If you’re a start-up struggling to raise cash, the concept of hiring a team member purely dedicated to managing your finances probably seems like an expense you can live without. When you’re competing for world class technical talent on a shoestring budget, the last thing on your mind is using limited resources to hire someone whose primary job seems to alternate between telling you increase your revenues and producing eye-watering reports that constantly remind you of how much cash you’re bleeding every month.
But as a professional CFO who has worked on both sides of the fence with start-ups and venture capitalists, I can assure you that having a good CFO on board from an early stage, can make a huge difference in your company’s ability to cut through and succeed.
Moreover, as someone who specialises in turning around businesses that look like going under, I have seen plenty of instances where many of these company’s dire circumstances could have been prevented, had they had the foresight to hire a good CFO from the outset – rather than relying on their own limited accounting skills, or even worse, getting their Aunt Betty to do the books.
For starters, if you’re raising investment funds, potential investors need to be assured that the budgets you have presented are realistic, and that their money will be utilised effectively. More importantly, in raising money from third parties, you are now taking on legal responsibilities that can have long term consequences (and this is critical if you are also a director of the company) that could include issues of governance (if you intend to eventually list the company), transparency (if you want to keep your shareholders happy) and tax penalties (so you don’t need to flee to Venezuela).
What does a good CFO do?
First of all, a good CFO will establish procedures and policies that ensure that all funds are accounted for, all expenses are planned for and met, and that shortfalls in cash can be identified and mitigated, so that you don’t ever find yourself in the unfortunate position of having to explain to your staff that they won’t be getting paid this week. And when the staff start grumbling about having to fly to San Francisco economy, or that you’ve switched from cream biscuits to No Frills tea biscuits, you can now blame the CFO.
A good CFO will establish reporting systems that will enable both your board and your management team to understand the implications of your margins, the cost of holding your stock, the real cost of your sales, the products and services that are performing well, and the real return on investment you got from spending $100,000 on upgrading your website (although you may not always like the answer).
Most importantly, when it comes to raising finance, a good CFO will provide a service to your potential investors that no one else in the company can perform nearly as well – they eliminate doubt.
And believe me, when it comes to pitching your business, there is no greater emotion to overcome than the element of doubt that is deeply ingrained in most seasoned investors and venture capitalists.
While they may like your product (and you), there will come a point in the pitch where they start asking questions that test your knowledge of the market, and question exactly how much (of their) money, you are likely to need to grow the business to a point where it’s at least ‘revenue neutral’ (a favourite term of theirs, meaning your earnings are at least matching your outgoings) and that, my friend, is the point where you’ll want to throw to your CFO.
A good set of easy to understand reports, coupled with a well thought out budget, can go a long way towards eliminating any doubt investors may be feeling. Couple this with a calm and forceful CFO, who can present well, and you’ve got a winning combination.
So how do you find a good CFO?
To start with, you need someone who has had broad experience at executive level in a number of different business situations. A CFO is not the same as an accountant, although they should hold accounting qualifications as a bare minimum. Ideally, a good CFO has worked across a range of businesses (both small and large) and across a variety of markets. I once worked with a Fortune 500 Gaming company, whose international CFO had come from running Heinz’ most successful grocery division. He didn’t know anything about gaming, but boy, did he know tomato sauce.
Ask them lots of questions –
- Get them to provide you with specific instances where they have developed specific business strategies.
- Do they have examples of a prospectus or an I.M. (Information Memorandum) which is required for raising investment? I recently came across a CFO who didn’t know what an I.M. was.
- Do they know what a Due Diligence data room is? Can they walk you through the key components of one?
- Have they ever set up an accounting system from scratch?
- Have they ever been issued a Statutory Demand, and what action did they take?
- How many businesses have they raised capital for, sold or acquired? Experience equals valuable lessons learned that will help your business grow.
- Ask to see samples of reports they have produced such as Management Accounts, Board Reports, Strategy papers and forecast models.
- Most importantly, make sure you get someone who has the ability to inspire confidence, and stand their ground on financial issues. Hiring a CFO because they seem compliant and easy to boss around will not be in the best interests of the company.
A good CFO will inspire your staff and management team to follow procedures and create value in the company, they will eliminate doubt when it comes to investors and other stakeholders, and they will help you chart a course for success that will enable you to rapidly grow your company while using the resources you have on hand.
Daniel Fah is the CEO and a Founding partner of EMR Advisory. EMR is a professional services firm providing businesses with a dynamic financial reporting framework (MagniFi) that allows critical analysis and monitoring of business performance.
