The role of the CFO, is broad ranging, challenging and complex. Here are 6 areas an incoming CFO can really add value.
The Chief Financial Officer (CFO) fulfils a critical role within an organization, and especially so in startups and high growth environments. Far from being focused solely on accounting, today’s CFO has broad responsibilities and it can be difficult for newer founders to decide which areas CFOs should tackle first.
Here are 6 areas an incoming CFO can really add value in their first 30 days.
Managing & Forecasting Cashflow
- Understanding and managing cashflow is probably the highest financial priority for most startups. The CFO should quickly develop a detailed understanding of the business’ cashflows, and then go on to develop accurate, robust and timely cashflow forecasting looking forward for at least 12 months. The cashflow forecast should address;
- The sources, amounts and reliability of income
- Cash outgoings, divided between recurring and non-recurring expenditure
- Capital movements such as planned equity raisings
- Asset purchases and sales
- Significant one-off items such as loans, government grants and subsidies, capital purchases etc.
The cashflow forecast should be conservative and represent a realistic (rather than optimistic) outlook. A good cashflow forecast can then be used as the basis for planning future capital requirements.
Legal and Company Structure
The group structure of a business accommodates the ownership interests of stakeholders, asset and intellectual property ownership and business operations. Potential structures could include a Private company, an Unlisted Public company, a Trust, a Partnership or a combination of one or all of these.
The corporate structure has wide ranging implications in many areas including asset ownership, taxation, licensing, statutory compliance and capital raising – getting it wrong could have significant negative consequences and amending the structure in the future can be complex and costly.
A new CFO should critically review the structure of the business for its suitability, efficiency and ability to accommodate future needs, and re-align the structure as quickly as possible.
Statutory and Regulatory considerations
Hand in hand with the business structure are statutory and regulatory considerations – is the business regulated? Who is the regulator? What licenses are required? Does the business have a compliance process in place? Have there been any compliance breaches?
Regulation and licensing have become high profile topics and there is no doubt regulators are adopting a more prescriptive, literal approach.
The CFO should review your regulatory and compliance position, licensing and any open compliance issues. Compliance failures can have significant negative implications including bad PR should it be substantial.
- The Capital structure of a business is critically important in ensuring the interests of all stakeholders are properly reflected and protected, and new stakeholders (like a new investor for example) can be effectively accommodated. An incoming CFO should address questions like;
- Are there any restrictions on shares? Why?
- Are there any outstanding options?
- Are there different classes of shares? Why?
- Are there too many, or too few, shareholders?
- Are there any dominant shareholders?
- Is there a risk of loss of control for the Founders?
- Are Founder shares used or necessary?
An inappropriate capital structure can potentially inhibit the growth of a business, or possibly lead to ownership or control issues in the future.
Startups often have unique business models which pose questions about the most appropriate accounting treatment – in particular in the area of recognising and classifying revenues.
While accounting policy is not the interesting topic for founders, there have been several recent high-profile examples where inappropriate or overly ambitious accounting policies have led to substantial brand and reputation damage. Additionally, inappropriate revenue recognition may lead to investor scepticism, and can negatively affect the valuation of the business.
- Your CFO should critically review and evaluate the accounting policies used by the business, particularly in areas which are novel or possibly contentious, and consider;
- When is revenue actually earned / when are expenses actually incurred?
- Is all the revenue from a sale or service earned all at once? or over a period of time for example?
- Can the revenues be accurately measured?
- Are any expenses paid for by equity?
- Are there any circumstances where the revenue many not be fully earned? (e.g. a returns policy)
In novel accounting environments such as two-sided marketplaces or cryptocurrency-based businesses this is even more important.
Accounting systems & processes
- The accounting system is at the core of business operations and will likely be integrated with numerous other functions such as front-end sales capture, invoicing and revenue collection, payments, business intelligence, cashflow management and so on. It’s an essential feature of business infrastructure which cannot be overlooked.
- A few things to think about;
- Is your accounting system cloud-based?
- Does your accounting system address any unusual or complicated aspects of the business – for example multi-currency accounting, stock management, leases etc?
- Does your accounting system attract a strong ecosystem of complementary add-ons? E.g. business intelligence, point of sale, inventory, CRM.
- Will your accounting system support growth in volumes and users?
The role of the CFO, particularly in startups and high growth businesses, is broad ranging, challenging and complex. If your business’ finances require more expertise at the helm, contact the the seasoned team at Fullstack whom can help with outsourced CFO services.