You need to understand direct vs. indirect cash flow forecasting to make short and long-term business decisions. This article will show you how.
In our experience, the question of whether or not to hire a CFO for a startup founder is actually part of a larger problem that founders have with the finance aspect of their business: they don’t quite know what they don’t know about finance.
Of course, startup founders are typically not expected to be finance experts, but this knowledge gap can cause problems large and small. For example, we’ve seen:
Thinking to head off such problems, founders sometimes consider hiring a chief financial officer (CFO). And to be sure, there are times when a full-time CFO is essential. (More on this in the next section.) But they are also expensive. And it’s often much too early for new business owners to take that step.
There are actually a number of solutions that tend to be more effective than a full-time CFO. At Zeni, we specialize in helping our startup clients avoid the kinds of pitfalls we mentioned above without having to foot the bill for a CFO.
In this article, we’ll go over options for doing so—some traditional, and some, like Zeni, that are cutting edge. Specifically, we’ll explain:
There’s no magic formula for figuring out when; the moment arrives at different times and for different reasons depending on the arc of a startup’s development and financial planning.
Depending on the particulars of a company’s revenue stream, they might want to bring on a CFO when they reach $500,000 to $1 million in ARR. In other instances, the decision might arise from the need for a more finely-tuned long-term strategy: a plan for spinning off subsidiaries, or just elegantly, efficiently handling the complexities of a growing company.
Certainly, a company preparing to go public requires a full-time CFO—someone with broad, deep experience who will be responsible for certifying financials and meeting SEC and other reporting requirements. In most cases, if a startup is going to be acquired by a larger entity but plans to continue operating with some autonomy, they’ll need their own CFO, too.
In the early stages, before they have much in the way of payroll, production, or other overhead, startups can often get by without traditional financial infrastructure. But growing successfully and sustainably necessitates more buttoned-up finance processes.
There are a couple of key areas where this fact becomes painfully evident if founders neglect to get their financial ducks in a row.
In fundraising, founders are primarily selling themselves. Not just their product or service and vision, but their ability to run an enterprise. In particular, proving you have the chops to scale a company requires a founder to be able to answer a variety of complex financial questions:
Because such questions have little to do with brand or product development, founders often haven’t considered them. Not infrequently, they’re not even familiar with the relevant concepts or vocabulary. That can make questions like these rather difficult to answer.
That doesn’t mean they’re not destined for glory. It just means that where finance is concerned, they’re out of their depth. Members of our team at Zeni have sat in on countless pitch meetings at which brilliant founders have been hobbled by the simplest—and thus most glaring—of oversights, made due to financial naivete.
In one prominent example, a founder went into a fundraising meeting with salary forecasts that neglected to account for payroll taxes or benefits. He just didn’t realize that he had to think about those things—he didn’t know what he didn’t know. So in addition to skewing his cost projections and underestimating his company needs, his error caused the founder to look like an amateur in front of people he badly wanted to impress.
Betraying a lack of financial savvy won’t necessarily kill a founder’s chances of getting funding, but it’s not going to help. Venture capitalists want to be confident that the money they’re turning over is going to be used wisely and carefully. A founder who’s demonstrated their inexperience right off the bat is likely to give them pause. The result is often, at the very least, a reduced valuation for the startup.
As illustrated above, by the founder who didn’t account for payroll taxes and benefits, the growth of a startup involves financial complications that founders often aren’t even aware of. The early mistakes like this one tend to be accompanied by others. For example:
To many (relatively) new startup founders, these tasks can seem premature. And it’s true that for a while, founders can often get away with putting them off. But before long such incremental neglect will create internal chaos. And that chaos can scuttle opportunities for founders to reach some of their loftiest goals.
When a startup begins contemplating a corporate partnership, spinning off a subsidiary, or courting acquisition, their books are going to be subjected to one or more audits. Whether the books are examined internally or by reps from would-be partners or purchasers, any deferred financial maintenance is bound to come to light. If things look messy—if it appears that past financial statements need to be revised and reissued, if required documents aren’t where they’re supposed to be—pending deals and partnerships are often delayed or derailed. Valuations fall and acquisitions are called off. Evidence of noncompliance with tax and/or labor laws, in particular, can become especially problematic.
The prospect of such painful, costly, potentially business-ending headaches is enough to scare many startup founders into erring on the side of caution. But founders frequently go too far, becoming convinced that they need to hire a full-time CFO very early on—before they seek Series A financing, for example. As we discussed earlier, before a startup reaches the point where a full-time CFO is necessary, there are numerous more efficient alternatives worth exploring.
In the next section, we’ll provide an overview of what they are.
Below, we’ve outlined four traditional options for founders who need to fill gaps in their finance expertise. The best option for a given startup will depend on who else is on the team, what they bring to the table, and the company’s needs. In the following section, we’ll explain how, for certain startups, Zeni may be the most sensible choice of all.
Pros: A competent part-time accountant or bookkeeper will manage accounts payable and accounts receivable, and stay on top of the monthly closing of the books. They will also oversee payroll and employee expense reimbursements. With relatively low fees, billed hourly, a part-time accountant or bookkeeper is the most inexpensive accounting support option available to startups. So if money is especially tight, and needs fairly limited, this isn’t a bad option, at least in the short term. (If you want a deep dive on bookkeeping for startups, click here to check out our previous article all about the subject.)
Cons: The downside, as ever, is that you get what you pay for. Someone in this role generally isn’t going to have a very broad range of expertise. They’re unlikely to provide early alerts or financial insights. Their service tends to be on the slow side, and it’s often going to be difficult to get in touch with them over the weekend or after business hours. They often aren’t very tech-forward in their methods. And though founders might save money on a part-time bookkeeper or accountant, chances are they’ll also need to consult on a part-time basis with an advisory CFO and tax accountant—adding to total costs.
Pros: Though the expertise of the person (or people) who fills this role will vary, they should be qualified to provide at least limited, forward-looking financial insights. They’ll also be able to prepare financial reports and analyses and review the work done by whoever’s handling the startup’s basic bookkeeping and accounting needs. A good temp CFO should also have a solid network, facilitating introductions to VCs and potential partners. In some cases, they’ll participate in board meetings and presentations to investors.
Cons: But just as a founder who opts for a part-time bookkeeper or accountant will likely also need to enlist a part-time or temporary CFO, a startup with a part-time or temporary CFO will likely need to bring on someone at a lower level to handle basic bookkeeping and accounting. Temp/part-time CFOs do not come cheap, billing at high hourly rates, and their accessibility and speed of service tend to be middling, at best. Again, the people who fill these roles don’t often have a tech-forward approach.
Pros: The first full-time solution that we’ve discussed, a controller or head of finance (these titles may or may not have meaningful differences) will take care of everything that a part-time bookkeeper/accountant would. But they’ll also fulfill most if not all of the duties handled by a part-time or temp CFO, including financial reporting and analysis, as well as reconciliations. Without other clients to attend to, like other full-time employees, a controller/head of finance will offer speedy, (often) round-the-clock service—or else soon be seeking employment elsewhere.
The person who’s going to be suitable for this role will be fairly experienced, but their particular range of expertise will vary. So it’s ultimately up to the founder or whoever they’ve put in charge of hiring. The same goes for how tech-savvy they are, as well as how likely they’ll be to offer proactive alerts and insights. In the end, it’s a matter of preference.
Cons: A controller or head of finance is an expensive hire, necessitating a high, VP-level annual salary. But as we’ve outlined above, founders can get a lot of bang for their buck by making the right choice for this role. Nonetheless, a startup with someone in this role will probably still need someone else for bookkeeping, and tax accounting services.
Pros: For startups lacking in-house financial expertise, the finance firm is a one-stop-shop, providing all of the functions that we’ve already discussed in this section of our article, including tax accounting. In other words, by hiring a reputable finance firm, startup founders can save themselves the headaches associated with coordinating various employees, contractors, and services to cover their financial needs. Because such firms invariably have a deep bench, they also offer a broad range of expertise.
Cons: This all sounds good so far, but finance firms also have some notable drawbacks. For one, they can be expensive, with steep hourly billing rates—and unpredictable monthly costs. With many layers of management and extensive client lists, their service is often slow—and again, largely limited to standard business hours. They’re generally not particularly tech-forward. Nor do they excel at providing proactive industry alerts and insights.
Though they might work in a pinch, each of the traditional CFO alternatives we’ve talked about have some pretty obvious drawbacks. We started Zeni to create a service we wish we had when we were running our previous startups: a single solution for the different finance-related tasks a founder has to think about — including those that a CFO may do at a larger firm.
Startup founders using Zeni get everything they would from a finance firm:
To put it another way: until they’ve reached the point of requiring a full-time CFO, founders who opt for Zeni don’t need any other resources to manage their financial needs. They can use Zeni to get results that would otherwise be difficult to achieve without a full-time accounting team, controller, and/or CFO on staff—all for a relatively low monthly rate.
In particular, here are a few areas where Zeni can provide strategic or proactive help that are beyond what most bookkeepers can provide:
While the sort of part-time bookkeeper that most early-stage startups go with will reconcile the books every month, they’re not going to be able to help much with cash forecasting and financial reporting. These things can become extremely important when raising venture capital. Even if that part-time bookkeeper is willing to give them a shot, they’re unlikely to be the best bet for any founder who wants to be sure that the job gets done right.
At Zeni, on the other hand, cash forecasting and financial reporting for early-stage startups is part of our bread and butter; in fact, we have a data scientist on our finance team specifically for this reason. We’ve helped dozens of founders prepping for a first VC round with these tasks.
Similarly, part-time bookkeepers and accountants tend to offer service that is slow, limited, and at best, reactive—rather than proactive. Generally, they’ll review their client’s finances once a month, at month’s end, to reconcile the books. Then they’ll send an email attaching a spreadsheet that provides an overview of business performance that month, 2-3 weeks into the next month.
If the founder is lucky, that email might also contain a note about anything irregular or unusual they’ve noticed. But the vast majority of contract bookkeepers and accountants won’t bother to include such observations—or even think to make them—leaving analysis to the client.
Certainly, they’re not going to perform proactive analysis throughout the month—calculating that expenses in a given category are trending high, for example, or that burn rate seems to be spiking—and notifying the founder.
We’re not knocking part-time bookkeepers/accounts. This sort of thing is just not what they do. Until now, startups would typically need to have a full time controller or accounting team in order to expect such updates.
But those options tend to be very expensive, beyond the budget of many startups. With Zeni, even early-stage startups can get these kinds of financial alerts, ensuring that they don’t run out of cash—among the most common problems of young startups.
Temp CFOs and finance firms are useful resources for founders preparing for board meetings. But they’re pricey, and they can be tough to rely on in a time crunch. By spending 20 or 30 minutes with Zeni, founders can arm themselves with all of the data and financial analysis they need for comprehensive board meeting prep.
For starters, Zeni provides finger-tip access to all of a startup’s current financial data and historical financial reports via the Zeni Dashboard. This includes all past monthly reports (P&L, income statements, balance sheets) and real-time key indicators (operating expenses, revenues, cash balance, burn rate, runway and more). Ahead of the board meeting, founders can engage Zeni to generate waterfalls, adjusting their original forecast to reflect the actuals based facts on the ground.
For example, if in a given month their revenue is higher than expected, they can project how that’s likely to affect the rest of the year. (Just as importantly, if things aren’t quite going according to plan, that will show up in Zeni, too.)
Via Zeni’s dashboard, founders can quickly and easily view and understand material variances of their finances ahead of a board meeting. Because the dashboard displays transaction-level data across every account for any given business functions, founders can visualize spending by department, or by type of expense: sales and marketing, customer support, salaries, travel, rent, etc. Founders can even view fixed and variable costs separately. That way, they can see instantly what levers they can pull to reduce overhead or spur growth (salaries, sales and marketing), and areas where they might have less control (rent).
Companies who operate subsidiaries can break their data out by subsidiary and, when presenting to their board, provide a fine-grained picture of subsidiary performance, as well as how that performance fits into their company’s overall financial condition.
With Zeni and the Zeni Dashboard, board meeting prep and financial analysis goes from a weeks long number crunching exercise to a 30-minute review of the financial data readily available to founders 24/7.
At Zeni, we offer a team of finance experts working seamlessly with powerful artificial intelligence—both dedicated to managing every financial function for your business with speed and accuracy. We offer best-in-class service and pricing for monthly bookkeeping, accounting services, invoicing, and even annual taxes. Learn more and try Zeni today.
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