Many start-ups or early stage business are often reluctant to hire specialist financial resource. This reluctance could hinder the successful development of the company. As you look to scale, a financial controller, who can help with things like financial planning, and developing internal controls can be the difference between success and failure.
In our experience as an investor, finance is often under-resourced within start-ups, with many relying on third-party, and often local bookkeepers. There may not necessarily be the need for a Senior Finance Director. However, there needs to be an acknowledgement of what finance skills the business lacks and how this gap can be bridged.
One of the most important things a financial controller can do is to manage the budgeting process. For companies, especially new ones, this can be a painful process. Founders want to get on with developing and selling their products. However, despite the pain, the budgeting process can add value to the strategic direction of the business and help set realistic plans for the future. In some cases, it can change the way companies think about their products when made to confront the bottom line and cash flow.
A proper Chief Financial Officer or financial controller can do more than handle the numbers. They often have expertise in areas like legal, HR, or operational matters like property leases and investor relations. They can take the pressure off a CEO, and others in the business to allow them to focus on their core jobs.
For a business that is looking to grow and attract more investment, the implications of not hiring someone can be more acute. Proper financial reporting, management accounting, and KPIs can help when seeking new funds. Businesses without the right historical financial information, or risk management and internal controls can struggle when sitting in front of an experienced investor. They want detailed information on what you are buying and selling, or to know that you have an agreed contract process, so people aren't making bad deals. They may want to understand who can raise a purchase order, create an invoice, or make a bank payment. This sort of information will give investors’ confidence that the business is well-run and worthy of funding.
Why the reluctance? In many cases, founders don't see the value a specialist finance person can bring. Entrepreneurs often haven't worked with a finance function. They believe they can handle the finances themselves. Start-ups can be protective of their culture, and are reluctant to bring in outsiders, or are too focused on development and sales, rather than the nuts and bolts of running a business. One other reason is the perceived cost.
Ultimately, businesses need to see that a finance person is not just about doing your accounts. It's about building a stable and sustainable business model. Good finance people challenge assumptions on the sales forecasts, making sure there is rigour in the process. A CFO can also help with marketing. Not to say whether the chosen approach is right or wrong but helping with the planning and reporting to make sure the money spent adds real value. They can make sure the business doesn't have too many suppliers and can help with the commercial terms. For example, they can determine whether extended commercial terms will put pressure on working capital. Or when selling, deciding whether the business is sacrificing margin for prompt payment.
When winning contracts or new investment, a finance person can add credibility to an organisation. If you want to win a contract with a big organisation or to get a new investor on board, they need confidence you have the money and plan to deliver on your promises. The ability to demonstrate financial stability and having a realistic business plan can be critical. A senior finance person brings credibility and shows you are punching above your weight. The right person says something about the company and its future.
Finding the right person is vital. A business needs to think about what they need now, and then in 18-24 months. If you hire someone senior, will the company grow into them, or too junior, will you quickly outgrow them? It's not unusual for an FD to resign after a few months. Managing expectations is key. When hunting, use your company network. Investors and NEDS will often know people, or you can use a specialist recruitment agency.
It is accepted that many start-ups fail, getting in the right financial resource, can reduce that risk considerably.