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Decoding the CFO Conundrum: Unpacking When and Why Your Firm Needs a Financial Guru

The question is often raised within the walls of growing firms: Do we need a CFO yet? On the face of it, it seems like a straightforward question, but the answer is far from simple. The decision to onboard a Chief Financial Officer (CFO) hinges on various factors – your firm’s financial complexities, growth objectives, and the financial literacy of your existing team. Let’s dive deeply into these variables and get to the core of the CFO conundrum.

The Historical Context: When Did Firms Traditionally Hire CFOs?

Once upon a time, the role of CFO was reserved for corporates – companies with revenue exceeding £50 million. But we’re no longer living in that traditional world. Today, even emerging businesses employ CFOs. So what’s changed? It boils down to the increased complexities and expansion plans of modern companies. If you’re a well-funded startup or a rapid scale-up, this discussion is for you.

Examining Your Firm’s Financial Landscape

Financial Complexity: The Litmus Test

The primary function of a CFO is to provide financial direction, which gains value in a more complex business setting. But complexity is a relative term. For instance, professional services firms, such as those in consulting or digital transformation, tend to have simpler financial mechanisms. There are no inventories to manage or convoluted software and product development processes. If you’re chugging along smoothly with software like QuickBooks or Xero, your finances must be more intricate to warrant a CFO.

The Dimension of Growth

However, growth has the power to make even straightforward businesses complex. Scaling up often involves additional capital – either borrowed or raised – and this is where a CFO’s financial expertise might come into play. It also entails complex forecasting and cash flow management. Firms aiming for over 30% annual growth usually need more than just an operational leader; they need a financial strategist. This is when a CFO shares the operational burden with CEOs or COOs.

Your Existing Team: The Internal Ecosystem

Skillset Inventory: What’s Already in Place?

You don’t necessarily need a CFO to have CFO-like functionality within your firm. It depends on the competencies of your existing team members. In some cases, a savvy bookkeeper and a knowledgeable management team can perform most CFO functions adequately.

The Six Must-Have CFO Functions

Regardless of who performs them, your team needs to cover these six essential CFO functions:

1. Risk Identification and Mitigation.

The ability to spot and nullify risks is crucial. While Founders often take this role initially, the faster your firm grows, the more essential this skill becomes. We recommend clients always have a risk register in place. It doesn’t need to be fancy; we provide a spreadsheet template to help you get started. Someone (singular and named) needs to own the register and the process of reviewing with the team and updating the risks and the current status of each risk – Pending, Achieved, Not Achieved, Avoid, Mitigate, Transfer, and Accept.

Do you have a risk register in place? Start it today.

2. Financial Forecasting and Strategy

Have we ever started working with a client who understood their customer profitability? Nope.

Sophisticated financial forecasting might be overkill for businesses with low operational costs and modest growth. However, as your firm expands, this becomes increasingly important. There are two main risks to be averted here. One is you need more cash as growth sucks cash – see bookkeeping and reporting below. The second is that you end up growing unprofitably. You must forecast your expected cash requirements and your funding needs. Often, firms “diversify” (sell anything to anyone) and have no idea what their product or customer profitability is or is forecast to be.

Do you know the profitability of your customers? Do you know your least profitable customers? Who can start this project today?

3. Management of Finance/Accounting Personnel

The bigger your finance team, the greater the need for a dedicated manager. The next hire is always a manager if you have 3 or 4 team members.

4. Financial Reporting

Beyond standard monthly reports, you’ll need someone competent to create ad-hoc reports per your needs. You need KPIs (leading and lagging) and job scorecards to be in place to enable you to scale. This means you need skills in the firm to generate and publish reporting to all employees. As you grow, a more sophisticated data review will inform your decisions. I remember at Rackspace, the data clearly showed that a client outage, when responded to with an apology and a credit, resulted in less churn than one only with a credit. The team also built a model that could predict the power charge for the following months with a few pounds.

What few leading (i.e. not lagging, such as sales) metrics do you run your firm on daily? Are these published every morning? If not, you have a gap in your reporting capabilities.

5. Pursuit and Management of Debt and Equity

Raising capital can be a full-time job. But unless you’re a capital-intensive firm, you might not need a CFO’s level of expertise here. As a Founder, having someone else to share the burden of funding rounds with should not be underestimated. As a rapidly expanding firm, short-term debt finance can be helpful and knowing where to go and how to put this in place is specialist knowledge.

Do you know your funding requirement for the next 12 months? Is there a plan in place to enable the founding to happen? Do you have a plan B?

6. Bookkeeping

The responsibility for clean, accurate, and up-to-date books falls under the CFO’s jurisdiction, although they typically don’t handle day-to-day bookkeeping. Knowing how and what to record can save so much time. Ask anyone who has tried to produce the data for their first R&D tax credit. If only we had known, they say to themselves.

How soon into the next month will you get accurate financial information? 20 days? A week should be enough if you have the proper process and people in place.

The Not-So-Black-and-White Answer

The CFO Decision – Full time of Fractional

Most firms will not require a full-time CFO before they reach £10m, especially in the people-heavy industries. The relative business simplicity and less capital-intensive nature mean that a fractional CFO should suffice. What matters most is that a CEO remains closely connected to the firm’s financial health. If you have a team already fulfilling the duties of a traditional CFO, then you might not need one. 

Navigating the Search: Five Key Aspects to Consider When Hiring a Fractional CFO for Your Startup of Scale-Up

The Domino Effect of a Good Hire

Congratulations, your growth is driving complexity, and you’re considering hiring a Fractional CFO. As the CEO, the onus falls on you to do your due diligence. As each piece in a domino setup is pivotal, so are the critical criteria you should focus on when choosing. Here’s your guide to putting the pieces together. 

The First Domino: Street Cred

Does this CFO know our terrain?

Venture capital-backed startups and rapid scale-up PE-backed firms have their own unique set of financial and operational challenges. Opting for a candidate who’s lived through the ups and downs of this world can be a game-changer. Forget the enterprise-level resumes; you need a street-smart CFO who understands the complexities of fundraises and acquisitions.

The Second Domino: The Swiss Army Knife of Services

Can this CFO juggle multiple tasks adeptly?

Rapidly growing firms are unique beasts that require a diverse skill set. While accounting fundamentals remain the same, each business has its unique demands. Your ideal CFO should be well-versed in:

– Cash flow management

– Strategic business planning

– Financial scenario planning

– Funding strategies

The Third Domino: Sector-Specific Sorcery

Is this CFO a wizard in your industry?

Like the magic that makes your startup unique, industry-specific knowledge is invaluable. Whether in SaaS, public cloud or software development, the CFO you hire should have a magic wand tailored to your sector.

The Fourth Domino: The Network Effect

Who’s in their Rolodex? (Does anyone under 50 even know what this looks like?)

There’s an old saying that “your network is your net worth.” A well-connected CFO can be a gateway to potential investors, partnerships, and industry experts. 

The Fifth Domino: Rapid Value Creation

How quickly can they deliver results?

Remember, time is money, especially at your pace. The successful candidate should be able to provide quick time-to-value metrics from their previous roles. 

The Final Tumble: Measure Twice, Hire Once

There’s a fine line between scaling successfully and stumbling along the way. A well-suited Fractional CFO can ensure that each falling domino triggers a sequence leading to sustainable growth. So, when you’re ready to tip that first domino, revisit this guide to ensure you’re setting up a winning run.

Written by business growth coach Dominic Monkhouse. Find out more about his work here. Read his new book, ‘Mind Your F**king Business’ here.

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