The current economic uncertainty has many businesses closely evaluating their current and future staffing needs. While some positions are being cut, especially in the immediately impacted sectors such as hospitality and travel sectors, many businesses are strategically hiring financial professionals into executive leadership positions during the downturn.
While finance might not be one of the most exciting parts of running your startup, it undoubtedly is integral to your startup’s success.
According to CB Insights, two of the top five reasons startups fail is because they lack significant financial expertise, i.e., they create products/services that have no market need and run out of cash.
Companies that previously had tasked their CEOs with handling finance functions are now hiring dedicated CFOs (or outsourcing CFO roles to reputable third parties) to ensure they will be able to weather the new economic storm.
With ambiguity over how long businesses will need to keep their offices and storefronts closed paired with unpredictability in the stock market, business owners and CEOs are feeling increased pressure to make critical strategic financial decisions for the health of their organizations.
That is why having a seasoned financial expert on your side is critical for startups. Broadly speaking, a finance leader will help you structure your costs, create better investment channels, chart out strategic roadmaps, and efficiently structure future deals.
As a startup founder, your challenges change constantly as the business evolves from the initial ideation stage to the subsequent rounds of institutional financing. Before we dive into the specific use cases of the finance function in a startup, let’s look at the two broad components of the finance function:
Accounting/Compliance
Financial accounting involves recording, summarizing, and reporting all your financial business transactions over a specific period of time. Financial accounting for startups depends on the size and stage of the business. For early-stage startups, accounting can be outsourced because of smaller volumes and a lack of in-house resources. Moreover, early-stage founders need to focus on creating a solid business, generating demand for the product/solution, talent acquisition, and more. On the other hand, mature startups need an in-house accountant and external auditors and reviewers to go over monthly accounts.
Strategic Finance
Management accounting is the strategic part of finance and is forward-looking. This is much more than just accounting and informs your overall business strategy. Strategic finance involves everything from product pricing to budget creation, cash flow forecasting, and performance management. While functions like payroll and audits can be outsourced to CAs, you need in-house expertise to navigate all other finance functions as your startup finds its feet. Cashflow management and strategic planning are important to ensure that you are on the right course and that your business is safe against unforeseen circumstances.
As you embark on your growth journey a reactive approach to financial management is not enough to identify risks and opportunities affecting your business. Also, as your business evolves, your accounting process must follow suit and you will need a partner with the right skills and expertise to correctly record, report, and plan while keeping and on the cash flow.
Here’s a look at some of the specific use cases of finance through a startup lifecycle:
Pre-Seed Investment
You must be able to track all your business transactions including receivables, payments, contracts, and the like. Interestingly, research suggests that nearly 80% of startups fail to progress beyond seed funding.
Series A to B
When preparing to raise your first round of funding, reporting becomes a key element on that investors base their business’ potential. Reporting in this sense involves both internal and external reporting for specific business areas (sales growth, cashflow projections, marketing KPIs, employee retention, etc.) and therefore you need to define your cost centers and establish basic controlling mechanisms. Annual forecasts would be especially beneficial.
Series C and Beyond
Considering you’ve progressed through the initial funding rounds, now, you need a strategic partner that will look beyond current operational needs and focus on what really sets you up for success – product/service pricing, M&A, international expansion, and market intelligence to name a few.
Most B-schools tell you that an accountant or controller is responsible for accounting and a CFO is responsible for finance, however, this academic thinking doesn’t apply to the world of startups.
You need a financial partner that brings crucial information to the table which will impact your company’s top and bottom lines while setting up a robust operations strategy. You will need someone who can help you find the right balance between processes, structures, and reporting in an agile environment that will enable you to scale rapidly and sustain growth.