The Chief Financial Officer (“CFO”) in a startup company has a different role than the CFO in a more established company. The startup CFO requires more hands-on activity and to be involved in a variety of tasks and areas.
A startup company (“startup”) is a new business started by an entrepreneur who has a good idea for a service or product. As a result of being a new business, there is no guarantee the business will succeed.
The owner needs to be surrounded by people with an entrepreneurial mindset. There is usually excitement for the new employees because they feel they can make an immediate difference in the company.
This article is about the importance of CFO services to a startup. We’ll talk about the different tasks and areas that are important for any startup.
The startup CFO wears many hats and is hands-on. Therefore, the startup CFO will be involved in these areas:
- planning
- financial modeling
- sources of capital
- cash flow management
- financial reporting
- organizational management
- business insurance and legal management
- risk management
- human resources
- information technology
- Questions?
We’ll look at these different areas and discuss the importance of the CFO’s role.
Planning – using a startup CFO
The business plan is developed and describes in detail how the business will achieve its goals. The startup CFO can help create a business plan.
The business plan describes
- the product or service
- the processes used
- the marketing including its target market
- the operational side of the business
- the financing
Organization chart
The organization chart is part of the business plan. The organization chart is a visual tool and shows the structure of the company.
The next step is financial modeling and creating the budget and cash flow projections.
Financial modeling using a startup CFO
The financial model includes cash flow projections based on budgeting and forecasting. One of the first projects when launching a startup is to determine the planned cash expenditures and the projected cash inflows. The startup CFO can help in this process.
Start building the startup company’s financial model by listing the planned expenditures.
Building or manufacturing a product
Create a bill of materials including costs if building or manufacturing a product. The costs include
- equipment
- supplies
- tools
- labor
- operating overhead expenses
- facility
Startup entrepreneurs sometimes use their garage or basement as the facility.
Providing a service
Create a list of costs when providing a service. The list includes
- equipment
- supplies
- tools
- labor
- operating overhead expenses
- facility
Budgeting and forecasting
The purpose of budgeting is to create a plan for cash flow, which starts with a forward-thinking income statement and balance sheet. For instance, the budgeted income statement includes projected income, the cost of manufacturing the product or the cost of the service, and operating expenses.
Cash flow projections
Cash flow projections are part of the budgeted income statement and balance sheet.
Financial Ratio Analysis
Subsequently, the startup CFO calculates the financial ratios. These ratios are important when comparing to industry standards and the actual financial statements.
Sources of capital
If the cash flow projections of the business show a shortfall, the company will need a source of capital or cash from outside sources. Because of having a relationship with lenders, the startup CFO can help the business obtain capital through the issuance of debt or equity.
Also, a line of credit may be obtained through a bank if the cash flow projections show a short-term need for cash. Similarly, if a longer-term is needed, then the owners of the company may seek debt financing or sell ownership in the company.
Another type of debt financing is for the purchase of physical assets such as property, buildings, and equipment. Banks, lending institutions, or equipment financing companies provide financing.
Cash flow management
Cash flow management involves having a good understanding of the company’s cash flow projections. Because of having an ongoing relationship with the bankers, lenders, and owners, the startup CFO will be able to help in the cash management process. Also, regardless of the source of financing, the startup CFO helps because the lender will need to see and understand the budget and projected cash flow.
Banking relationship
The company should always have a good relationship with its bank and banking representative. The startup CFO helps in this area by knowing the business and being able to explain the business plan and sharing the budget and cash flow projections.
Debt financing through lenders
Banks, finance companies, and equipment manufacturers are always looking for new customers. The startup CFO reviews the different financing methods and helps the company get proper financing.
Stock issuance
When the company needs more long-term financing and doesn’t mind having others owning part of the business, then the issuance of stock or units may be a good option.
Financial Reporting using a startup CFO
The business starts operations after the business plan is completed, including the budget, and the financing is secured.
We’ll now talk about financial reporting, including accounting and performance measurement. The startup CFO helps in calculating this information.
Accounting
The accounting system needs to be in place. The system includes software, hardware, and having a process in place to capture information.
Performance measurement
One method used to measure the performance of the business is to review the key performance indicators (KPI) and the financial ratios. The startup CFO helps by calculating and interpreting them.
Organizational management
Organizational management is the process of managing an organization. Managing includes leadership and having a structure in place to capture information so it can be analyzed. Part of this structure is developing processes and procedures.
Management
The business plan and organization chart describes the different roles in management.
Advisors
Additionally, the startup company needs business advisors. These include the startup CFO, who provides advice to the owners and management.
Cross-functional teams
Also, management and employees with different functional expertise need to communicate with each other. The cross-functional teams include members from different levels and can come from both inside and outside the company. The startup CFO can set up and lead these cross-functional teams.
Business Insurance and legal management
The startup CFO helps with insurance and legal issues.
Business Insurance
The startup CFO understands the business and knows the type of business insurance a startup needs.
Legal management
Companies also have activities that require the preparation of legal documents. The startup CFO understands the business and can communicate with the attorney regarding documents and other legal matters.
Compliance
The business should comply with the rules and procedures of both the company and governmental entities. In addition, the startup CFO understands the business and can monitor the company for compliance.
Governance
The startup CFO also works to establish processes and procedures to protect the company and its assets.
Internal auditing
Internal auditing verifies the company complies with the proper processes and procedures. Improvements are made to the organization’s operations as a result.
Risk management
There are various types of risk a business can have. The startup CFO coordinates to minimize and monitor the exposure that can cause problems for the company.
Human resources
It is a good idea for a startup company to have an employee benefit program to attract good employees.
Employee benefit programs including health insurance
The starup CFO can coordinate and monitor employee benefit programs, including setting up plans for section 125 cafeteria and 401(k).
Training, development and mentoring
Employees successfully integrate into the company through orientation including, ongoing formalized training and development. Thereafter, the startup CFO can verify that employee training, development, and mentoring occurs.
A startup business needs a well-designed information technology (“IT”) system.
Information systems and technology
The startup CFO helps to coordinate the setup and implementation of the information system. Decisions to be made include whether:
- a stand-alone computer or a computerized network is needed
- the system is secure from hackers and is being backed up properly
Accounting software
The startup company needs to decide which accounting software to use and whether it is scalable.
Data migration, testing, user roles, mapping chart of accounts
The startup CFO can help set up new accounting software, including migrating data from an older system. Also, the CFO can set up security and assigns user roles.
Startup helps
State and local programs are available as startup helps for companies. Accordingly, the startup CFO can help in researching this process.
Business incubators
Different communities have business incubators to help startup companies.
Economic development incentives
There are state and local organizations that encourage economic development. Accordingly, these groups provide financial support or incentives for companies that expand their business or are creating jobs.
Do you have any questions?
Let me know if you have any questions, would like more information about this topic or have suggestions for related topics.
