Assembling the right finance team at the right time is a delicate balance: Hire too early or at too senior a level and you burn precious capital, maybe even damage company culture. Wait too long and you could make expensive financial mistakes or miss out on funding opportunities.
Your finance and accounting staffers have a few key responsibilities: Make sure your bills get paid and that customers pay you. Make sure your employees get paid, with accurate deductions. Keep the government off your back by properly filing taxes and financial statements. Work with auditors, and watch for errors and fraud. And, maybe most important, keep business leaders in-the-know on the financial state of the company: Are your goods and services profitable? Can you afford to launch a new product or make that hire? What will the coming 12 to 18 months bring for the business?
|Let’s look at the hierarchy of some common accounting and finance roles to get all that done:|
|CFO: A chief financial officer reports directly to the CEO and the board of directors. CFOs aren’t just about closing the books — they serve as reality checkers, strategists and risk mitigators for their companies. The CFO typically supervises a diverse finance/accounting team and is responsible for the overall financial health of the business. CFOs in publicly traded companies formally attest to the accuracy of financial statements and shareholder reports.|
|VP of finance: The VP of finance typically has a deep accounting background — essentially, a CPA with leadership skills — and understands in-depth the current and historical financial data of the company. Generally paid less than a CFO, VPs of finance may also be promoted into the CFO role.|
|Controller: The controller is a CPA and, often, holds an MBA. Controllers are senior accounting experts and oversee a company’s cash flow and AR/AP. In smaller companies, they may help with financial planning & analysis, though generally FP&A is a finance function versus accounting.|
|Accountant: These professionals hold CPAs and may be in-house or contractors who work with a number of companies, sometimes within one industry. They prepare audited financial statements and oversee financial records, such as tax returns, balance sheets, employee expenses, and cash flow and income statements.|
|Bookkeeper: This position is your first financial hire and, again, may be a contractor or an in-house staffer. These professionals have accounting backgrounds and they are responsible for putting together monthly income statements and balance sheets for the company.|
|Other staff roles: Within the finance team, companies may have specialists who focus on auditing, FP&A, human resources, bookkeeping, taxation, budget analysis, accounts receivable/accounts payable and inventory or other operational aspects.|
So what type of expertise do you need, and when? Should you hire full-time, part-time or enlist the aid of a contractor, such as a virtual CFO?
You need services commensurate with the stage you’re in. Initial hires should be bookkeepers and accountants. As a company builds its revenue base and decisions start to revolve around unit economics, financing and forecasting, the pendulum shifts in the direction of finance.
A person with both accounting and finance knowledge and leadership abilities will take your company far, possibly even growing into the CFO role over time.
The biggest mistake young businesses make with their financial hires is bringing on someone too senior too soon. Before a company reaches a certain complexity level, around $10 million annual revenue, it’s far too early to even think about a CFO. Even then, unless your business is at a crossroads and needs to make strategic financial decisions, I strongly recommend an experienced part-time CFO, or CFO as a service. These pros can advise you without a six-figure price tag.
When asked the differences between a VP of finance and a CFO, most of us would say they’re about as significant as the variances between an alligator and a crocodile: You know there are some, but you’re not too worried about figuring it out.
In reality, the differences — in leadership experience, technical skillset and associated pay — are significant, and understanding the two roles will help you hire the right person at the right time.
Hiring a VP of finance should always precede the hiring of a CFO. The VP of finance is typically a senior accountant with leadership skills and a deep understanding of the company’s current and historical financials.
The VP of finance manages your accounting team and is responsible for core functions like AR/AP, taxation and keeping your books in accordance with appropriate standards. These actions define a well-run company in the best of times. In times like these, proper management of accounts receivable and accounts payable can substantially extend your cash runway and line your business up for success as the economy improves.
Initially, the VP of finance may serve as a senior accountant and manage an outsourced or hybrid inside/outside accounting team. Depending on experience and location, this role starts at around $125,000. Bonus structure is normally tied to profitability, not growth.
Your senior accountant’s ability to manage staff and contractor relationships is a crucial factor in determining if he or she has the acumen and leadership skills to handle the role and responsibility of VP of finance.
For most businesses, the finance function should consume about 1% of revenue. Ask yourself “why” if you’re spending 2% or more. Unless your business is quite complex, you’re overpaying.
We’ll keep that “finance spend to revenue” rule of thumb in mind as we work through the evolution of finance.
Remember: Outside CFOs and accountants have other clients and are incentivized to accomplish their tasks as expeditiously as possible. They have little impetus to spend time optimizing your cash flow. Learn more about their business model.
The first financial hire a company needs is a bookkeeper — someone to set up an accounting software system, run payroll and close the monthly financials. Ideally, the candidate has a CPA or strong background in managing the financials of companies like yours. Key is understanding accounting rules to properly book expenses, assets and liabilities.
Depending on the complexity of the business, a part-time hire may suffice. Depending on total hours and geography, a half-time accountant runs $30,000 to $60,000 a year. If your business is more complex — say, you operate in multiple states or have income with complex revenue-recognition requirements — a third-party accounting firm with broader expertise may be a better bet. If you have international aspirations, you’ll likely need a firm that’s been there and done that.
At this point, we’re talking about finance expenditures from under $100,000 up to perhaps $125,000, so an internal person or two plus an outside firm should suffice up to the $10 million revenue mark. Then, it’s time to review your org chart.
By now, you’ve probably got a few people in finance along with outside help and a strong toolset that supports the roles of the accounting team and business managers. The annual finance budget will reach roughly $200,000, excluding any stock compensation, to support a $10 to $15 million revenue rate.
As your company grows and the complexity of the business increases, the VP of finance will build a team that assumes many of the responsibilities that your outside accounting firm provided, such as managing AR and AP; payroll; and proper accounting for state, local and federal taxes. The VP will eventually need to hire support staff, such as assistant controllers, to help manage these tasks. How many, again, depends on the complexity of the business.
If and when an internal person has proved up to the job, or you bring in a VP of finance from outside, the going salary is $125,000 to $150,000 annually, depending on the equity component. If the need has been established to hire support people to manage AR and/or AP, these team members will run $60,000 to $80,000.
Remember, you’re aiming to keep your finance expenses between 1% and 2% of gross revenue, with some variability attributable to the level of stock compensation and overall company funding.
Bottom line: When you need to know exactly where you stand in terms of cash on hand on a weekly or monthly basis, that answer lies with the VP of finance and team. If getting the answers you need starts to be expensive, consider your toolset. Small firms using basic accounting software and spreadsheets that can’t integrate with the systems that govern sales, HR and supply chain; reporting and auditing; and AR and AP will end up manually collecting data from all those sources, bringing it together and trying to create a view of the business each and every month.
That’s time-consuming and error-prone.
At these revenue levels, you’d better have reduced or eliminated the need to manually collect and reenter information from each part of your business. Avoid the trap of being people-heavy and technology light. CFOs usually get this, but the technology groundwork should be laid well before you hire a CFO.
A CFO has a solid foundation in accounting and finance, leadership skills and a strong understanding of how your business should run. The CFO is tasked with projecting revenue and profits in the coming quarters and years and devising actions to maximize cash runway and profitability for the company. Thus, bonuses are tied to profits. Generally only sales and, sometimes, marketing leads are incentivized based on top-line growth. Equity is how everyone shares in both profit and growth.
A financial model, sometimes kept in a spreadsheet (at least at first), with revenue, margins, cash flow and balance sheet by quarter for the next few years will be where the CFO collects the executive team’s beliefs and creates a projection that will be clear to potential investors. CFOs also help establish valuations.
A CFO is a major investment, carrying an annual salary in the range of $200,000 to $300,000 plus performance bonuses and, depending on the stage of the company, equity participation and funding/valuation incentives.
In exchange, you get insights into opportunities for growth and for savings. Our Winter 2020 Outlook Survey shows that nonfinance execs are very interested in partnering with finance to grow the business; in fact, it’s a top priority.
The CFO will likely be assisted by a financial planning and analysis (FP&A) team that will rely on past financial data, future product roadmaps and socioeconomic trends to craft the financial outlook. These FP&A people are later-stage hires, usually brought in when a company is well along in growth — series C and beyond. They have more of a finance background versus accounting-oriented controllers but are compensated at roughly the same rate.
In companies that aren’t candidates for venture capital, The VP of finance may grow into the CFO role and bring on a controller to watch over some of the functions affecting treasury. In this case, the CFO title may be something of a matter of taste, but if growth becomes about M&A, it’ll be up to your finance lead to guide the process of determining the valuation of your company and working with potential suitors.
If you’re on the IPO path, speaking with sophisticated investors like private equity firms or talking actively about M&A, you need a financial model that shows prior financials and, more importantly, financial projections. Depending on the financial acumen of the early management team, you may need an interim finance person to help translate your beliefs into financial projections.
Here’s a little secret: In my 10-plus years working in private investing, there’s only one absolute certainty when it comes to the financial projections of early-stage growth companies. Whether the business is a flameout, middle-of-the road survivor or the next unicorn, its future-revenue estimates will be wildly off.
Usually, they’re overly optimistic, showing the company quickly gaining steam and in three years well on its way to $100 million in revenue and cash flows that would make the tech elite envious.
The open secret among those who generate these models — and I have created quite a few — is that the investors who scrutinize them understand they are almost always a puffed-up, best-possible-scenario guess. They realize that it’s difficult enough in a normal environment to predict what will happen in the next quarter. But to be able to predict now how a newly established company and product will fare in the next two to three years is about as likely as picking a Superbowl winner and pegging the exact score three years out.
The focus for investors is on how your executive team thinks. When your teacher asked you to “show your work,” it was to see your thought process in answering the question. Same with early models: The investor wants to see your strategy and how you plan to penetrate the market and grow, knowing full well that if you could accurately predict that, you should be investing millions as a hedge fund portfolio manager.
In the early days, cobble together a working financial model using internal employees with the help of early investors and advisers. If need be, bring in some outside financial help on an interim basis for the purpose of creating a working financial model to present to investors.
A CFO hire should be pushed off until it’s a necessity. The key trigger points for the hire will be strategic decisions that will alter the course of the business: big fundraising rounds, Series B and later, typically, and M&A — considering an acquisition or deciding between selling the company and staying independent.
Even then, using outside consultants to get the particulars right can allow your internal finance leader to grow into the CFO role.
If you have a solid team but lack certain skills, you can find interim or part-time CFOs to fill the gap in short-term stints. Unless your company has a fairly clear path to an IPO, true for a small minority, there are a plethora of companies that will be happy to provide a leader with domain expertise to help navigate these crossroads.
Overkill: Don’t bring on a CFO solely to craft a financial model; it’s akin to hiring a surgeon to remove an ingrown toenail.
Note that interim CFOs cost more than full-time CFOs in terms of upfront pay. That’s reasonable because they will not participate in any equity upside, nor will they get full-time benefits, such as medical insurance. Still, a skilled advisor whose services can be dialed up or down is a great way to let your team continue to grow while you evaluate if you truly need to make a hire or whether in-house talent is maturing into the job.
When a company has well-established professional investors involved, whether VC or private equity, there will be a need for an investor-relations professional to keep them informed while preserving the CEO’s time and focus on the core business. A good CFO can manage this role, and contractors may have relationships with those investors and thus be a calming and steadying influence. Here’s how to select and hire an IR superstar.
Another benefit of promoting from within, usually to the VP of finance role: Your top financial person will take a strong hand in managing matters beyond finance. They’ll watch to make sure sales projections aren’t too rosy. They’ll help keep marketers on track with their goals and help manage the process of acquiring and fully using technology. They’ll watch capital and human resources spending to make sure that staffing and systems are appropriate to the growth your company can sustain. In many cases, the CFO’s view will be more conservative than the line-of-business owner: “Can you really make that sales quota?” “Do we really need this equipment right now?” “Can you show me the ROI for past marketing spending to justify this new project?”
Besides being a reality checker, your finance team can be a force for change as they’re likely hearing from customers through the AR function: “If we can decrease our order-to-delivery times, we’ll resolve a frequent customer complaint.”
Founders often have great product visions and the customer connections that drive growth, or the know-how to market the company’s goods or produce excellent products. But they rarely know all of that, and they almost always need help moving from vision to ROI to profitability.
The finance team is there to not only keep the books but to shore up the skillset of the founder and the rest of the management group. There’s nothing more existential than managing cash flow — and there’s nothing more strategic than taking the knowledge that goes into fully understanding cash flow and applying it to all facets of the business.
Josh Burwick is an active private technology investor with a particular focus on software, Blockchain, e-commerce and sports betting technology. He has served as an interim CFO and advised on strategic fundraising for a variety of technology companies, ranging from Series A to Series D rounds.