New startups don’t always hire a chief financial officer (CFO) right from day one. After all, CFOs can represent a major expense in the early days, and much of the early-stage financial tasks can usually be handled by a combination of accountants and bookkeepers from outside the organisation, if necessary.
But as an enterprise begins to scale and revenues grow, founders invite unnecessary and dangerous risk by not having a dedicated in-house or outsourced CFO.
From regulatory and compliance issues to cash-flow management and critical investment decisions, a CFO’s unique skill set will protect businesses from any number of risky financial pitfalls and lay the groundwork for future growth. And without CFO protection, companies risk sacrificing the opportunities to maximise value creation and enterprise value.
But what are the risks if you wait too long to hire a CFO, or do the unthinkable and not hire one at all? What advantages will you miss out on, and what are the consequences?
Strategic leadership
The most important risk founders and CEOs run by not hiring a CFO, is the absence of vital strategic input. One of the CFO’s principal roles is to help design and implement a company’s medium- and long-term strategy. After all, the way the role of CFO has evolved beyond transactional processing and financial analysis into that of a key strategic player has huge implications for a startup’s ultimate success and enterprise value. Looking that particular gift horse in the mouth isn’t really an option.
If founders don’t establish the correct strategic direction through experienced CFO input, a company’s profits, investments and savings are at risk. Indeed, as one industry insider puts it, “the CFO is an investment in the protection and maximisation of company profits and savings”. And conversely, the absence of a CFO exposes profits and savings to quick erosion.
Financial-management systems
One of the biggest pitfalls for founders waiting too long to hire a CFO, or choosing not to hire a CFO at all, is to overlook the critical need for comprehensive financial-management systems. And whilst investors and VCs will almost certainly insist on these and interrogate them on a regular basis, going it alone without the 360-degree visibility needed to measure, plan and correct everyday financial decisions invites disaster.
This is why financial-management systems, from startups and SMEs to corporations, are widely accepted as best practice. These include a weekly key performance indicator (KPI) review, monthly forecasting and financial-statement analysis, monthly variance analysis and annual budgeting.
Financial-management metrics like these serve as sensitive financial radar systems that can give CFOs and CEOs an early heads up on potential trouble ahead. As such, they can help avert problems further down the road before they arise and escalate. Keeping cash flow, expense ratios and profit margins under constant and reliable review, allows the business to pick up, improve or mitigate any issues.
And in what amounts to an avoidable act of unnecessary self-sabotage, businesses that don’t engage a CFO to produce a detailed annual budget will end up muddling through dynamic economic conditions totally blind. At least, that is, until it’s too late.
Cash flow and growth
Among their growing list of responsibilities, the role of optimising cash flow calls for the kind of expertise that’s usually only found in a CFO. Enterprise growth relies not just on increasing net margins and growing revenues, but also on streamlining cash flow. Alongside their growing responsibility for securing investment funding, CFOs decide how and where to allocate capital, and it’s that specialist expertise in optimising cash-flow management that can drive growth in the enterprise. And it’s almost unheard of for any other discipline within a startup to have that kind of expertise.
A second-in-command
It’s often said that CFOs should be prepared to present the unvarnished truth to CEOs, the board and investors. Understanding and communicating risk and opportunity falls within the CFO’s remit, and added responsibilities like this demonstrate the rapid evolution of their role, from financial gatekeeper to, in essence, a deputy CEO.
And the term ‘second in command’ is no exaggeration; the strategic input and performance management now expected from a CFO, means that successful CEOs will now share high-level responsibilities with trusted CFOs. In fact, enterprise success itself often depends on the corresponding success of a CFO/CEO relationship based on mutual trust.
Debt management
Financing enterprise growth or product development through debt is not uncommon, and if managed correctly, this approach can often be a more cost effective and efficient way to grow an enterprise. But taking on excessive debt with no input from a financial professional will leave business owners exposed to uncontrollable influences such as rising interest rates, unsuitable debt terms and escalating repayment obligations. Leaving a business exposed and vulnerable to unpredictable debt-servicing costs and obligations is major pitfall when it comes to accumulating excessive debt without CFO oversight.
Financial expertise & collective financial literacy
If the finance team – presuming entrepreneurs will recognise the inherent value in hiring one – is fully on board with a company’s strategic direction and financial goals, they’ll be much more financially savvy when it comes to making financial decisions. Not only does that reduce the chance of errors, it positions the team to make a more valuable contribution to enterprise success. And that collective financial literacy among the finance team will ultimately make a CFO’s job much easier.
Fraud and cybersecurity
Given their evolving strategic role, CFOs are becoming increasingly responsible for protection against fraud and cybercrime. And that’s not surprising – the consequences of theft, embezzlement or fines from regulatory authorities after data breaches, are mainly financial.
It all boils down to a CFO’s ability and responsibility to identify, remove or mitigate risk – and cybercrime represents one of the biggest single risks faced by modern-day enterprises. In fact, according to CyberSecurity Ventures, which produces the annual Cybersecurity Almanac, global losses this year from cybercrime alone will amount to an eye-watering USD 9.5 trillion. Yes, trillion. “If it were measured as a country”, says Cybercrime Magazine, “then cybercrime…would be the world’s third-largest economy after the US and China”.
And that’s before you account for the inevitable damage to investor confidence, client trust and company brand.
Your eyes and ears: CFO protection from risk you can’t see
Hiring a CFO isn’t simply a box-ticking exercise. The hiring process is quite possibly one of the most important things a founder will ever undertake, and entrepreneurs should view that decision with the same considered perspective as they would their long-term business strategy.
Getting it right is crucial to the success of your business; a poor hire can turn profit into loss and runaway profits into mediocre returns.
Can your business afford to run that risk?
