Updated: Jun 3
One of the biggest challenges startups face, especially those growing quickly, is knowing when to bring in expert help. As business owners we're told both to manage costs, and to get help rather than trying to be an expert in all things - two seemingly contradictory bits of advice!
One area of expertise often overlooked by startups and SMEs is in the area of strategic financial management. As small businesses grow, they tend to outgrow the existing capabilities of their accountant or bookkeeper, and their success and on-going growth will likely be constrained by not having access to the right level of financial advice.
The business will often only realise that tipping point has been reached long after the event. This Forbes interview suggests the tipping point might be when the information needed to support decision-making in the business is not available. But it may well depend on a number of other factors, including size, growth and complexity of the business.
A CFO is a Chief Financial Officer. In larger corporates, she will sit at the top of the finance and administration hierarchy, and report directly to the CEO. In the case of startups the CFO is more typically the second financial resource hired, after the bookkeeper.
I’ve acted as a CFO for over a dozen businesses, ranging from employed full-time by large multinationals, to engaged as a consultant or ‘virtual’ CFO by fast-growing startups – so I thought I might share an overview of what role a CFO can play in your business, with a particular focus on startups.
What does a CFO do?
Before getting stuck into what a CFO is, let’s provide some context with the differences between a bookkeeper and an accountant.
A bookkeeper (which incidentally is the only word in the English language with three consecutive double letters – and us bean counters always appreciate a good fact 😊) is the traditional process-oriented clerk, who processes paperwork and entries in the general ledger, using accounting system software. Nowadays cloud-based packages like Xero make bookkeeping so much more accessible to people with no accounting background, as such it’s not unusual for the role initially to be taken on by the business owner of a startup, later being delegated to a part-time bookkeeper, or even an internal admin resource. The bookkeeper most likely reports directly to the business owner, and once a year collates information for the outsourced tax accountant to prepare the tax return.
As the business grows, it is not unusual for it to hire an accountant – though more typically for startups this is outsourced to an accounting firm, who can prepare monthly management accounts in addition to the year-end annual report (often referred to as statutory reporting) and tax return. In contrast, medium to larger businesses would have an in-house team of accountants running all of the accounting, management reports and annual reports - though still relying on an external tax accountant to lodge tax returns and generally advise on tricky tax issues.
The external accountant will most likely act as the startup’s tax agent, that is an advisor who is authorised to deal with the ATO on the business’ behalf. They may well also act as the business’ ASIC agent, taking on responsibility for lodging the annual statement and other updates with ASIC and maintaining the company’s registers (a formal list of shareholders and directors) - in this regard the role has some overlap with that of the Company Secretary.
A business is under no obligation to use a tax agent nor an ASIC agent – often very small startups, and/or startups led by a financially savvy entrepreneur will choose to handle one or both of these themselves. This is fine, but as the business matures it makes sense to outsource as the cost is not prohibitive – and also if the tax starts getting complicated, eg with international expansion.
An accountant should typically be qualified, which means they have passed an accounting qualification and are registered with a body like CPA or CA in Australia. This is important as it provides you with some indication that they are properly qualified and professional, have up-to-date knowledge and are bound by a code of ethics - after all, they will be entrusted with the financial health of your business. The accountant will typically oversee the bookkeeper and advise on any tricky accounting questions.
So the accountant has a dual role: external facing (compliance, tax, ASIC, statutory reporting, etc), and internal facing (preparing management information, maintaining a cap table, etc).
So where does the Chief Financial Officer come into play? The CFO is a type of accountant – insofar as they originally qualified as an accountant and that is their profession. However they have built up a broader range of commercial experience and reached a point in their career where they lead the finance function within an organisation – rather than advising a range of clients on tax and accounting matters.
While the accountant focuses on ensuring you remain compliant with accounting standards and tax obligations, the Chief Financial Officer goes one step further. They will often prove pivotal in the following areas:
· Capital raising, investor presentations and relations.
· Financial modelling, cashflow forecasting - both particular important for startups.
· Readying a business for sale or investment, handling mergers & acquisitions.
· Ensuring are you using the most appropriate form of finance for your business (debtor finance, operating cashflow, angel investment, crowdfunding, VC, bank debt, etc).
· Thinking outside the box and more commercially than an accountant might. For example, they won't just ensure you're paying your tax as it's due, but they will ensure all options have been explored to minimise tax, leverage tax incentives and stimulus payments, etc.
· Rather than simply ensuring your accounts receivable are collected promptly, they will identify your most and least profitable customers and ensure the business' resources are appropriately focussed.
· Advising on productivity, efficiency, process improvement and business improvement.
· Establishing policies, controls and systems, in order to manage risk and ensure the business grows is sustainably.
· Providing strategic advice and ensuring proper alignment between strategy, controls, measurement tools and management reporting.
· Supporting decision-making, by ensuring systems exist that provide the key decision-makers (directors) with timely and accurate information - enabling them to make the right decisions for the business.
· Data analytics, extracting and collating business intelligence from both financial and non-financial data sources.
Often the CFO will absorb responsibility for HR and IT, particularly if the company is not large enough to appoint executives in those functions - though this is less typical if the business is heavily dependent on its IT systems or its people.
When to hire a CFO
Companies are usually advised to appoint a CFO for the first time when they are experiencing rapid growth. Usually with rapid growth comes complexity and risk, and an experienced CFO will ensure the company successfully navigates its way through strong growth, managing both the upside and downside risk. However the problem with this view is that, many SMEs will never get to experience what rapid growth looks like, because they are stuck in their way of seeing the world: a particular market they're in, a particular solution or product they are selling, a particular category of client they serve. Without the insights of a CFO, they may not identify the lost opportunities associated with maintaining unprofitable customers, processes or products.
Here's an interesting blog from Janine Popick (CEO of VerticalReponse), which offers some useful insights from a SME owner as to what you get from a CFO, and how with hindsight she might have done things differently.
In my experience with startups, often the focus can shift from growing as fast as possible (eg after a capital raise) to cutting back as much as possible (eg when no new capital is forth-coming) over night, and having a disciplined, independent financial voice in the business can be invaluable.
One solution a lot of SMEs are turning to is the outsourced CFO. This outsourcing trend is of course not unique to corporate financial management. Outsourcing sites abound, catering for both the low-end, low-cost engagements, and the higher-end, more ‘expert’ type consultants, with the best known in Australia being Expert360. I’ve used Expert360 both as a client appointing an expert, and as an expert delivering work, and have found the platform very useful. Platforms like these are establishing a new lean model of running a business, with business owners coming to realise the value of trusted, expert help that's easily accessible and well-priced - and with no long-term commitment.
While the outsourced CFO is certainly going to cost more per hour than the typical freelancer (ie most likely in the $200-$300 range for a true CFO), it's important to view this as an investment in the business rather than a cost. SMEs can gain on-going access to the experience and expertise of a CFO for as little as $1,000 per month, or even engage a CFO to work on a particular project, for example to advise on an investment opportunity, or to help prepare the business for a sale when the owners are retiring. Some consultants may even accept to be paid on a contingency basis, meaning you only pay them an agreed proportion of any increase in revenue or profit.
Given the financial outlay though, some consideration needs to be given by the business owner to how best to leverage this resource – so pre-planning around what the expectations are is essential.
So really, while the focus of the accountant is to keep things ticking along, the CFO is more akin to a business partner, who will question how things are currently working across the business and ensure you are being provided with appropriate decision-making information and support.
Reach out to me if you want to discuss whether now might be the right time to get the support of an outsourced CFO. Our packages start at $500 per month.