Tools for the Startup CFO - Part 2

In Part 1, we covered several tools that will help CFOs/ Finance Leaders and their teams to support and enable their businesses. In this blog, we continue that discussion and cover the remainder of the tools and models that should be considered as the finance function gets built.

7)  Headcount Plan:

As CFO’s we all know that people costs are the most important investment that the business makes. It is also the largest recurring cost for most companies. So, it is critical that the CFO work with the rest of the leadership to build out a solid headcount model that lays out all current resources, salaries paid out, and other compensation costs.

The model then must have projections that show new planned hires, known attrition, or other changes to headcount. New hire plans must be built out thoughtfully, assuming both the need for new hires, the timeline it takes to fill the position, and the cost to do so. The timeline to fill the position depends on the skillset, the availability of candidates, and the capacity of the recruiting team. The Headcount plan should be updated periodically to reflect a current and accurate picture of people costs in the company.

Key point – The headcount plan can be embedded as part of the company's financial model or maintained separately, but well integrated with the company's financial plan.

8)  Software Subscription Tracker:

Like every company, you will inherit or build out a software stack that propels your business. Part of this stack could be financial software, but there would be major commitments made to other modules like Customer Relationship Management (CRM), Data, Business Intelligence, Data Science, Cloud, Marketing Software tools, Design Tools, Engineering tools, etc. To say the least, for every company, there is a significantly long list of software vendors.

The CFO / finance team should keep a tight tab on all the software tools that the company subscribes to. The tracker should lay out the name of the vendor, payments made by month, and projections moving forward. Note - Some software contracts are annual contracts requiring a bulk payment once a year. Some others have bi-annual payments, some have quarterly payments, and many are on a monthly subscription schedule.

All of this needs to be tracked at the vendor level and projected forward to understand expenses by month. Especially cash flow related to the lumpy payments associated with the quarterly or annual payments.

Another utility of this tracker is to be able to identify the tools, discuss their usage with functional leaders and users, and understand if they should still be part of subscriptions or need to be cancelled. Alternatively, this tracker can offer insights into opportunities to renegotiate some contracts or avail credits offered by the software vendor.

Key point – The software subscription tracker can be a separate standalone model, or it can be embedded as part of the company’s financial model. Our recommendation is to embed it as part of the company's financial model and maintain the tracker periodically.

9)    The Bank Account:

The bank account (s) make this list for 2 reasons. First, in a startup, it is best to keep up with your bank balance and activity daily. Remember, cash is king, so make sure you know what is going to hit your bank account, when, and why. The ins and outs should, in the end, map to the forecast drawn up in your cash flow model.

Another reason is to ensure the extra cash you have as a startup is parked to give the highest yield in a safe, FDIC interest-bearing money market account. Ideally, you should seek out sources where you can park this cash with multiple banks so that you avoid a single point of failure.

Key point: The best strategy is to have relationships with multiple banks and open up bank accounts accordingly. The Silicon Valley Bank crisis of 2023, followed by the collapse of First Republic Bank, were major wake-up calls for startups and startup CFOs who quickly had to diversify their banking relationships and add more partners to ensure continuity and avoid single points of failure.

10) Cash Flow Model:

The cash flow model collects its inputs from the company's financial model. Typically offers a condensed version that starts with the cash on hand/bank and then all the ins/outs that occur during the month in terms of revenue collections, fees earned or paid, costs, expenses, interest payments, debt repayment, capex, new funding in the form of equity or debt etc.

This model should offer you a solid and accurate picture of the changes in cash and the drivers for the same. Importantly, it will enable you as the CFO to forecast your cash flow and thus measure your runway and cash zero date.

In startups, both metrics (runway and cash zero date) are critical as they allow the CFO to ensure the company will have enough liquidity or attract new funding to remain solvent and fund the growth and operations of the business. The model should be built such that it can allow for scenario analysis and planning, and allow for stress testing. For a startup, the cash flow model should have the highest level of accuracy possible, given that cash is a very scarce resource for the company.

Key point – This tool is the most native tool to the CFO. No one in the company cares about this tool (unless the company runs out of cash) as much as the CFO. Hence, the cash flow model and all other data that feed into the model should have the highest level of accuracy on two fronts. First, in terms of the absolute values, and second, in terms of the timing of the cash flows. Remember, cash flow is very different from revenue. There could be a lag between when revenue is booked and when cash is collected. Some businesses have a ‘blessed model’ where cash is collected in advance of the service provided and revenue is booked. Hotel, Airlines, and Travel companies are examples of this, as are several software vendors who get paid in advance of the service. But most businesses end up providing the service, booking the revenue, and then collecting cash 30 – 60 days later. Another factor to consider is the collectability of the revenue. It is not uncommon for customers to not pay you on time or not pay at all. So, as you anticipate the cash needs of the business, make sure you understand your customer base and their payment terms very well.

11)    Working Capital Model:

Congruent with the Cash Flow model, there is the ‘working capital’ model. It is not exactly a model but a dataset that lays out all your receivables and payables. The trick here for any smart CFO is to expedite the company’s Accounts receivable timeline and get funds in fast and push the limits on Accounts Payable to the best possible extent without violating the vendor deadlines and incurring needless fines, penalties, or disruption in services. This ‘aging’ data set is something that should be maintained and reviewed periodically, and over time, become a component of finance hygiene done at lower levels in the company, but having this tool will help get the working capital in line and, in many ways help the company's cash flow stay efficient.

12)     Capitalization Table:

In the startup context, we at the CFO Office call the cap table the “4th financial statement”.

Having and maintaining an up-to-date cap table is great hygiene. In the early stages of a company, this responsibility is borne by the CFO’s office. Yes, we have seen cap tables be maintained on spreadsheets, but that is not ideal and not sustainable. Hence, at the first available opportunity (in terms of budget), we encourage companies to subscribe to a capitalization table tool like Pulley or Carta, or others.

For a broader view of the players in this space, please follow this link. Maintaining an up-to-date cap table is critical, especially as the company talks to prospective investors. The cap table gains a lot of prominence in the C-suite when new investors join in or there is a spurt of senior executives who are granted equity.

Key point – Having a clean and well-maintained capitalization table is a strategic advantage for the company, and the CFO’s office tends to be the custodian of the cap table in most cases. Sure, the company can seek external help to maintain and update the cap table, but it comes in the form of very expensive fees, which may not be advisable. Also, it is best to subscribe to a Cap Table tool and be on top of all the funding events which range from issuance of new stock and new funding, conversion of debt, conversion of SAFE’s after a priced round, new hires and attrition of employees, vesting cliffs of founders and employees, secondary stock sales etc.

13)     Board Communication Templates:

Most companies will have a board, typically it will be the CEO and the lead investor, or other investors, or board members. As a CFO, it is on you to make sure you are providing the reporting they desire. Some investors will prescribe a format that they prefer. They will also provide a deadline each quarter by which they would prefer your financial updates. This so that they can consolidate your financials with the rest of their portfolio and report to their Limited Partners.

As a CFO, if you are given a prescribed format to fill out, you should make sure it is feasible and within the bounds of information that should be shared. Most investors are extremely reasonable in what they expect. If you are not given a prescribed format, you should proactively build out the information you want to share on a monthly or quarterly basis and send it to the board members after running it past your CEO.

Key Point – Offering regular financial and business updates is both appreciated and considered part of key hygiene by investors and board members. The more proactive you are in providing this information, the better. Make sure it reads well, and you are transparent about the positives and the negatives prevailing in the business.

Board members are there to help your company, so treat them as partners and not adversaries.

14)   The Finance Software Stack:

Saving the best for last because in early-stage companies, the stack will have to be built over time. The most important first step will be to start with an accounting software like Xero or QuickBooks. Quickly, then add tools like Ramp for expense management. Bill, Recurly, Chargebee, or other applicable software to manage billing and invoicing, Carta or Pulley for cap table automation, ADP or Gusto for Payroll, Rippling or Bamboo HR for HRIS, and Bill or other software for invoicing.

Over time, you may acquire more specialized software for FP&A, Treasury management, etc. This progression is inevitable as the business grows or expands. But if you go in early, the company will be using a lot of Excel or Google Sheets initially before you start the process of migrating to more advanced digital software applications.