By SHELAGH BRALEY
BOSTON—Understanding a company’s financials often translates into success or total failure. And the one person who can bridge the gap between an entrepreneur and that knowledge is a CFO.
Do you have one?
Here are the top three triggers for when and why you need a CFO, even part time, according to the experts:
You want to raise funds
Financial knowledge makes investors comfortable. According to Ciaran Hynes of Cosimo Venture Partners, having a well-conceived financial plan is a requirement for any company looking for investment. “One of your first hires should be a CFO,” Hynes said.
“Even in small companies, (finances) can run away from you quickly. Most companies we deal with are in seed and series A, and you can tell right away which ones have CFOs. You need to know your finances. The companies that have that information and can access it quickly, the difference tends to be a CFO that has put in the time.”
Hynes—a proven entrepreneur himself whose firm goes beyond venture by also providing operational and strategic support to growth companies—says it’s all about economics.
A founder sitting down with potential investors is expected to deliver all the details of the company’s finances both present and future—otherwise, there’s no hope for funding. “An entrepreneur must be able to deliver all that investors want to understand about the unit economics of the business. It’s the basic: You’re buying for X, you’re selling for Y, what’s the user acquisition cost, what’s the lifetime customer value, what’s the next stage? I think that’s just a priority, being able to answer those questions, and well, if they’re not there, maybe they don’t have a business.”
The value of a CFO at the table quickly surfaces when you’re engaging investors, agreed Bob Croak, a CPA and tax principal with Baker Newman Noyes.
Though a CEO may be passionate about the product or service, and investors will want to understand the science, “They will still look to the CFO and ask, ‘How are you going to scale this so I get my money back?’
“VCs, angels, they’re not into it to lose,” Croak said.
“That’s the difference, it’s confidence,” he said. “Talking to VCs, they’re like analysts, they will eat your lunch. When a bank walks in and they see a CFO, they feel a lot better that they’re going to get their money back, rather than Janie or Johnny being the CFO and they go, ‘Who’s going to provide me with my comfort level?’ ”
Providing tax expertise to companies for 20 years, Croak has seen some questionable—and downright sad—negotiations without a seasoned financial pro on board.
“Sometimes you’ll see a CEO give away the company, because they’re so focused on the science, because they just want the money to keep the company going.”
But bring a CFO into the conversation, and the dynamic changes quickly. “The CFO will go, ‘You’re looking for how much? And you’re valuing how?’ A CFO gets it and can play poker, and normally they don’t blink,” Croak said.
Investors are always looking for the exceptional, and having a CFO working on your behalf is a differentiator of quality. “One of the things (having a CFO on board) shows us is that we’re working with an excellent company. We’re talking about: One, they’ve got their unit economics down, and two, they’ve thought through their finances for growth. That’s two of the top four things we look for,” Hynes said.
You’re facing the due diligence process
Due diligence—the stress-filled, paperwork-heavy wringer through which companies go before transactions take place—belongs firmly in the hands of an experienced CFO, according to Croak.
“You will need a CFO at the time of transaction, where you have to go through due diligence. The CFO will get you ready: He has that experience, having gone through it before and will be able to identify the pitfalls that can affect, say, purchase price. The seller wants a higher price, the buyer wants lower. With a CFO in there, you get a better presentation. Partly, you need that executive presence.
“One company I worked with, they sold to Sony, who just wanted the company. But (the seller) might have gotten a better price with a CFO in there. There’s a lot of value there,” Croak said.
You’re scaling quickly
Growing fast is a good problem to have, but those waters can become precarious, risking profitability without a strong financial rudder. “In some cases, I’ve had clients where they truly need that CFO, that strategic person,” Croak said.
“(The CFO) is not a bookkeeper, he’s not a controller, he’s helping you go to a $20M company. If you’re a $3M business, and you want to get there, you need to look to that strategic thinker.”
Jeffrey Rosen, president of Corona Environmental Consulting, has just brought on The CFO Center in Boston to help handle finances. Corona focuses on water vulnerabilities and has a number of high-profile projects—including helping to solve the January 2014 Elk River chemical spill that left more than 300,000 West Virginians without potable water and the August 2014 emergence of a deadly brain-eating amoeba discovered in Louisiana’s water supply, among others.
Corona began small just two years ago—but now, as Rosen and his partner translate their expertise into software, their growth is exponential.
“We are developing cloud software supporting water vulnerabilities that’s got some amazing potential for growth, and we’ve had a lot of interest in it,” Rosen said. “There are real threats to our drinking water supplies. We are trying to identify those threats, and understand the natures of chemicals. We are building that system as we grow.”
While Rosen and his team are happy to grow, they struggle with the financial aspects of the business. “We’ll at least double in size in the next six months, bringing on more staff. We’re realizing the whole dream of hiring and growing—but once you hire, you have to pay salaries, benefits, taxes, every two weeks, and you don’t see the first dollar from their labor till month 3.
“We just got to the point where we realized we needed help. We also need expertise and bandwidth. We’re scientists, we’re not financial people. We needed to find someone who could keep us moving,” Rosen said.
Having a go-to financial expert helps service providers do their jobs more efficiently, too, which saves even more time and money. “When I talk to a CFO about tax, they have enough financial knowledge, they’ll grasp it very quickly. When you’re dealing with a founder or CEO and they have no background, it’s a challenge to let them know why you have to do certain processes or elections for tax. If the CFO knows it, it helps ease the subcontractor to get the job done, instead of looking back trying to fix problems,” Croak said.
Can’t afford a full-time CFO? Then try part time
Hiring a full-time CFO can cost upward of $400,000, plus potential equity in your company, Croak cautioned, especially to engage CFOs with proven success records.
“It’s very interesting: CFOs’ experiences are worth a lot of money because they’ve seen more than the average controller. CFOs more often than not, they think strategically and operationally—it’s got huge value.”
“If you go with a consulting CFO, part time, they’re going to take care of business without wasting any time. When you’re in a startup, sometimes that’s all you need. My firm, a CPA firm—I don’t know everything about tax, but I know enough people in my firm that I can ask and someone will know the answer. The CFO Centre has all the same experts behind (the principal),” he said. “Why not leverage a whole group?”
When should you go for it?
The decision to bring in a CFO is a defining moment for any company. You reach a certain level of traction, and need better control over your maturing process. A CFO can keep your financial picture on track while you focus on growth. They also assess your existing financial picture and identify potential problems, Croak said.
“A good CFO, they just look at financial documents and know if something is wrong, they just know.”
“It’s easy to bring in someone like me (a CPA). (Companies) need to get their tax returns done. They say, ‘I need someone who’s going to keep me out of jail when I sign my tax returns,’ ” said Croak. “When they hire a CFO, they say ‘I’m going to make the investment, I don’t need ponies anymore, I need horses.’ ”
Even having a part-time CFO works for investors, Hynes added. “The ability to not burden the company with a massive cost, that’s a huge advantage.”