Why Start-Ups Should Invest In A CFO Right from the Beginning?

Start-ups are started on the blood and toil of founders, not to mention their life savings and goodwill with family, relatives, and friends. Only a few start-ups have recurring revenues that meet their operational expenses. The need for funding becomes acute as spends increase on continually improving the product/service offering and enhancement of customers sales and support infrastructure.

Start-ups must also grapple with changing regulatory environment, whether it’s stricter compliance and reporting, taxation rates adjustment, export / import issues, and even angel tax and their equivalent. These matters if not handled well lead to crippling financial liabilities. Additionally, when these are focussed by the founders, they dilute the mind-space critical for business acceleration and competitive advantage.

Our polling with early stage Start-ups showed that more than 95 percent of them depend on a combination of Chartered Accountant, in house accounts professional and ad hoc tax consultant combination to manage the regulatory, business compliance and taxation issues in a reactive mode.

This lack of vision from visionary start-up founders is a profound folly. They tend to invariably get blind-sided due to being reactive and are also not able to use financial management as a strategic operational and competitive advantage.

Meticulous attention needs to be invested right from inception to ensure that the financial performance is at the healthiest that it can be to deliver the essential business momentum and smoothness. A competent CFO who has the macro and micro understanding of start-up compulsions and government and economic forces thus becomes important right from the start.

The CFO ensures that all financial matrices are actually healthy with prevention is better than window dressing processes. S/he ensures that cash flow stay optimised, debtors and debtor days remain in control, contracts are safe and win-win, office space is taken with the right buy vs lease decision, director compensation is in line with standards, supplier, customers and employee agreement are litigation free, margins are maintained, projections are feasible and the list goes on.

The founders when freed from financial worries and bottlenecks are able to focus on business growth and customer retention. Their investments in product / service extensions are based on prudent financial projections with prioritisation of organisation resources to most revenue relevant improvements.

It also becomes possible to understand the most profitable customers / services. A good CFO ensures robust financial data analysis protocols which help in creating multiple insights. They also quickly flag red herrings and potential minefields thus ensuring survival and accelerated growth.

The CFO is also able to help Founders take tough decisions at crunch times. The current pandemic is significant example where nearly every organisation and start-up has had to tighten the belt. The CFO analysis with cost and revenue projections vs impact on customer retention and attraction was essential in taking the right decision at the right time. Deft management of debtors and creditors too has been the difference between closure and survival.

A good CFO brings to the table understanding of different government initiatives and financial support packages. S/he is best able to guide the organisation. Take the case of loan moratorium, the CFO would have guided the start-up on the business impact, the benefits, the accounting of interest on interest, the possible impact on credit rating, the trade-off vs the need of immediate survival. In addition, good financial practices and reporting from earlier would have ensure that the financial institutions have a respectful view of the start-up enabling lower interests to begin with followed by easier refinancing.

The advantage of healthy matrices becomes even more important when it comes to funding. VCs feel assured and also form a better impression of founders which helps in attracting more strategic investors with better valuation and terms. The three vectors of a) accounting for past performance and b) future projections and c) capability to manage challenges of scaled business holding the fate of funding and valuation success are better presented with a talented CFO.

It is thus smart business practice for start-ups to hire a CFO at the earliest. The right CFO will create a ROI that is multiple of the cost of talent. Today options exist for start-ups to work with outsourced / limited-time CFOs that help keep the cost to company low in the initial stage thus getting the best of both worlds – low upfront cost and high impact.