Dan Allred
Contributor
Dan Allred is Liquidity Group’s North America CEO. Allred is a fintech professional and spent two decades at Silicon Valley Bank (SVB), most recently as a Senior Market Manager and Head of the National Fintech practice. He is also a member of the board of directors for FS Vector and an adviser for Modern Treasury.
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When should you hire a CFO?
Startup founders wear a lot of hats. They have to build, they have to hire, and they have to inspire. They have to test, confirm, and pivot.
And they have to manage their finances.
When it comes to startup finances, things can get hairy quickly. But when is the right time to hire a CFO, and is a full-time CFO even necessary in this age of C-level-as-a-service?
I’ve worked with founders and chief financial officers for my entire career. The skill sets needed for each job are completely different, but their complementary personas can be exactly what drives a company forward. I also asked a few experienced financial operators and CEOs for advice on this crucial question.
Why do you need a CFO?
CFOs are responsible for managing cash flow, overseeing financial planning, and managing regulatory compliance. This ensures that the business has enough liquidity to support its operations and growth. They also play a vital role in financial planning, guiding the company’s strategic financial decisions and guaranteeing compliance with relevant regulations.
It is common for founders to think narrowly about accounting when considering whether to hire a CFO. Instead, they should think about the finance function more broadly. Sure, clean books and financial controls matter, but a true financial executive brings a lot more than just good housekeeping on that front. An experienced CFO is going to look at the business from the perspective of allocating resources and optimizing capital.
For instance, a good CFO will be able to plan for and secure different types of capital (i.e., loans, leases, etc.) and align cost to return, keeping the company’s more dilutive and expensive venture capital free for product development, team building, and market expansion. This, in turn, will drive even more ROI (return on investment).
Startup coach and CFO Evgeny Popov said that hiring a CFO was a no-brainer, akin to finding a CTO for your tech company.
“CFO is a crucial role for every business no matter how large it is, especially in the case of a tech startup aiming to expand,” he said. “Unfortunately, hiring a CFO is not an obvious move for founders because most founders come from the product or tech worlds and don’t see the CFO as vital to growth.”
They’re wrong, said Popov. He also recommends looking at CFO services before giving up equity to a dedicated C-level executive.
“I support the position that at an early stage, you can use a part-time CFO — but not an accountant. Later, when funding changes and operations change, the company absolutely must have a full-time CFO on board,” he said.
Do you need a full-time or fractional CFO?
Let’s get the biggest question out of the way first: Do you need a full-time or fractional CFO?
During my time working with venture-backed tech companies, I have seen the timeline for hiring a CFO shift later and later, partly because there are so many contract-based and outsourced CFOs in the market and partly because of increased efficiency in managing finance and accounting via tools from fintechs and services from other providers.
These tools are getting better, and with the addition of generative AI in the mix, you can get away without a CFO well into the Series A round. That said, every business is different, just as every fractional CFO is different. Finding the right fractional CFO who is capable, competent, and hardworking is surprisingly difficult. When you find the right one, however, it’s like striking gold. I recommend finding a freelance CFO and then offering them a full-time position when the time is right.
“Most companies that are still finding product-market fit don’t need a full-time CFO,” said the founder of Sudozi, Rose Punkunus. “That being said, you can get a good CFO who is part-time, but by the nature of only spending part of their time on the business, you won’t get the full value of that person.”
In other words, having a part-time CFO works until it doesn’t.
Should you hire a CFO before you raise?
“The moment you decide to raise or plan an IPO, you suddenly realize you need to fill out a lot of paperwork,” said Oleg Tsarev, VP of engineering for Truvity. “That’s where the dedicated CFO comes in.”
Remember that the time needed to prepare for a fundraising event is longer than you realize. CFOs are very good at putting themselves in the mindset of the bankers and investors who drive fundraising events. They know what “money people” want to see and how they want to see it. That said, professionalizing financials, pipelines, forecasts, projections, and pitch decks takes time, so err on the side of getting a CFO engaged early so they know your story and can start to make it their own before you need to do a fundraising roadshow.
“In addition to the paperwork, you quickly realize that you need a CFO to fix your finances, change your working processes, and maintain your budgeting procedures,” said Tsarev. “Without a CFO, there’s no way to IPO. Having a good CFO from the beginning will help you to be prepared for this future.”
When do you know that you can’t live without a CFO?
“Exactly when a company requires a CFO is dependent on several factors, including revenue size, growth rate, and complexity of the organization and its financial model,” said Ed Goldfinger, who runs a CFO coaching and consulting practice. “In the fast-growing tech world where I come from, you’re pushing it if you don’t have a CFO in place by about $15–20 million in revenue. Can you get by? Perhaps, but the money and equity you will save by delaying the hire of a CFO at this point will be far outweighed by the economic inefficiencies and risks you expose the business to by not establishing the decision frameworks, systems, operational controls, and measurement disciplines needed to scale effectively.”
Signs that indicate a need for a CFO in your startup include unmanageable finances, a lack of experienced business perspective, and a struggle to allocate investment funds effectively. Situations such as rapid revenue growth, budget increases, and high growth expectations also signal the need for a CFO. It is essential to hire a CFO based on annual revenue thresholds, budget increases, and growth expectations to ensure effective financial management.
In addition to the growth drivers discussed above, certain types of businesses demand CFO attention sooner rather than later. These tend to be businesses with either complex business models or those reliant on multiple sources and types of capital. Business model complexity often comes when a business is touching customer funds in some way — think marketplaces and other businesses where funds are flowing through your books and your company is taking a piece of that value as its revenue.
Processes and controls are important in these businesses, as is understanding how your company’s enterprise value derives from the gross transaction volume relative to the net revenue and other factors as well. As for multiple sources and types of capital, this often comes into play with fintech and asset-heavy tech businesses where debt and other forms of nondilutive financing make up a significant part of the capital stack.
Ask yourself a few essential questions to determine when to hire a CFO, such as the ability to work with future planning models, handle tax and other compliance issues, secure funding, and understand and explain financial statements. These considerations will help you assess whether your startup is ready for the expertise and guidance a CFO provides in managing finances, optimizing investments, and ensuring fiscal responsibility. If your startup is experiencing rapid growth, struggling with financial management, or facing complex investment decisions, it may be time to consider hiring a CFO to navigate these challenges effectively.
A good CEO needs a good CFO
It’s easy to focus on the functional value of the CFO, but they also bring lots of value as a teammate, especially to the CEO. Of course, the CFO is going to lead in areas like budgeting, planning, allocating financial resources, etc., but the CFO often plays a trusted adviser role to the CEO. It is a lonely job being a CEO, as many founders quickly learn. The CFO typically brings pattern recognition and an ROI-oriented perspective that most BOD members also have. On top of that, CFOs have been conditioned to keep conversations confidential because of the types of projects and initiatives for which they are responsible. All of this adds up to being the perfect sounding board for the CEO. Founders should keep this in mind as they consider when to hire a CFO, as they often get a lot more out of it than just the financial expertise.
“CEOs should be expansive in their thinking about the market opportunity and the company’s vision — they should allow themselves to dream about the possibilities,” said Goldfinger. “And they should have strong CFOs as strategic partners to help translate those visions into financially viable and valuable realities. The relationship between the CEO and CFO is, for this reason, absolutely critical. It needs to be built on a rock-solid foundation of trust and allow for healthy debate.”
For the most part, the fractional CFO solution is a great one but temporary. Just be honest with yourself about when you and your business need to bring on a CFO full-time. Consider it another successful milestone on the long and winding road to success.
