Building a Financial Function

Few startup founders come from a finance background (except perhaps fintech startups!), so building out the foundational financial function is often outside the founders’ comfort zone. Yet, building a robust financial function becomes essential as a startup grows, especially if it raises money. 

While competent businesspeople should all learn the basics about the primary financial elements of a business, for startup founders and leaders, developing business financial acumen is critical. As a founder and possibly fundraiser, you are ultimately responsible for ensuring that the company’s finances are correctly managed. The ability to knowledgeably discuss the financial aspects of the business with potential investors and the Board of Directors is critical for building credibility. Plus, knowing how the various elements of the business you are building fit together financially is imperative to making good business decisions.

Why Business Financials Are Important

To ultimately be sustainable, a business must be able to make money, which requires having a way of determining if it is indeed making a profit and being able to report its financial results to its owners, investors, and tax authorities. To do that, a business must establish systems and processes that track financial flows throughout the business, including generating financial reports such as income statements, balance sheets, and statements of cash flows, in addition to managerial accounting analyses and financial forecasts. These systems and processes may be pretty rudimentary at the earliest stages; however, as the company grows, the financial management demands grow increasingly sophisticated. Even when it comes time to add specialists, never forget that having an accounting firm or team does not absolve the startup’s leadership from reviewing the books, reports, and making critical financial decisions along the way. It is vital for a startup CEO to continue to grow their own skills in this area because, ultimately, the company’s executives are responsible for how the company operates, including what it reports as its financial results.

Building a Startup’s Financial Function As It Grows

Sometimes, at the earliest stages, when the business is pre-revenue and just a few people, it can make excellent sense for a founder with some finance background to take on the work of developing financial forecasts, paying the bills, and maintaining accounting records. Before long, one of a startup’s first investments in specialized staff is adding the support of a part-time bookkeeper or accountant.

For the founders taking that first step, it is important to understand that a bookkeeper’s role is limited primarily to keeping accurate records of a business’s financial transactions by ensuring they end up in the right buckets. In general, bookkeepers are not equipped to design the financial systems and determine what those right accounting buckets are for a new business, so it is essential to get someone with a higher skill set, such as an accountant, to set up the financial record-keeping system and to supervise the bookkeeper’s work as well as provide insight and analysis based on the accounting data. Often, accounting firms may offer a combination of skill levels as a service to enable early-stage companies to get the combination they need.

As I said, every startup founder/CEO needs to develop their foundational financial skills. However, even if that is an area of personal expertise, as the business grows, for both skill set and capacity reasons, the financial management of the business will demand the addition of specialized accounting and financial roles to the team. As the startup’s leadership approaches these limits, it is important to build out the financial function. That will mean thinking about the scope of a company’s financial function, developing plans for addressing the most urgent elements, and then growing these capabilities over time as the business grows. There are various ways to assemble a financial and accounting team for any given business. Part of building the right function over time depends on assessing the business’s particular requirements based on factors such as the scope of financial support required, the number of transactions that must be processed each period (for example, retail businesses will often have thousands of transactions while B2B businesses may have only a few), and the complexity of the company’s finances (revenue, fast growth, multi-currency all increase complexity).

As a place to start when thinking about what financial support any given startup needs, it helps to consider what is typically included in the scope of a company’s financial function. You then assess the volume of work and skill sets required to execute that work at each stage of a startup’s growth. All companies need to accurately track their financial transactions and analyze their implications (accounting) plus other financial functions such as budgeting, financial forecasting, banking, billing and collections, payments, financial investments, equipment leases, tax management and payments, payroll, insurance, audit management, and more. These responsibilities require specialized knowledge, such as expertise in finance and generally accepted accounting principles (GAAP), a set of account rules, standards, and procedures issued and frequently revised by the Financial Accounting Standards Board (FASB), that standardize the methods for recording financial transactions to help ensure consistent, accurate, transparent, and readily understandable financial statements.

The time to start hiring financial professionals to support your startup is when you find that:

• You have to spend too much time personally taking care of financing and accounting tasks
• Your highest, best use is in other parts of the business (like fundraising, building your product, or securing your first customers)
• Your business is starting to grow to the point that more capacity is needed to track those financial flows
• You have more complex finances or taxes.

Financial complexity typically increases significantly when a startup transitions from an R&D/product development stage where you only need to account for a limited set of expenses to securing customers and taking on the complexity of invoicing, collections, revenue recognition, and larger teams that go along with it.

To address this work, the startup will need to begin building a financial team, possibly on a part-time or consulting basis. In fact, it will be essential as a founder/startup CEO to demonstrate to potential investors that you have recruited the right financial skills onto your team. In a small company, your earliest financial professional hire will need to be able to be a jack/jill of all trades. As the company grows, it will have bigger and broader needs. It may help to think about what a scaled-up financial team looks like as you begin to take steps in that direction.

The highest and most strategic financial professional in a company is the Chief Financial Officer (CFO) or VP-Finance, who directs and oversees the full scope of the financial activities of a corporation, such as developing long-term growth strategies, directing the preparation of current financial reports and summaries, and creating forecasts. There is a bit of a connotation of big picture, outwardly focused strategic thinking to the CFO title. In contrast, the VP-Finance title implies more of an internal, day-to-day operations focus. A small company rarely needs both, but considering the differences might help you decide where to place your emphasis in hiring. Note that, when beginning to build your team, it is wise not to hand out the title of CFO/VP-Finance to someone who does not have relevant financial experience, as these role(s) may need to be filled at some point and you can undermine your credibility as a business-builder with potential investors by hiring an underqualified CFO/VP-Finance at the seed stage. It is possible to hire a fractional CFO or a controller initially.

A top financial leader will oversee a team that can include several roles, such as a controller who is generally in charge of the accounting function in a company and can supervise bookkeeper(s), accounts receivable/payable clerk(s), payroll specialist(s), tax preparer(s), and accountant(s) as well as financial analyst(s)/accountant(s) whose responsibilities will be more analysis orientated. Note that at the early stages of a company’s growth, some of these roles may be merged or outsourced, but over time, the volume of work will lead to greater specialization. In addition to the internal financial team, a startup often has an auditor (if their investors require audited financials) and tax preparer. These roles are typically filed by outside firms and overseen and supported by internal financial professionals.

Building a financial function is essential to building a successful startup. If this is your first time, perhaps my best advice is to tap into those who have built financial teams in a startup before for guidance and to make sure you invest in growing your core financial skills so that you can ask the right questions and oversee the business as a whole intelligently.

A few caveats and disclaimers

• Grant and government accounting often have specialized requirements that a startup will need to meet, so if you are planning to secure grant funding or engage in government contracts, make sure that you secure support from someone with expertise in these areas.

• While there are some exceptions, the financial functions of a business share many common characteristics across most businesses. However, some industries, like insurance, banking, etc., have special needs that I am not touching on in this blog. If you are pursuing building a business in one of these specialized industries, be sure to get help from those who understand your industry’s regulatory and financial nuances.