The entrepreneurial CFO: Scaling finance capabilities for growth

In 2021, approximately 5.4 million new businesses were registered in the US and more than 800,000 in the UK. Based upon historical trends, by the end of 2022, almost 20% (1.2 million) will have ceased operation; by the end of 2025 over half will probably have disappeared. Starting and growing a successful business is hard. For many, the reason for failure is not a bad idea or a bad product, but a failure to be able to manage the financial side of the business: raising capital, managing cash flow, accurately accounting for business activity, or forecasting future performance.

Entrepreneurs rarely have strong finance backgrounds. They are usually smart engineers who have designed an innovative new product or creative marketing types who have spotted an underserved customer constituency or need. However, no business can succeed without effective finance and accounting support. Typically, a startup cannot afford to establish a full-service finance organisation replete with accountants, controllers, planners, and tax specialists from day one. Finance capabilities need to grow with the business, often starting with part-time bookkeeping and then progressively incorporating additional skills.

The evolution of an entrepreneurial finance function has three stages. An entrepreneurial CFO understands the requirements at each stage and identifies when the business is transitioning from one stage to the next. They will prepare in advance to ensure that finance is never seen as an impediment to growth. Here is a summary of the capabilities an entrepreneurial CFO needs to deliver at each stage.

Stage 1: Opening for business

Stage 1 is about being ready to support the business from day one. The CFO needs to:

Establish a trusted adviser relationship with the CEO

Trust is the basis for an effective CEO-CFO relationship, requiring a blend of strong and relevant financial acumen with an understanding of and commitment to the goals, objectives, and strategy of the business. CFOs often need to deliver bad news, hopefully accompanied by sound advice. They can only do this effectively if the CFO’s goals and motivations are aligned with those of the rest of the leadership team.

Melanie Payne, CFO of Syniti, a fast-growing, enterprise data management company, described the entrepreneurial CFO in a 2021 interview as requiring both speed and agility: “The need to move faster in how we make decisions [and] change course quickly.” In the early growth stages this may not be a full-time job, but it does require discipline, focus, and commitment.

Implement foundational finance processes

Getting the basics right is job number one. Being able to process basic transactions such as collecting cash from customers, paying suppliers and employees, and reconciling accounts in a timely and accurate manner is essential from day one. Kunwar Chadha, FCMA, CGMA, described this succinctly in the December 2019 FM magazine article, “What I Learned Being the CFO of a Tech Startup”: “The first task was to … report numbers accurately and make timely payments to employees and suppliers.”

Many small businesses look profitable on paper but have no cash in the bank due to poor basic accounting discipline. An effective CFO will ensure cash flows smoothly through the business from day one. The good news is that there are well-defined best practices and tools available that even the smallest company can implement to ensure control of a business’s finances from day one.

Stage 2: Fuelling growth

Stage 2 focuses on adding the capabilities necessary to enable, not just support, growth. Here, the CFO’s role is to:

Develop a compelling financial story for investors

Raising capital to fuel growth is often the area where a CFO can add the most value. CEOs are usually able to articulate what makes a business special, but investors are looking for a return on investment, not just a cool idea. The ability to tell the financial story that complements a business’s vision, strategy, and product offerings is essential to securing and retaining investors. Entrepreneurial CFOs can readily answer questions such as: How much capital is needed? How will it be used? What returns can be expected? How will financial risks be managed?

Build credible forecast capabilities

No business has the luxury of unlimited resources. Successful management of growth is about optimising the allocation of scarce resources, be it money, time, talent, or materials. Efficient resource allocation is predicated upon being able to develop accurate forecasts, anticipate potential positive and negative variances, and take corrective action in a timely fashion. The CFO must be able to identify the right data, select the most appropriate tools and technologies, and build forecasts that support timely decision-making.

Establish a cost-effective and scalable control and compliance framework

As a business grows, volume and complexity increase. This in turn increases risk and adds new compliance requirements. An entrepreneurial CFO ensures that increased risk and compliance do not impede growth. Updating control processes, adjusting materiality levels, and meeting new compliance needs are all part of a scalable finance capability. In recent years, this has become an even more important focus as CFOs are asked to address much broader issues such as data security, corporate governance, and sustainability.

Stage 3: Scaling the business

Stage 3 sees finance scale to sustainably support an increasingly large and complex organisation. The CFO needs to:

Build a talented finance team

A CFO is only as good as the team they build. In the early days, the CFO may be able to handle everything, but that will not last long. Knowing when to add capacity and delegate are hallmarks of a forward-looking finance leader. Hire too early and precious capital may be wasted; too late and finance can become a barrier to growth. The first two additions a CFO is likely to make are a controller or chief accountant and a planning analyst.

A CFO cannot afford to be too inwardly focused and backward looking. A chief accountant can relieve that burden by bringing strong accounting skills to bear and ensuring accurate accounting and reporting. A planning analyst can be a powerful aid to the CFO in supporting the leadership team and board with insightful forward-looking information upon which to base decisions. Blending internal hires with external partners can help balance capability and affordability as the business scales.

Establish a scalable finance ecosystem — advisers, partners, and service providers

The options for creating a scalable finance capability are increasingly rich. Traditionally, many startups would handle basic bookkeeping in-house and rely on part-time support from a professional accountant, increasing the time commitment of each as the business grew.

Today, there are many more options. Self-service accounting and finance software can automate much of the basic bookkeeping including payment, receipt, and account reconciliation functions. The advent of cloud-based, software-as-a-service solutions has made best practice software available to any size business. No longer do you need to spend capital on computers, data centres, and software. Qualified accountants have expanded their offerings to provide full-service, outsourced finance capabilities.

Many startups are also tapping into fractional CFO networks whereby they pay for access to experienced CFOs who can guide them through the growth process without the expense of a full-time hire.

Know when to transition

An entrepreneurial CFO brings a unique set of skills to the table. One of the most important is having enough self-awareness to understand when the time is right for a new person to take on the role. One common inflection point is when a business is planning a stock market listing. The requirements of being a public company are very different from those of a private company, and many choose to switch CFOs in the run-up to a stock offering.

This is not a condemnation of the startup CFO, but more a recognition that the business has evolved to a point where new skills and experience are needed. There is a recurring pattern of CFO transitions at companies such as Google, Netflix, and Spotify as they moved from startup to initial public offering to ongoing operation.

Building a strong finance foundation helps entrepreneurs monetise their ideas. An entrepreneurial CFO balances creativity with discipline. They are able to confront multiple disparate challenges and help shape the growth of an organisation while ensuring the basics are done right. It is a demanding but immensely satisfying role for any finance professional.

David A. J. Axson is a former partner with Accenture, co-founder of The Hackett Group, and former head of corporate planning at Bank of America. He currently serves as part-time CFO of Shrap.co.uk. To comment on this article or to suggest an idea for another article, contact Oliver Rowe at Oliver.Rowe@aicpa-cima.com.

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COURSE

RESOURCES

Articles

“On-demand Career Paths for Current or Aspiring CFOs”, FM magazine, 1 April 2019

“Effective Financial Projections for a Startup”, Journal of Accountancy, 1 March 2019

Podcast episode

“Starting Up: 3 Metrics Entrepreneurial CFOs Need to Watch”, FM magazine, 13 October 2021