Much has been written (and spoken) about navigating the winding road to startup success. So much so that it’s hard to know which resources to trust and when each should be tapped. It’s also not trivial to find resources that truly align with your industry and stage of growth, let alone the unique set of challenges and opportunities you face.
Yet, we’ve all read countless statistics (most point to a 9 in 10 failure rate) about startup failures and how the odds are stacked against you – the founder (or investor). More to the point, according to a 2018 study by CB Insights, nearly one in three of those failures were due to running out of cash.
Financial stress in a startup comes from many directions. Managing cash, fundraising, meeting projections, finding the right pricing framework all contribute. Financial headwinds are a constant in the early years of a business and your success relies on bringing to bear the right resources to help you seize opportunity and steer clear of financial pitfalls.
The right financial resource(s) - a fractional CFO in most cases - can help in many ways, but we'll tackle several areas where such a resource can minimize financial stress and dramatically enhance your probability of success.
Good financial information is the cornerstone of sound decision making. Data quality is only as good as the financial technology, process and team that produce it. Job one of your financial leader - whether a CFO, controller or both - is to establish the right systems and controls so you have a scaleable foundation for handling all facets of financial management. The right CFO will have a proven process for establishing a finance system that will make your startup hum.
Look no further than the CB Insights statistic mentioned above as a reminder that cash management is the most important planning activity for a startup. Build and actively use the cash management tools to project cash flow and take appropriate action to ensure you will have the cash to cover your obligations and have adequate runway until your next round of capital is raised (and in your bank account).
Whether you seek financing from an angel, venture capitalist or a bank, you need to craft a compelling financial story as to why they should invest in your firm over the countless alternatives they could fund. You (or your CFO) will need to be fluent in the right "financial terminology" and have clean, current financial statements to present. You will also need to demonstrate your progress to date as measured by the key performance indicators (KPIs) that matter most in your industry and for a firm at your stage of growth. You'll also need the financial roadmap (or budget) that credibly illustrates how you'll leverage their capital achieve your growth objectives.
Boards of directors (or advisors) can serve as tremendous assets for you throughout your startup journey. But a collaborative relationship with your board can't develop if you aren't feeding your board members with ongoing financial reporting and operating metrics. Their counsel relies on great data. The right financial resource can help you develop and produce a board package that makes for constructive board engagement.
Whether determining the right sales compensation plan, pricing a new offering or selecting the most profitable niches to pursue, you need to rely on accurate and useful financial data to drive key management decisions. Knowledge gained from these data provide you with the confidence to take decisive action on your most crucial decisions.
Finding the right Financial Resource
The fact is, startups are incredibly dynamic so the right resource needs to adapt as your needs change. Such a resource can and should be part-time, but they really need to be engaged on an ongoing basis.
The startup leader needs a partner who will roll up his or her sleeves to provide a steady flow of relevant financial insights. Such a partner will maintain control over your startup’s finances, providing data that fuel one critical decision after the next. CFO services for startups can fill that role. While not every startup will need such a service, read our articles on when CFO services are appropriate and how much CFO services cost to gain an appreciation for how efficiently they can plug in and add value and how cost effective they have become. If you're looking for a framework for how to consider engaging a CFO, look no further than our Outsourced CFO Buyer's Guide.