Posted by Grace Townsley
April 5, 2023 | 5-minute read (896 words)
Operating without a chief financial officer in place is the reality for many early-stage startups. In fact, according to some estimates, as many as 80% of early-stage startups run without a CFO on staff — relying instead on their banks or financial backers to provide essential financial guidance.
While this strategy may seem like a cost-effective way to operate leanly and focus all energy and cash flow on growth, it’s an oversight that can cost startups their success.
If you’re operating an early-stage startup without a CFO on board, read on. In this article, we’ll outline the key benefits of hiring or outsourcing your CFO services and how an experienced CFO can actually benefit your business’ bottom line — not subtract from it.
If you don’t have a CFO leading your financial operations, you could be missing out on these 5 benefits:
1. Proactive financial planning and forecasting
Early-stage startups need a clear and adaptable plan for their financial future, backed by real-time data and experienced insights. An in-house or outsourced CFO can help your startup make smart and informed decisions based on financial modeling and forecasting that considers your specific revenue growth, cash flow projections and key investment decisions.
This benefit is especially important for startups that don’t have deep experience in the financial industry — and are relying on their industry-specific expertise instead of real financial data.
2. Healthy investor relations and fundraising
Unless you’re bootstrapping your startup, you need to attract investors and secure funding for long-term growth. A CFO can help your startup prepare the necessary financial statements, pitch decks, and investor presentations that accurately convey your financial position today, and projected growth for tomorrow — making your startup even more attractive to potential investors.
3. Accurate cash management and budgeting
According to some estimates, as many as 44% of startups fail due to bad money management. A CFO can help with your ongoing budgeting, cash flow forecasting and financial risk management, helping your startup make sound financial decisions that don’t restrict your cash flow.
4. Strategic risk management and compliance
If you’re new to running a business, the detailed financial, local, and industry regulations that govern your startup can be overwhelming. But with a CFO on your team, your company can stay compliant with regulations, avoid unnecessary financial risks, and minimize your liabilities along the way.
5. Informed decision-making
While you’re focused on building and expanding your startup, your CFO can help you see how every major decision will impact your cash flow, profitability, margins and overall revenue. While it may seem like hiring or outsourcing your CFO services is an expense, the insights they offer can actually help your startup reduce overall costs, recognize high-profit opportunities and avoid costly mistakes.
Despite these benefits, for cash-strapped startups, hiring a CFO can seem like more of a challenge than an advantage
Young startups may be hesitant to hire or outsource their CFO services because of the cost of adding another full-time employee or partnering with an outsourcing firm. When their budgets are limited, every dollar spent on something other than R&D, marketing or expansion can feel like a waste. Plus, many early startups are led by first-time founders — who have only an 18% chance of success — and may not be aware of the benefits a CFO can offer.
Plus, the need for a CFO is less apparent when times are good
In 2021 as the economy raced to recover from the quick recession of 2020, private venture-backed companies raised over $238 billion. But when the economy became more turbulent in mid- to late-2022, capital became harder to access. As a result, startups raised just over $200 billion — making 2022 the second-best year for funding, but still a steep decline from the year prior.
When money is easy to get, startups focus on growth, expansion and development— not on building their foundational structure. And when the market shifts, those companies without financial expertise tend to stumble.
That’s why future-focused and success-minded startups should seek out CFO services from their earliest stages, especially in the wake of major banking crises like that of Silicon Valley Bank. If more of the startups that conducted business with SVB had an experienced CFO on board, they could have seen — and avoided — being caught up in the collapse.
If you’re bootstrapping your startup, hiring a CFO is even more essential
While VC-backed startups may get the most attention from news outlets, bootstrapped companies are actually much more common. A full 77% of startups are bootstrapped, at least in the beginning. For these growing companies, every single dollar is hard-earned — and requires even more precise oversight.
For VC-backed startups, there’s always the opportunity to find new investors or raise more funding from current ones. But with bootstrapped companies, your growth is limited by what you can earn or find yourself. That’s why outsourced CFO services, which can be more cost-effective than hiring an in-house CFO professional, are particularly important for personally-financed companies with little-to-no margin for error.
While it’s not yet common for early-stage startups to bring in a CFO, it should be. Especially in times of market turbulence! An experienced CFO isn’t a expense — they’re just the boost your startup needs to manage cash flow and avoid growth-slowing missteps along the way.