Tools for the Startup CFO - Part 1

For CFO’s or Finance Leaders at startups, especially early-stage startups, they know well that it is a very different battlefield compared to late-stage private companies or mid-size of large enterprises.

At a startup, the CFO is faced with scarcity on many fronts. This scarcity comes in the form of capital, budgets, resources. The scarcity also naturally occurs because of lack of established systems or processes. But this is an opportunity. A “greenfield” for the CFO to put his/her own mark on the company and build out necessary finance infrastructure from scratch. Often availing the opportunity to lay out state-of-the art modern finance tools vs being beholden to legacy platforms. But until such time, the CFO has to rely on a few ‘home grown’ tools.  

In this 2-part blog series, we lay out the key enabling tools that a CFO should build or avail and help the organization scale by being on top of financials, cash, expenses, investor relations and relationships with key stakeholders such as the founder/CEO and the board.

1)  The Finance Calendar:

Startups by nature tend to be very dynamic and often chaotic. But not all of that should apply to the CFO’s office in a startup. The CFO’s office must maintain its own sanity and discipline and be a beacon for the rest of the organization in terms of stability when it comes to practicing a higher level of discipline around accounting, planning, reporting dates, deadlines and deliverables.

Of course, not all dates are predictable in a startup, but it is upon the CFO to come in and put structure around processes such as month-end close, forecast cycle, reporting cycle, annual budgets and plans, major finance milestones like large vendor payments, dates related to updating various financial documents etc.

Note, the CFO’s office is advised to adopt a flexible approach and be adaptable to the dynamism that surrounds a startup. Regardless all of this comes together in the form of a Finance Calendar which should be forward looking and lay out all the deliverables that finance is accountable. This calendar should largely be used inside the finance department and then communicated to relevant stakeholders outside of finance.

Key Point –Build a calendar and maintain it. Ensure it reflects discipline and rigor but also flexibility given the nature of startups. Know which deadlines are negotiable and which are not. Some deadlines like a monthly review meeting can get pushed out but a tax filing deadline better not be pushed out.

2)  Sales Pipeline:

The sales pipeline is maintained on a CRM by the sales team. They own the funnel and do all the hard work in terms of building out the sales funnel and tracking it. But the CFO’s office should have close access to this data to assess the quality of the sales pipeline from a financial standpoint. This so that the sales pipeline data can be translated into a meaningful, rational and realistic financial forecast.

It is not uncommon for the sales team to be more ambitious on the speed of sales closing and hence revenue generation. Hence, the CFO’s office needs to dig in and analyze how realistic the timeline is or if the deal is even a possibility and what is the right timeline for the CFO's office to use to project revenues and cash flows.

Also, after a bit of history, the sales pipeline will offer many more insights in terms of the type of sales deals that move fast vs others that stall or die away. It will provide insights into Sales reps who have a high hit rate and others who do not, Sales reps that produce high quality revenue vs others who often toe a thin line when it comes to margins. The sales pipeline data should be ‘respectfully’ challenged and vetted by the CFO and then used for financial forecasts with the right level of adjustments and hedges.

Key point – The finance team is best served by getting hand in glove with the GTM team and be an available and trusted partner as they go about their sales processes. While accurate forecasting is critical, it is just as important for the CFO and his team to be an enabler to the sales team and offer them creative tools (especially pricing strategies) to help close deals.

3)  Company Financial Model:

The value of a company financial model at a startup cannot be understated.

As a CFO, you want to have a solid and clear view on how your business makes money. You want to understand all the revenue drivers by product, geography etc. You want to understand direct and variable costs, you want to understand your gross profits and margins and then you want to understand your cost structure related to people, G&A and marketing.

Of course, not only do you want to understand these drivers but as a forward looking and forward-thinking CFO, you want to project what your business will look like in a month, 3 months, 6 months, a year and even longer.

The best tool to get this done is to build a company financial model. This tool has many utilities but above all it gives the CFO a very keen and unique view of the business and the ability to understand all the financial drivers and their impact on the business under various scenarios. This process adds significantly to the intelligence of the CFO and the CFO’s office and equips the CFO to advise the CEO and the rest of the leadership team on spend, investments and other financials decisions.

Key Point: Start with a simple financial model and as a startup CFO you should understand this model in and out. This is imperative regardless of if you have staff that can build and run the model for you, or you the CFO are on point to pull this together. A note of caution – If a model has already been built by the business or the founder, take it over and build consensus to re-build using a finance and operational point of view.

4)     Unit Economics Model:

The Unit Economics model can feed off the financial model and vice versa. The unit economic model is critical to understand the profitability of the business all the way from pricing the product at the unit level to unit level direct variable costs and margins.

A CFO who has a great handle on the unit economics of the business will have head start in his/her understanding of the business and get a framework to keep improving those economics overtime. The good news is unit economic models are relatively easier to build at small and young companies because there is so much firsthand visibility to pricing and costs.

Key point: The unit economics model is your secret weapon. This will give you the best view of the economics of the business and over-time this tool will be in high demand, not just internally but also externally among prospective investors and other stakeholders.

5)  Investor Financial Model:

The audience for the investor financial model, you guessed it, are prospective investors. The investor model is one of your best tools to communicate the financial prowess of your company to new investors. This communication typically happens during a formal fundraising process.  

It is best to use the company financial model as the base to build out the investor model. In a perfect world, the company financial model should be the investor financial model. The advantages are consistency and a lot less effort involved with having a single model to maintain. But given that the audiences are different the investor model might differ from the company model. The company model will have more operational data and more detail. The investor model will have a more long-range view of the business and could provide a more ambitious and aspirational picture depending on the trajectory.

Regardless the investor financial model cannot be too decoupled from the company financial model and must be updated to reflect recent actuals and projections that make sense and withstand honest scrutiny from prospective investors.

Key point – Similar to the company financial model, keep the investor model simple. Ideally have a similar format to the company model albeit with the appropriate level detail. Best to make the company model a feeder for most of the data that goes into the investor model. Keep the investor model updated periodically. Ideally every month after the books is closed and the actuals are published.

6) The Financial pitch deck:

A lot of the output coming from the investor model will go into the financial pitch deck and this deck will become a subset of the overall company pitch deck that is presented to investors. Hence it is imperative that the financial pitch deck weaves well with the overall strategy presented in the company pitch deck and importantly tells a well laid out story about the company’s financial picture – all of past, present and future.

Investors want to know your unit economics, they want to know your assumptions, particularly around revenue growth, they want to understand your cost structure, they want to understand your projections and ability to scale, and they want to understand both risks to the plan and the opportunities you see beyond the financials presented. So, all that must be wrapped well in a few slides, saved, and updated periodically.

Key point – Focus on the narrative and storyline and hitting key financial highlights like traction, unit economics, assumptions etc. Best not to dense out the slides with financial detail which can be plugged back into the appendix section for reviews.

To be continued in part 2 of this blog