Fifty million new firms are started every year across the globe. By the five-year mark, half will no longer exist. It may come as no surprise that an abundant supply of capital is the major factor in longevity. Ample capital over time requires a sophisticated financial fluency to optimize cash flow, monitor and communicate financial performance, and manage risk. The financial fluency needed for the durability of your start-up comes from the right Chief Financial Officer (CFO).
Marie Epstein, Chief Accounting Officer at VMTurbo, has built a career providing financial guidance to high-growth start-ups. "I have seen start-ups fail because they did not have the right financial guidance," says Epstein. A common mistake is waiting to hire a CFO to guide the executive team on the creation and deployment of a financially successful business model.
Your CFO should be the BFF everyone on the executive team wants to have; the kind of BFF who will helps your business be the best version of itself. "A CFO is a key member of the enterprise executive team," says Epstein. "She should be working side by side with all functions of the business including sales, marketing, and operations."
Start-ups can get by with bookkeeping for small payrolls, AP/AR, and handing over financial statements and receipts to accountants during tax season. Knowing when you need to graduate from tactical accounting support to a CFO strategic hire is critical to the financial health of your business.
Epstein believes that a permanent full-time CFO is needed when all four criteria are met:
- Your have raised a significant round of capital or bank debt
- You are planning an acquisition
- You are expanding internationally
- Your revenue is growing quickly
Now that you have decided you need to hire a CFO, how do you chose the right person for your start-up? Not all CFOs are meant to be start-up executives. Epstein suggests you consider three criteria when deciding on the right CFO to join your executive team.
1. Strategic pragmatists outperforms thinkers or doers. Your business needs a financial strategy the will enable you to be part of the 50% of start-ups that succeed. "The best start-up CFOs are the ones who create a vision, strategy, and then roll their sleeves up and get to work," says Epstein.
2. Cultural fit beats out financial competence. You may luck out and find the most amazing financial mind in the business, and the person in whom that brain is contained may be beyond excited to set your start-up on the road to financial success. But, if you can't see that CFO fitting into the culture you are building, it's better to pass. As Peter Drucker said, culture eats strategy for breakfast. "Most entrepreneurs I've met are relentlessly upbeat and tend to be blind to potential pitfalls in their business model. Most CFOs I know tend to be natural skeptics and that dose of realism will occasionally bring you down to earth. If your communication styles clash, you cannot have a productive relationship," says Epstein.
3. Financial experience trumps industry expertise. Without question, your CFO candidate must have knowledge and experience with VC boards and how financing cycles work. While you shouldn't compromise on financial acumen, executive teams who discount potential CFOs due to lack of industry experience are missing out on a rich talent pool. Finance does not vary much from start-up to start-up. "In fact, a CFO from another industry may bring a fresh perspective to your business," says Epstein.