When is the right time to bring on a fractional CFO or when does it make sense to hire a Financial Controller or when is it appropriate to use an outsourced resource versus bringing someone in house? This is a crucial question for scaling businesses. Getting it right can be the difference between success and stagnation but the reality is also that there is no one size fits all answer to this, it depends on the nature of your business, its size and the sort of transactional and strategic complexity you have to deal with.
Here, Aarish Shah, Founder of EmergeOne, provides a rough blueprint as to what things you will want to consider at various inflection points and the sort of resource that you might bring on as you grow.
The Evolution of Finance Needs
As your startup grows, your finance needs will evolve. Understanding these changing requirements is key to allocating resources effectively.
PRE SEED
You may have raised a small amount of funding to explore your idea, build out some technology and start testing the market appetite for your product or service.
At this stage of your business, you can get away with a pretty basic setup for your finances, using a SaaS system like Xero or Sage and either doing the bookkeeping yourself or outsourcing it all to a small accounting firm that can handle all the various aspects of your business from VAT to tax from bookkeeping to submission of your annual statutory accounts.
I would always recommend the latter over doing it yourself – unless you have a background in accounting or finance – as at this early a stage, your focus should be on figuring out how to get your product or service into the hands of potential customers rather than figuring out how double entry bookkeeping works.
Oftentimes, when a founder without experience decides to take on the work at this stage, it just leads to them having to spend additional time and money down the track to clean up the books – not only that, but making sure you’re handling payroll, VAT and taxes in the right way can be incredibly difficult and making mistakes can be very costly, so go to a professional and get the basic support in place early on.
SEED STAGE
By the time you get to Seed and have raised your first substantial amount of capital, as mentioned above, you will either have a situation where founders have been handling finances themselves or have outsourced basic bookkeeping.
This takes care of the basics, but you’re now in a place where you are beginning to transition from a pure startup into a more established business and some of the focus necessarily shifts.
With institutional investors on board, you need to be have a much better handle on cash management and to start establishing fundamental financial processes.
This is often the stage at which you would bring on a fractional CFO. Someone that provides the experience you need without having to hire in someone full time with all the expense that that might entail.
A good fractional CFO, like the team at EmergeOne, will help you put the foundations in place and start working on the processes, systems and projects that will start to become more critical from here on in.
This might include things like financial modeling and forecasting, budgeting, cash flow management, management, board and investor reporting, employee share schemes, controls over employee expenses and other critical areas that sit outside of the services that a traditional accountant might provide.
Whilst most companies will keep the bookkeeping outsourced at this earlier stage, if your business is transaction heavy (for example an eCommerce business that buys products from multiple suppliers and sells through multiple channels in different geographies), it might be appropriate to have someone internal in the business doing the bookkeeping in a more focussed and real time manner than an outsourced accountant might do.
This is also the time at which you might start using other systems that plug into your financials to manage things like employee expenses, payroll, inventory, purchase orders and other aspects of your finance operations.
SERIES A & BEYOND
As you secure more funding and scale operations, your finance function needs to mature rapidly. This is when you’ll need to consider building out a more robust finance team especially in your finance operations team.
At Series A you can normally still take care of the more strategic aspects of finance with a fractional CFO, however by the time you reach Series B, you will almost certainly want to consider bringing in someone full time given the amount of capital you will have raised and the volume of revenue you should have going through the business by now.
Let’s break down the requirements further:
Key Elements of a Finance Department
Finance Operations
This forms the backbone of your finance function. It includes:
- Bookkeeping and accounting
- Payroll management
- Accounts payable and receivable
- Financial reporting
Finance operations ensure day-to-day financial activities run smoothly and provide the data necessary for strategic decision-making.
Without a good finance operations team, you will not have the basic ‘hygiene’ in place that allow you to confidently scale the business.
At whatever stage you are operating, it is always critical to make sure that the basics are in place.
Strategic Finance
As your company grows, you’ll need to focus more on:
- Financial planning and analysis (FP&A)
- Budgeting and forecasting
- Investor relations
- Capital raising
Strategic finance helps guide the company’s future, informing critical decisions about growth, investment, and resource allocation.
This might require a CFO, management accountants, treasury managers or others depending on the specific nature of your operations and what matters are critical at any given point in time.
Resourcing Your Finance Department
Early Stage: Fractional Support
In the early stages, as I have mentioned, you should consider leveraging fractional CFO support. This allows you to access high-level strategic expertise without the full-time cost. A fractional CFO can help with:
Preparing for fundraising
Setting up financial systems
Creating financial models
Growth Stage: Building the Team
As you scale, you’ll need to build out your in-house finance team. This might include:
- Fractional CFO
- Management accountants
- Financial analysts
- Accountants
- Treasury specialists
Again, the exact composition will depend on your business model and growth trajectory.
Scaling Stage: Specialization
At this point, you may need to introduce more specialized roles such as:
Data and automation experts
Tax specialists
Internal auditors
Financial systems managers
Timing Your Finance Hires
Knowing when to bring in different finance resources is crucial but sadly there is no hard and fast rule when you should bring on different types of resource. Here are some key inflection points that are worth considering as you start to build out your team:
Opening a funding round: Bringing in strategic finance support to build out your model, deck, and data room is valuable – especially from Seed onwards.
Closing a round: Post-funding, you’ll need help managing investor relations and setting up robust financial processes, this is also a great time to engage with fractional legal resource to ensure that you’re not caught off guard by any of the terms investors might be asking for.
Reaching product/market fit: As you prepare to scale, you’ll need finance support to understand resource allocation and cash needs, and potentially more robust finance operations support than can be given by an outsourced accountant or equivalent provider.
International expansion: When expanding globally, you’ll need expertise in international compliance, tax planning, and governance. It is likely that you’ll need to expand the sort of external accountants you work with as each jurisdiction will have different requirements. It is easy to assume you’ll be able to work your way through, but in my experience this is a sure fire way to spend more money cleaning up than it would have cost to get it right in the first place.
Preparing for exit: Whether it’s M&A or IPO, you’ll need sophisticated finance support to navigate the process. There are CFOs that have specialized experience in exit activity and who will be able to help you ensure that the right elements are in place to get to the outcomes you are looking for.
Conclusion
Resourcing your finance department is not a one-size-fits-all process by any means. It requires careful consideration of your company’s stage, growth trajectory, and specific needs.
By understanding the different elements of finance and timing your hires strategically, you can build a finance function that not only supports your current operations but also fuels your future growth.
Remember, finance should be a catalyst for growth, not a blocker. With the right resources in place at the right time, your finance department can be a powerful driver of your company’s success.
Aarish Shah is the founder of EmergeOne, a consultancy providing fractional CFO support to venture backed tech startups from Seed to Series B. He is also the host of Nothing Ventured, a podcast featuring the people behind the stories that drive the venture ecosystem – check it out!
