For any first-time CFO, getting the top job in finance is both exhilarating and frightening. For all things financial, the buck stops with you. The CEO and the board depend on you to ensure basic obligations such as reporting and compliance are being met. They also expect you to be a value-adding business partner.
When I became CFO of ChannelSight, a Dublin-based technology startup, the company was growing fast, and it required funding.
Startups often don't generate profits. They tend to raise funds to develop products and/or services by selling stakes of company equity to investors. As cash reserves decrease, additional rounds of fundraising are required to continue development. Traditionally, investors hope to sell their equity stakes at a premium following an initial public offering or when the startup is acquired.
Since I had no mentors who had gone through a similar experience, and external training was impractical, I had to learn on the job.
The first task was to ensure I had a fully trained team that could report numbers accurately and make timely payments to employees and suppliers. This freed up my time to take on more strategic tasks and to help our CEO grow the business.
These are the lessons that I'm sharing in the hope that others in a similar situation might find them useful.
To become the value-adding business partner your CEO and the board hired you to be, you need to quickly bring under control basic operational responsibilities, such as reporting, compliance, and cash planning; and strategic responsibilities of capital allocation, including pricing strategies, a sales compensation plan, and process improvement for sustainable and efficient growth.
Delegate day-to-day operations
In the beginning you may need to roll up your sleeves and do the day-to-day finance work yourself. This is fine if the situation is temporary. However, for you to be able to work as a strategic leader, you should look to negotiate a budget to hire a finance team. If you are unable to do this, you could struggle to find the time for strategy planning and execution. A strong finance team at ChannelSight allowed me to step back and focus on helping to grow the business.
Hiring and onboarding can take considerable time and effort, so be careful in your selection, training, and retention of staff. Choosing a strong financial controller whom you can trust might be the most important decision you make in this role.
This is an important topic for a startup CFO. If the company is cash rich or profitable, cash planning could be considered part of the day-to-day operations described above. More often, cash in startups is a scarce resource and has to be carefully managed.
In 2019, ChannelSight raised $10 million in a series B funding round, which is being invested towards future growth, but when I joined the company, it was nearing the end of its runway of available cash. Cash management quickly became one of my top priorities. Through rigorous forecasting and control we were able to extend our runway by three months, which gave us enough time to close the funding round successfully.
Here are some tips for effective cash management during difficult times:
Make sure forecasting is accurate. To ensure all spend is captured accurately in your forecasts, meticulously analyse the company's creditor payment patterns. This will ensure that your forecasts are accurate and help you avoid nasty surprises — for example, an annual vendor payment you didn't anticipate. It's a good idea to go through a full annual cycle of spend to ensure an ironclad forecast.
Minimise waste/unnecessary spend. Ensure that your limited cash resources are deployed effectively on the company's strategic objectives, such as revenue growth. Any wasteful or unnecessary spend should be scaled back and remediated.
Improve credit and collections process. A lower days-sales-outstanding (DSO) metric will improve cash flow. Try to focus on improving this number. It can make all the difference when you are struggling to pay salaries near the end of your runway.
At ChannelSight, we re-engineered the collections process by improving communication with clients and by incorporating a process of escalation — from automated reminders for payment to management (or even executive) team escalations. Where we saw clients fall outside of their normal payment pattern, we contacted them to mitigate potential payment delays. These process changes reduced our DSO by 50% — from 120 days to 60 days.
Negotiate payment arrangements with key vendors. Try to negotiate temporary payment arrangements with key vendors. However, where payment delays are expected, vendors generally prefer upfront honesty — as this gives them time to plan for the corresponding shortfall.
Think about trade finance. You can consider trade financing options such as invoice discounting or factoring. Consider carefully the impact of doing this, as your clients can get rattled when a third-party lender gets involved in the invoicing and payment process. Have open conversations with your clients, through the right channels, before rolling this out.
Apart from the operational responsibilities of the finance function, another role that a CFO has is partnering with the CEO in growing the business. This entails formulating and executing company strategy — which is a vast subject in its own right. Although an in-depth analysis of this is beyond the scope of this article, I will touch upon some key components that need to be in place to grow the business:
Capital allocation. In order to make decisions on where the company's funds should be deployed, a CFO should be involved in strategy formulation. This requires an understanding of how the business works, its value proposition to clients, and its market/competitive landscape.
For a startup, gaining an understanding of the company's cost drivers and unit economics is also important. This is necessary to ensure that the company grows in a sustainable and profitable manner. Once strategy is agreed upon and allocation decisions are made, budgets can be set and performance measured through monthly management reporting, key performance indicator (KPI) reporting, and profit and loss forecasting.
Sales compensation strategy. An effective sales compensation strategy should motivate the sales team to hit targets and encourage positive behaviour aligned to the company's interests. There is no one-size-fits-all policy, and what works for one company might not be suitable for another.
Due to the dynamic nature of business, it is important for a CFO to regularly review this policy and ensure its effectiveness. Things to consider include sales quotas, commission rates, and sweeteners such as accelerators or sales performance incentive funds (SPIFs), which offer incentives for sales representatives. Especially for a software-as-a-service business startup, which delivers and licenses software online and is paid for by a subscription fee over time, another important point to consider is the timing of commission payouts. For example, consider whether you should pay the sales rep when a contract is booked, the service is delivered, the invoice is issued, or the invoice is paid.
Pricing strategy. This is an important topic that requires a CFO's attention. When considering a pricing policy, consideration needs to be given to company strategy, competitive conditions, unit economics of the business, and the market environment.
In the long run, a business should price products above the variable costs of producing and delivering them. Otherwise, the bigger the business grows, the higher its losses will be. Sometimes, a business will be aggressive and set a price below its variable costs. This could be done to gain market share, with a view to reducing costs through economies of scale at a later stage.
Don't be afraid to look at alternatives to cost-plus pricing, such as value pricing. You could be leaving money on the table if your product's value proposition is not being monetised effectively. A strategy of differentiation in a commoditised market can increase your product's value proposition to clients, allowing you to charge premium prices.
Process improvements. Finance and accounting professionals are trained to be analytical and critical thinkers. Due to this skillset, CEOs often rely on their CFOs to champion process improvements not just in the finance department but across the organisation. An argument can be made that each department is responsible for its own performance or that these responsibilities fall within a COO's domain. The point here is not for the finance department to take ownership of nonfinance processes but to lead by example, provide guidance, and champion process improvements across the organisation.
At ChannelSight, the finance department set an excellent example for the rest of the organisation by showcasing improvements in the month-end reporting timeline, credit and collections, KPI reporting, and trialling cutting-edge automation technologies. Outside of finance, we worked with client onboarding and sales departments to bring visibility into their processes and drive improvements — for example, by remediating bottlenecks in client onboarding (thus shortening lead time to revenue) and improving lead generation and sales funnel performance.
Fundraising. A CFO is a key participant in raising long-term funding for the business. At a minimum, this can involve preparing and pitching financial projections to potential investors. As investors need to be convinced on the reliability of these projections, the CFO should be prepared to defend the forecasts and any assumptions.
Kunwar Chadha, FCMA, CGMA, is the CFO of ChannelSight and is based in Ireland. To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, an FM magazine senior editor, at Sabine.Vollmer@aicpa-cima.com.