Finance teams in a startup
As a general rule, people who build a career in finance and accounting are more conservative and like structure. After all, the function is driven by monthly routines and following rules. Building a finance team that wants to work in the context of a highly uncertain and often chaotic environment can be difficult. The simplest way to solve this problem is to hire people who’ve worked for a startup before and want to do it again. You select for people biased toward building rather than optimizing and running. Be brutal on finding this kind of experience - it will make all the difference in the team to have even one leader who’s been through the ups and downs of building.
The other option is to hire more inexperienced people who have the motivation and capacity to work in a startup environment. I’ve generally found this to be more successful than hiring people who have worked many years in a big (or slow) company and believe they’d like to try a startup. The cost is that inexperienced people will make mistakes since they lack experience.
As soon as you can afford to, make sure you have a right hand, “swiss army knife” person on your team. Someone with the job description to do whatever is needed to support the CFO. Don’t try to trick someone into thinking the role and tasks will be clear as it will just lead to disappointment or adverse selection. And when you have this person, don’t take advantage of him or her. Make sure they are learning a ton and exposed to almost everything you are exposed to.
Control and support
There are two functions of finance - support the organization with data and processes (and in some cases much more) and police the organization on control/rules and cash. If you do one without the other, you will be ineffective. For example, if you are only perceived as the police, most people will try to avoid your team. On the other hand, cleaning up control issues is always a pain, so it is best to have a bias to start early. Symbolism is important here as well. People learn to be aware of control issues by seeing you do it in practice.
Some specific examples on where early control is valuable:
From as early as possible, know where every single contract is stored. One way to make this easier is to insist that only the CEO can sign. Get thoughtful tax and transfer pricing advice early when you go global - this is really hard and expensive to clean up. In accounting, also be prepared to take some pain early as it will save you later. Take the more conservative approach to revenue recognition as an example. It is always hard to change later to make the numbers look “worse”. If you see something that could be treated more conservatively when you join, consider changing sooner rather than later.
The whole organization should understand that finance has a dual role to avoid conflicts and confusion.
A time for everything
The above said, you can invest too early in defining and perfecting processes. Often, your first view of how a process should work is wrong as you might still be iterating on customer acquisition, pricing models, or product. You don’t necessarily know the processes that the business will need as it scales. Corollary: be careful of adopting software that forces process too early, unless it is in an area that is likely to be reasonably stable (e.g., accounting rules or sales tax rules). Use spreadsheets until you know more.
At the same time, at some point you must clear process/spreadsheet debt. Implement quarterly meetings with the finance team to discuss and prioritize process debt. Be clear that you must have some access to IT/tech resources to solve these challenges. Clearing this process debt will be much easier if you’ve made the effort to document even manual processes. Thirty minutes of documentation usually has a huge ROI on time spent later to either automate something or transfer ownership. I’ve always wished I was more ruthless on forcing process documentation.
Certain people in the finance team will want to automate as soon as a new process starts, while others will be happy maintaining manual and risky processes for way too long. Understand their biases and create a shared framework so you can make the right judgments about what to automate.
Accounting rules don’t make sense
Many accounting rules won’t make sense for your business. Don’t always trust your auditor or accountant - they are often making interpretations that are based on their specific experiences. Sometimes you need to go to the source by reading the accounting rules and developing your own view. However, sometimes you need to accept that accounting numbers aren’t well suited for the things that matter for your business. Keep accounting numbers and performance management numbers separate (but of course you must understand how they relate). As seen in the public markets, investors increasingly look for data not reflected in US GAAP or IFRS, as they understand these numbers are just a small, and sometimes misleading, part of the picture.
Always track cash and understand where it goes
This goes without saying but is worth a reminder. Even when you have lots in the bank (a likely situation for a new CFO), knowing where cash is coming in and going out is critical. Don’t be afraid to invest, but understand where you are spending and why. If everyone has some basic understanding of where cash goes, it also affects behavior in a positive way. People start to look for opportunities to improve cash flow without having to ask. With respect to cash, it is best to build an “adult” organization. This means that people understand the principles of frugality and try to do what is right, rather than just following a set of budgets and rules as if in kindergarten. In general, once people are treated like children, they are more likely to act that way.
More resources often slows you down
This is particularly true when you are working on something relatively new or not yet figured out, like a new product extension or go-to-market strategy. New people take time to train. They take time to adapt to the culture. More people also means more lines of communication. All this takes away time from solving the problem that needs solving. New people should be added in an overwhelmingly cautious fashion. Being resource constrained is a gift in terms of focus. At the same time, adding the right resource in the right area can unleash tremendous value. The CFO should have a point of view on where people bottlenecks do NOT exist. Everyone else will have a point of view on where they do.
Your effectiveness is driven by software
Financial information is just a transformation of business activity into digital data. A customer buying a one year software plan translates into a set of numbers placed into a system. Those numbers are then further manipulated in various reports for both internal and customer use. All financial process and data availability problems have software solutions. As CFO, you will be responsible for buying or building software to solve these problems (including spreadsheets). At the core of much of this software is typically some accounting system or ERP. You must early develop a point of view of what functionality you want to have in an ERP. Does it need to handle international operations well? What processes are critical in the company that you want the ERP to handle (eg. customer invoicing)? Does it have simple integrations to allow easy connection to other systems like expense reporting? And often most importantly, is this ERP part of a company that you think will succeed and thrive? Will they be responsive? Is there an active set of consultants supporting the service? What you buy today should be a fraction of the functionality you will have in the future if you pick the right choice. ERP choices in particular are very hard to reverse.
The best companies dedicate appropriate energy to internal tools and systems. This is a way of showing respect to employees, but this also ultimately allows a company to move faster. More manual processes equals either more people doing manual work or less flexibility with respect to your internal and external customers - neither of these is a great outcome.
Gathering data
Having access to the right data to make good decisions is obviously valuable. It can also be extremely demotivating for curious and data driven employees to not be able to find what they need to make good decisions. However, collecting and organizing the right data is a moving target as a growing company can frequently change processes (eg. sales/marketing funnels), products (potentially changing gross margin calculations for example) and customer segments (changing LTV or other calculations). The last thing you want to do is to slow down a needed change because you don’t have the right data infrastructure to support it. Naturally, the best solution is to have a data team as early as you can afford (an engineer and a BI tool expert are the minimum to start) along with good software (BI tools, data lakes, ETL). Just as important is knowing what metrics must be correct and available and what can wait. If you are growing at 50% with software gross margin of 80%+, accurately knowing your gross margin is not that important. But things can change (see Zoom gross margin), so you need to think ahead.
Managing finance suppliers
In addition to buying software, finance is generally a big buyer of professional services. Tax, audit, outsourced accounting, systems support/implementation are a few bigger areas. Legal will also be under the responsibility of finance in many cases. These professional services are often extremely important to the company (like good tax and legal advice) and consume lots of cash.
Managing outsourced professional services is a skill. Incentives are frequently misaligned in obvious ways, e.g., a tax advisor will always want to do more work to minimize risk (less worry you will complain later), or to make things more complex than necessary (more hours to bill). Advisors have a habit of re-inventing every problem even though 90% of legal, tax, software implementation and accounting problems have been solved before by somebody else.
The first goal for managing suppliers is to pick the right ones. Run a competitive process whenever you can. References from similar companies on the specific individuals you will be working with are invaluable. Find out if they’ve worked on your problem area before. Learn who is hungry for the work. Cost is important, but quality is critical - particularly in legal and tax.
The second point is to make them want to work with you. This doesn’t mean paying them a lot or being an easy client. You should invest time to give them context and to excite them about your company and your future. The more context your partners have, the more helpful they can generally be and the more motivated they become. The big professional service firms in particular don’t make money on smaller companies but understand investing in younger firms can pay off later. In addition, many younger employees at professional services firms want to work with startups - they don’t want the specialized project with the national telco (even though they eventually figure out this is where careers are made in professional services). In addition, you should be challenging and fair. The good firms have people who respond to challenges.
Third, you must set expectations for the overall relationship and for each and every task or project up front. On the relationship front, the firm should know they will need to invest with you on the promise of growth. The firm should know you are aware of the conflicts of interest and expect them to be managed. They should know all bills will be scrutinized. They should know you have high expectations and will not accept poor work or missed deadlines. On specific tasks, don’t ask a firm to look into something unless they (1) fully understand the context (2) know what kind of result you will be dissatisfied with (3) know the deadline and (4) know the budget they need to work against. If they fail against the general or task-specific expectations multiple times, you must be willing to fire them. This is also important for your organization to see.
Finally, you have to challenge bills. If the firm had to invest extra effort since the first try was poor, challenge that additional expense. Although ideally you would have been clear on this earlier, it is almost inevitable that you will be charged for something that leaves a bad taste in your mouth. If the client knows you read the bills and will challenge them, they will be more careful when billing you.