While startups may begin with just basic accounting (tracking transactions, collecting and managing invoices, and producing basic financial statement), there will come a time when the finance function within an organization has changed from just “keeping track of” transactional activities and compliance to providing strategic leadership to the overall business.

For example, a high-growth startup with multiple companies/locations and operating in multiple currencies/countries has outgrown simply being an accounting function. Therefore, as the organization creates significant variation in their operating model, the role of the Chief Financial Officer (CFO) evolves from “updating” financial statements to providing strategic leadership throughout the organization.

When companies are in the Young Stage of growth, the finance organization focuses on:

– Recording transactions
– Managing invoices and payments
– Preparing basic financial statements

As the company matures and grows internationally, there are significant changes to the company’s financial profile:

– Each entity will have multiple legal structures through which the business operates
– There will be cross-border transactions, intercompany flows between countries and subsidiaries
– There will be multiple tax/financial compliance regimes that must be consistent and accurate
– Each company will have varying requirements for investor reporting and governance
– Establishing a strategic planning approach and capital allocation to allow for rapid growth of the company

A company’s question will now shift from “Are our records accurate?”, to “Is our company legally structured to grow?”

The changes that result from this level of complexity are numerous and there is no way that the finance organization can “keep track” of this type of environment if they only maintain their function in a bookkeeping environment.

In order for these multiple entities to operate effectively, each entity has:

– Statutory requirements that are different based on where the entity is located
– Local accounting standards that are different based on the entity’s location
– Exposure to different currencies based on the entity’s location
– Tax obligations that differ from entity to entity
– Banking relationships that are unique to each entity

With multiple entities operating independently, companies will experience the following challenges:

– Fragmented reporting between multiple entities
– Delays in closing the books on a monthly basis due to consolidation activities
– Difficulty ensuring compliance due to fragmented reporting and activity
– No real-time visibility into actual activity, and the company’s ability to report on that activity

By consolidating all entities into a unified financial structure, the CFO ensures that there is one continuing framework for all entities to work together as one cohesive unit.

The CFO’s Role in a Young Growth Company
From the perspective of a Young Growth Company, the CFO is responsible for ensuring that the company has and maintains a solid foundation to grow upon. The CFO builds and manages the entire financial structure of the business (financial architecture).

The CFO creates the foundation for the company by establishing scalable financial systems to support multiple companies and locations. Examples include:

1. Design, develop, and implement the company’s financial systems (e.g., charts of accounts, reporting hierarchies, and ERP configurations such as (NetSuite/Plus/Agresso).

2. Provide the company’s leadership with timely and accurate data to enable them to make timely and accurate decisions (dashboards and KPIs) and report on those decisions.

3. Ensure that intercompany transactions are properly structured, tracked, and reported to avoid inconsistent financial reporting, thereby reducing the company’s exposure to material misstatements for audit purposes.

4. As the company grows, work collaboratively with the stakeholders on investor/external reporting, forecasting, and governance. The CFO acts as a liaison between operational finance and board level expectations.

5. Provide strategic advice to executives and the board of directors in areas such as budgeting, forecasting, and capital allocation to facilitate the sustainable growth of the company.

When a company does not have a CFO providing this level of leadership, the company will experience several common problems:

– Over-reliance on spreadsheets for consolidation of financial results across multiple entities
– Disconnected financial systems that do not provide quick access to information
– Lengthy monthly close cycles due to delays in merging financial results from multiple entities
– Lack of consistent financial reporting formats across the organization
– Limited visibility into the company’s cash position and profitability
– Reactive financial planning as opposed to proactive financial planning

While these types of issues may work well when the company is smaller, they become significant obstacles to the continued success of the company during rapid growth.

What is Going On with Timing

One of the most common myths in the professional world is that a CFO is needed only at a later stage in an organization’s lifecycle.

It is much easier for a company to scale when it has designed its financial architecture correctly from the very beginning.

In order to properly scale a company, bringing in CFO-level thinking early will allow the organization to:

Avoid costly restructuring after the fact

Set up systems that create a path for a company to expand internationally

Build strong financial controls right from the start

Increase credibility with potential investors and partners

Engaging the services of a CFO does not always require bringing someone in full-time. There are many startups who have realized great benefits utilizing a CFO as a Service model.

Why Finance Should Be Strong Growth Driver Instead of Back Office Function

CFO leadership provides a company with the capability to drive growth by providing:

Faster and much more accurate reporting cycles

Better decision-making through use of real data

Significantly improved cash management and longer runway planning

Less operational and compliance risk

Greater alignment between the company’s strategy and execution

Conclusion

Bookkeeping provides you with accurate numbers.

Strategic CFO leadership gives you the means to scale your company.

There is a meaningful distinction in what it means to a startup, when you are conducting business in a multi-entity, international business environment, between having accurate numbers and an effective CFO leading strategic initiatives.

Companies that invest in CFO-level leadership early are not only better prepared for growth, they are also better positioned to sustain that growth over the long haul.