In our experience, the question of whether or not to hire a CFO for a startup founder is actually part of a larger problem that founders have with the finance aspect of their business: they don’t quite know what they don’t know about finance. 

Of course, startup founders are typically not expected to be finance experts, but this knowledge gap can cause problems large and small. For example, we’ve seen:

• Meetings with investors that become embarrassing when subtle or complex financial questions are not deftly answered
• Fundraising targets that go unmet due to improper or overly optimistic cash requirement forecasting
• Acquisitions or expansions that fall through when audits reveal messy bookkeeping practices
• Chaos in the runup to a public offering or sale

“Of course, startup founders are typically not expected to be finance experts, but this knowledge gap can cause problems large and small.” 

Thinking to head off such problems, founders sometimes consider hiring a chief financial officer (CFO). And to be sure, there are times when a full-time CFO is essential. (More on this in the next section.) But they’re also expensive. And it’s often much too early for new business owners to take that step.  ‍

In this article, we’ll go over options for doing so—some traditional, and some, that are cutting edge. Specifically, we’ll explain:

• When startups really need to hire a CFO
• How being in the dark about finances can create trouble for startups
• The pros and cons of traditional CFO alternatives

How To Tell If Your Startup Really Does Need a CFO

There’s no magic formula for figuring out when; the moment arrives at different times and for different reasons depending on the arc of a startup’s development and financial planning.

Depending on the particulars of a company’s revenue stream, they might want to bring on a CFO when they reach $500,000 to $1 million in ARR. In other instances, the decision might arise from the need for a more finely-tuned long-term strategy: a plan for spinning off subsidiaries, or just elegantly, efficiently handling the complexities of a growing company.‍

Certainly, a company preparing to go public requires a full-time CFO—someone with broad, deep experience who will be responsible for certifying financials and meeting SEC and other reporting requirements. In most cases, if a startup is going to be acquired by a larger entity but plans to continue operating with some autonomy, they’ll need their own CFO, too.   ‍

Why Founders Need To Know What They Don’t Know About Their Company’s Finances

In the early stages, before they have much in the way of payroll, production, or other overhead, startups can often get by without traditional financial infrastructure. But growing successfully and sustainably necessitates more buttoned-up finance processes.

There are a couple of key areas where this fact becomes painfully evident if founders neglect to get their financial ducks in a row.

Fundraising

In fundraising, founders are primarily selling themselves. Not just their product or service and vision, but their ability to run an enterprise. In particular, proving you have the chops to scale a company requires a founder to be able to answer a variety of complex financial questions:

• How might current rates and industry trends influence projections?
• If you have to shift out six months, how would it affect cash flow?
• How would a higher than predicted attrition rate affect funding needs?
• How would price reduction change projections?‍

Because such questions have little to do with brand or product development, founders often haven’t considered them. Not infrequently, they’re not even familiar with the relevant concepts or vocabulary. That can make questions like these rather difficult to answer.

That doesn’t mean they’re not destined for glory. It just means that where finance is concerned, they’re out of their depth.

In one prominent example, a founder went into a fundraising meeting with salary forecasts that neglected to account for payroll taxes or benefits. He just didn’t realize that he had to think about those things—he didn’t know what he didn’t know. So in addition to skewing his cost projections and underestimating his company needs, his error caused the founder to look like an amateur in front of people he badly wanted to impress.

‍Betraying a lack of financial savvy won’t necessarily kill a founder’s chances of getting funding, but it’s not going to help. Venture capitalists want to be confident that the money they’re turning over is going to be used wisely and carefully. A founder who’s demonstrated their inexperience right off the bat is likely to give them pause. The result is often, at the very least, a reduced valuation for the startup.

Internal Growth, Partnerships, Subsidiaries, and Acquisitions

As illustrated above, by the founder who didn’t account for payroll taxes and benefits, the growth of a startup involves financial complications that founders often aren’t even aware of. The early mistakes like this one tend to be accompanied by others. For example:

• Failing to put in place a budget template to project revenue and expenses
• Not bothering to research and select a suite of accounting, tax, and bookkeeping software
• Neglecting to institute a stock administration tool   ‍

To many (relatively) new startup founders, these tasks can seem premature. And it’s true that for a while, founders can often get away with putting them off. But before long such incremental neglect will create internal chaos. And that chaos can scuttle opportunities for founders to reach some of their loftiest goals.

When a startup begins contemplating a corporate partnership, or spinning off a subsidiary, or courting acquisition, their books are going to be subjected to one or more audits. Whether the books are examined internally or by reps from would-be partners or purchasers, any deferred financial maintenance is bound to come to light. If things look messy—if it appears that past financial statements need to be revised and reissued, if required documents aren’t where they’re supposed to be—pending deals and partnerships are often delayed or derailed. Valuations fall and acquisitions are called off. Evidence of noncompliance with tax and/or labor laws, in particular, can become especially problematic.

The prospect of such painful, costly, potentially business-ending headaches is enough to scare many startup founders into erring on the side of caution. But founders frequently go too far, becoming convinced that they need to hire a full time CFO very early on—before they seek Series A financing, for example. As we discussed earlier, before a startup reaches the point where a full-time CFO is necessary, there are numerous more efficient alternatives worth exploring.

Source: https://www.zeni.ai/blog/when-to-hire-cfo