reworks down the line.
by Naomi Kokubo
Most startups I know simply use QuickBooks and Excel to do their financials. It doesn´t hurt to hire a temp CFO to look over your numbers and make sure you´re doing things correctly. The basic bookkeeping you can do yourself or hire a part-time bookkeeper to come in and do the books every other week. Unless you´ve raised serious capital or have a unique situation, you can probably get away without a CFO until you´re at a later stage.
Just under 3 yrs ago I opened a small plumbing business in South Florida. A year later my partner suggested I hire a part-time CFO from Barbar Financial to help manage the financial aspect of my business. After meeting with them for a few sessions, I truly felt confident in their abilities. Any feedback they gave me has always proven to be great advice. Visit their website http://www.barbarfinancial.com or call (561) 302.6304. I highly recommend them.
Thanks Soody for the nod in your response to the question posed.
I agree, CFOs provide more than accounting skills and can certainly minimize costly reworks down the line by understanding the business model and company’s growth projections. Most accountants or bookkeepers just don’t have the chops to do that and they’re not meant to. While fledging start-ups can neither afford nor need a full-time CFO they can, however, greatly benefit from hiring temporary or part-time experts. I built a business around serving that specific need, which we’ve been providing now for more than 25 years. You can read more about it in a blog article I wrote to address the question “Is it time to Hire a CFO?” http://www.2gocompanies.com/cfos2go-blog/2013/08/is-it-time-to-hire-a-cfo/.
CFOs provide forward looking planning as a partner to CEOs who need just a bit of CFO skills to facilitate growth and manage threats such as running out of cash. A few hours a month of an experienced CFO’s time can save you time and money as your business grows.
There are many small to mid-sized Bay Area companies over the last decade, from struggling momand-pop shops to fledgling start-ups that are clearly on their way to success and profitability. What has been observed is that in almost all these cases they often start to commit valuable cash and resources to staff the back office before they really need to, including bringing on a full-time CFO or financial manager. Any successful business needs to deal with financial projections, budgets, and cash flow forecasts, but that doesn’t mean you need a full-time CFO to handle it. Thus, if you can’t afford to bring one on, rent one! CFOs for hire are also much less expensive than hiring the wrong candidate.
There are many back office support systmes out there these days which can be outsourced, and sort of work a lot like cloud computing – or pay-per-click, methods, you get high expertise, higher security at 1/3 the cost and half the time.
Dana Costantino
pcg-services.com
I currently provide part time CFO services to early stage companies so my advice can be considered biased. I would like to add on to Nathan’s comments:
+ An experienced CFO not only can build a business plan but knows what is realistic and credible to potential investors and help you to articulate more precisely the financial drivers of the business.
+ CFO’s also have relationships with other service providers which can save time, money and the headache of hiring the wrong service providers.
+ One overlooked area that needs guidance is corporate governance which will be important as your new investors perform due diligence. It is better to start off right than scramble at the last minute to find or create the proper audit trail and documents. If your attorneys need to do that as part of the financing you will pay far more than if you had a part time CFO guiding you all along.
With a part time CFO you get the brains, experience and network of a full time CFO at a fraction of the cost.
As its been clearly noted the role of the CFO is critical in the latter stages of the startup. We provide this sort of service to just those types of firms. However, whats more critical is getting a good financial back-office discipline early on to ensure your bookkeeping is accurate, this pays off in the long run even though it may not seem like it at the time. I have lost count how many start-ups call us at simply-bookkeeping.com to pick them out the bookkeeping and accounting mess they got themselves into which could of been avoided with a bit of planning.
Good Luck, Nghi
Nathan covers it well. I would add that a savvy p/t CFO on board, who is available after funding as needed, is a big risk reducer for investors-with good reason. Investors want to know that the team has strong financial management and control available and that the plan has been well vetted. While XL spreadsheets are common, a CFO who knows the details and is a good communicator can significantly help the fund raising task and will also fundamentally help refine the company strategy and plans, important to hitting the ground running. With part time availability it is a wise and high ROI investment.
Good luck.
Like other commenters, I’m not unbiased in my response here– I currently work as interim CFO for several startups. And like Naomi said, most startups can get by just fine on the accounting side with Quickbooks (or various online equivalents).
But where a p/t CFO makes sense is if the startup needs help with:
+Developing or refining the business model (CFOs have a keen sense for making money and for optimizing things like price vs. volume, upsells, ancillary revenue streams, etc.)
+Cost containment, cash flow discipline, and performance benchmarking (the counterpart to the bullet above– how to keep the burn rate low, so as to stay in the game and fight another day)
+Developing financial forecasts and models (very useful when pitching your deal to investors, but also a good exercise to gain deeper insight into your business)
+Providing analytical support or economic models as part of a strategic partnership deal (making sure you get a good deal while also keeping you from getting screwed)
+Negotiation and valuation support when raising money or getting acquired
…and many other scenarios. In short, a p/t CFO can be a strong complement to a founding team comprised of a couple engineers and a sales-y CEO. In this scenario, the CFO rounds out the team’s skillset by providing analytical or financial support and a deal mentality.
Fortunately, this can be hired on an as-needed or periodic basis, keeping costs down. Best, Nathan
Don’t confuse your need for an accountant (bookkeeper, bill payer, tax filer etc…) with a CFO (financial partner and advisor in running the business).
At the beginning you most likely only need an accountant type unless you want someone who’s a true partner to work with you in doing fund raising and growing the business.
I think it makes perfect sense. What you are looking for is people who can to help craft a strategy and view of the business that will be interesting and exciting to potential investors. Someone who could potentially go on a road show and talk in support of the CEO CTO about the company. This typically means the firm or person should have experience and understanding of the markets, channels of distribution and technology being addressed by the business. Lacking these attributes the CFO will look pretty one dimensional which frankly is death for any management team looking to move. Which gets back to the focal point the CFO is not an accountant, but rather a strategist with a financial background.
Interesting comments – I have been providing outsourced CFO services for the past 10+ years to more than 250 pre-funded and growth technology companies. It is very important to have the guidance of someone that has the CFO focus right from the start. It does not not have to be expensive – you may need only a couple of hours a month or even a quarter when you first start.The benefit is, you get a strategic financial expert that is looking out for your best interest and dealing with things that will distract you from what you need to be doing. Remember, it is not how much it cost, it is what is the value you received from it. I am proud to say I have always saved my clients more than I have cost them. This is a very economical way to start and grow a business to the point where you need full time executives. Merritt.Dicconson,Morris can provide you with a complete Executive team on an as need basis for less than the cost of one full time executive on staff. We are available to help you anywhere anytime –
The question was phrased as a pre-funding scenario, in the Valley this is code for you are planning to raise outside money. If that is the case, there are a variety of issues that an CFO with early stage experience can help you think out. The first is the capital structure. Depending on the business model you perhaps alternative funding may work such as debt, prepayments, etc.
How are you going to value the company? What is the 3 year plan /the model look like? What has the value? How are you managing the pitch. A CFO or someone who has been through that can avoid a lot of mistakes. You only get one time at bat with a investor so the first time has to be well executed.
If you use an adviser, anyone worth their salt will want options or founders shares. Would you rather pay for advice or give away part of your company?
I recommend that start-up CEOs form a small Board of Advisors, one member of which is an experienced CFO who has taken companies from pre-revenue to say $50 million in annual revenues. Try to avoid paying for such expertise through a 3rd party firm or a franchise “rent a CFO” program as typically one-third or more of the CFO's hourly billing rate goes to the sponsoring firm, not the CFO doing the work. Better yet, try to find a temp CFO who has done 1 or 2 IPOs, like me, who might be willing to take part of their consulting fees in equity to conserve the precious cash of the startup. Once the start-up reaches critical mass, it can establish a Board of Directors when it can afford to pay for D&O insurance.
There is no requirement for CFO expertise for talking to investors or anything like that. I am assuming that is the gist of your question. MOst startups don't hire anything close to a CFO type until they are upwards of 50 employees and or $1 million in revenue.
Even then most companies don't need full fledged CFO type experience. A good bookeeper, tax accountant usually cover most needs.
Hope that helps.