Outsourced CFO: Taking a Startup to the Next Level

posted in: General

There is a point in the life of every successful startup, when the business requires strategic finance to grow and to run successfully, a time when accounting alone can’t be used to make impactful decisions. This is easy to understand if you imagine an airplane: at low altitudes and with clear conditions, pilots can easily navigate visually. But when the plane goes to higher altitudes and the conditions get more complex, more sophisticated instrumentation, and a pilot who can make sense of it all, is the only way to fly safely. A startup begins flying low, and basic accounting is easy for a CEO to understand and use to make decisions. As the company grows, everything gets more complex, and financial ‘instrumentation,’ in the form of modeling or forecasting for instance, handled by a finance expert, is required to grow with confidence. This is a good time to bring in an outsourced CFO.

Earlier this year I started working with a well-funded seed-stage startup that was in the middle of a pivot. Their business was changing and the data needed to manage it was changing as well.  In the past accounting had been looked at primarily as a way to manage cash burn rate and that was enough. After reviewing their business financials it was clear that strategic finance was needed, supported by sound accounting.

From accurate numbers to a metrics-driven organization

Together with the CEO, we decided to create a finance plan and get on a cadence to review the numbers each month and make sound decisions based on what these numbers told us. This included looking at actuals vs the operating plan, learning from variances and trends, and comparing actuals to update the rolling forecast for the rest of year and next 12 months. This was a plan for cash management purposes to ensure the company could run smoothly, and for making strategic decisions on big expenditures and the impact of actual revenues not budgeted. Over time, this plan will take us from accurate numbers and cash management to a practice of being strategic and metrics-driven.

The CFO Plan 

This is the plan we put in place to graduate the business to the next level. This is also the plan I use with many startup clients when they have reached the same juncture with their business. 

Phase 1

Steps to get to timely and accurate accounting to build a foundation of quality data for further analysis.

  1. Conduct a major clean-up of the current accounting reports. Put in place processes to make the data more usable and consistent with the way the business is evolving.
  2. Make sure the chart of accounts is consistent with how we want to manage and track the business for operations and investors. For example, we need to be able to solve questions like: If we have more than one product, can we calculate a gross margin for each?
  3. Review business and accounting processes to make sure expenses and revenue are recorded in the right place.  
    1. It is often the case that the accountant does not not have sufficient access and exposure to the details behind all the revenue and expenses to improve the quality of the data.  This can easily be addressed by more exposure to all expenses (for example through the use of software such as Bill.com & Expensify). Admin access to these third-party accounts will let us update the charts of accounts and make it easier to assign COGS by product line.
    2. COGS need to be assigned to each product, not just allocated in the financial model.  We typically use QB Classes to accomplish this.  
  4. Make sure accrual accounting is really happening  and not just being done for revenue. It is critical to align revenue and expenses to get an accurate picture of the business. 
  5. Make sure all the third-party systems are integrated properly into Quickbooks.  Third-party products (like Bill.com and Expensify) make accounting more efficient, but if not implemented properly they can obscure data. 
  6. Do a quick review of all major vendors to make sure the expenses are going into the right accounts.

Phase 2

Introduce an annual operating plan / budget and start a rolling forecast for cash management. 

  1. At monthly closes the CFO needs to compare actuals to budget.  It is important to learn from variances and trends and what was not planned for along with what changed.  
  2. The next step in this process is to review actuals and look forward to update the rolling forecast for the rest of the year and next 12 months (primarily for cash management purposes, but also for making strategic decisions on big expenditures and the impact of actual revenues not budgeted). 
  3. Review Gross Margin by product line each month. 
  4. This monthly review starts with the Executive Team, but could eventually include individual departments (as they mature and have their own budgets and accountabilities).

Phase 3

Decide on financial and operational metrics that drive the business (plus investor KPIs when relevant)

  1. Introduce a monthly dashboard of metrics with actual data
  2. Now develop a financial model based on a one or two key variables that drives the business in each key area (Revenue, Hiring Plan, Discretionary Expenses, Capacity Planning and build in Sanity Checks!) 
  3. The model needs to be usable, relevant (the way to really do business), and simple enough for VCs

Phase 4 – Going Forward with Strategic Finance 

Support strategic planning and decision making with strong financial and operational data.

Once a company has accurate historical data and are better at forecasting revenue and expenses it is easier to make decisions based on real data vs intuition. This is where success lies. Learn more about outsourced CFOs at our homepage here.