When And Why Your Startup Needs A CFO

When And Why Your Startup Needs A CFO

This article is about the importance of having a CFO in your startup. It will help you determine when to hire a CFO.

A chief financial officer (CFO) is an individual in one of the executive positions whose role is to help the organization make and manage its financial decisions. They manage the business accounts, track cash inflow and outflow, and help the firm make future market projections. 

The CFO's role is almost similar to a treasurer's since they deal with all matters related to accounting and finance. Thus, they need to exhibit high integrity and diligence to ensure they present accurate financial analyses and reports. 

Many argue that a CFO isn't as important in a startup because the company isn't yet well-established in the market. Thus, they believe that a small financial team with the necessary skills is enough for such a company. But that may not be entirely true because getting a CFO while the company is still in its initial stages is better than waiting until you start experiencing problems. 

A chief financial officer helps your business develop a solid foundation through the choices they help your it makes. They can give your company a better financial perspective that'll help it optimize its activities thus, remain stable in the future. 

If you want to know when to outsource your CFO role and more reasons why your startup needs to have a CFO, read on!

When to hire a CFO

Since you may still be learning how to manage and run your business, here are some scenarios to help you determine if you need a CFO:

1. If you've started experiencing growth and making profit

Market experts recommend that the best time to outsource CFO services is when you've started getting profits. Hence, your firm's growth rate can serve as your guiding light. For your company to grow, there are specific strategies and tips that you need to employ. They include:

  • Doing thorough market research

  • Knowing customer needs, tastes, and preferences and giving them the exemplary customer service
  • Using advanced technology
  • Building networks with renowned brands
  • Providing a conducive work environment for your workers

Incorporating such strategies will help your company experience positive changes in the long run. Thus, you'll start attracting more customers and making more profit. When this happens, getting a professional to help you manage your business finances is essential. 

Otherwise, if you do it yourself, there's a high likelihood that you may fail to distinguish what amount belongs to the business and the amount that belongs to you. The reason is that a company's growth comes with many complexities, and without proper accounting, you may find yourself misallocating or mishandling funds. 

Also, when your business grows, it's essential that you add automation or technology to your systems for more efficiency. They translate to more capital to help finance your operations. A chief financial officer will help you by looking at the company's current financial position and determining whether you should go ahead with the plan or wait a little longer. 

Moreover, the CFO will ensure that you stick to the budget when planning to invest. They will manage all the revenue plus expenses to ensure you don't overestimate or underestimate the budget.

2. If you have many clients and complex transactions

Different businesses deal with distinct product lines and types. For instance, selling IT equipment can easily make a significant amount by dealing with a few clients. Hence, you can easily track the transactions made by your organization, and there's no need for a CFO. 

On the flip side, to make the same amount of profit as selling IT equipment when you're selling smaller items like hair accessories, you may have to sell as many products as possible. It means that you'll deal with many clients hence, multiple transactions. At this point, you must have a CFO to help you manage both cash inflows and outflows and ensure that the complex transactions are handled correctly. 

The professional will use their accounting and bookkeeping knowledge to record all the expenses incurred in producing and distributing the product plus the revenue from selling the products. Moreover, with proper record keeping from the CFO, you'll be able to trace the client who purchased the product plus the quantity. 

The Chief Financial Officer can advise you on a matter like issuing a receipt when the buyer has bought the goods. It's easy to forget who purchased a product in your shop, especially when dealing with many people. So, ideally, a receipt indicates that the transaction occurred and the product is from your shop. 

If they return the goods, you can quickly trace and ascertain that they purchased the product in your shop because they have evidence(receipt). Thus, you can replace the product rightfully while avoiding customer scammers.

3. If you want to merge with another company

It's possible that you may want to merge with another business to reduce risk and competition and also expand your market share. Thus, you may need a professional CFO to help you: 

  • Analyze the financial position of the company of your choice 
  • Interpret the data from the appraisal team reports for the time the company has been operating 
  • Outline a list of financial requirements that the concerned stakeholders must agree on before the start of the negotiations  
  • Get insight into some of the statutory guidelines you need to follow before merging with the other company  
  • Prepare questions to ask the other company during the merger process  
  • Evaluate inventory and equipment  
  • Project sales and budget

As long as you've involved a chief financial officer, they'll help you through the process, and you can close the deal seamlessly.

4. If you're struggling to adjust to the market changes 

The future is uncertain and unpredictable. With the shifting dynamics, new marketing trends, enhanced technology, and new leadership models, it's essential that you're flexible enough to readjust.   

A CFO will help your business adapt to these changes rapidly by helping you identify new markets and opportunities. Thus, you can quickly transform your products to fit the needs of your target customers.  

Also, the CFO will help you in forecasting your growth trajectory by analyzing your balance sheets, statement of financial position, and financial statements, and advise you on the following:  

  • Hiring plans 
  • Due diligence
  • The best investments to make
  • How to sell the new product 
  • The best financial management techniques 

They can help you achieve the goals that you have set as a startup and gain a competitive advantage over other businesses since you'll be well-informed.  

5. When you experience tax planning complications

Apart from disclosing accurate financial results, all companies, including startups, must comply with all tax policies and regulations. If your company's net worth has increased, there's a high likelihood that you'll face complicated tax regulations. The CFO can be of help to you in the following ways:

  • Explaining any changes in the law and advising you on the right decisions to make
  • Advising on any financial issues between the business, shareholders, and founders
  • Analyzing the benefits of investment and capitalization taxes
  • Improving the current tax positions
  • Ensuring timely reporting and filing of tax returns

You must hire a CFO to keep you up-to-date with all matters related to taxation. With them, you can avoid facing legal consequences or penalties for ignoring the significance of the above-mentioned things.

Other reasons why you need a CFO

Hiring CFO for start up

Apart from formulating financial strategies and the other factors explained above, here's why you need a CFO:

1. To assure your potential investors of credibility

Your potential investor wants to ascertain that their investment will be carefully taken care of. They support your vision and growth, but they need to know that you have professionals to help you achieve that vision. 

Therefore, having a CFO places you an upper hand in increasing the faith of potential investors and attracting more. They'll see that you're serious about growing your business and feel safer when investing in your business. 

Also, investors prefer working with reliable CFOs to give them an update on financial information regularly. Thus, as long as you have a competent and trustworthy chief financial officer, chances are high that you'll have long-term relations with your investors.

2. To help you scale-up your business

If you plan to enhance your business operations cost-effectively, then a CFO will help you achieve that. They'll advise you on the dos and don'ts of the whole process. Some of the things they might help you with include:

  • Developing a business map
  • Helping you create a definite purpose for the business
  • Giving you tips on how to reach and connect with your target market
  • Creating thoughtful operations and processes

That way, you'll achieve your goal of having a more distinctive brand.

Conclusion

As a startup, it's essential that you hire a CFO to help you start on the right note. You can outsource this professional when you've noticed immense growth, you're experiencing tax complications, and dealing with complicated transactions and customers.  

The CFO can help you develop better financial management strategies, advise you on ways to scale up your business, and guide you on statutory matters regarding your startup's financial obligations. That way, you'll be able to meet your objectives and stand out in this competitive market.



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Sam Makad is a business consultant. He helps small & medium enterprises to grow their businesses and overall ROI. You can follow Sam on Twitter, Facebook, and Linkedin.

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