A Startup Founder's Guide to being your own CFO

Finance can be one of the most intimidating areas of running your business, big or small. The term “finance” is so broad and encompasses so many complex topics that many shy away from managing this part of their business without professional help. But for the majority of early-stage businesses, finance isn’t overly complicated and doesn’t require tremendous spend to manage properly.

The Chief Financial Officer, or CFO, is the person on the payroll overseeing this area of the business. Within a CFO’s team, you’ll typically find two main teams – Finance Planning & Analysis (FP&A) and Accounting, which may include teams beyond the books such as Accounts Payable, Accounts Receivable, and Tax. The simplest way to think about the two areas is that Accounting owns what happened, or the actuals, and FP&A owns what’s going to happen, or the forecast/budget.

At larger companies, you’ll find large teams of full-time employees within these departments supporting complex processes, business functions and geographies. The role of the CFO in these cases is quite challenging because the job spans beyond the actual financials and projections, and involves coordinating people to consolidate many numbers, systems and processes into one streamlined view of profitability.

On the flip side, when you’re just starting a new company you most likely only have a few employees, development spend on one or a few products, and a website. Managing these costs, maintaining the books, and forecasting the months ahead isn’t as complicated as it can get at a larger company. This is why some small companies turn to a fractional CFO, like the services provided by Rainbow CFO, to oversee this at the beginning. The fractional CFO model provides founders access to an experienced CFO at a part-time cost which is why this arrangement is so popular.

But if you’re bootstrapping your startup and even a fractional CFO is beyond your budget, here are some tips and practices you can adopt to ensure your company is on track towards growth, profitability and liquidity without spending a lot of money.

Use Google as your Financial Model Lifeline

All founders begin their financial journey with a financial model, regardless of whether or not they are building it themselves or outsourcing the task. Without a business model, there’s no way to understand how money comes into and leaves a company, and therefore how to make decisions around pricing, hiring, marketing and fundraising.

If you’ve never built a financial model before, just the idea of it can sound exhausting. You may have taken an accounting class in college, and you know what a Profit & Loss (P&L) statement is at a high level, but you wouldn’t even know where to begin to build one yourself. The good news is, you’re not the first person in this position! In fact, there is a tremendous amount of how-to articles, templates and industry-specific guidance available to you through a quick Google search.

Start by searching for a template that you like and feel comfortable with. There’s free or low-cost Excel templates online for download, as well as automated modeling tools to can subscribe to like Jirav. Rainbow CFO offers industry-specific templates if you want a model skeleton that comes with prebuilt forecasting functionality (visit the Contact Us page to inquire!). Regardless of which route you go, download your file, add your logo, and make it your official model!

To build out the numbers, search by P&L line item for guidance on building each type of forecast (i.e., Online Revenue, Wholesale Revenue, Cost of Revenue, Operating Expenses, etc.). P&L organization and cost categorization can vary by industry, so be sure to do research on these areas as you’re building your model. For example, Cost of Goods Sold (COGS) for one industry may look quite different from another. You can also search for similar public companies on Yahoo Finance to see what percentage of revenue comparable P&L’s are showing for guidance in building your own forecasts.

If you’re using your financial model to show investors, proper organization and alignment with industry standards will flag credibility and ensure your model elevates your position as a worthy investment, instead of detracting from it.  

Conduct a Monthly Forecast vs. Actuals

So now you have your shiny new financial model and you think your job is done. In reality, building the financial model is just the start of your life as a founder with full financial transparency. A financial model predicts what’s going to happen, but you won’t know if it’s working if you’re not comparing it against real-time performance.

There are so many incredible financial models out there that sit for months without updates. It is oftentimes these situations where leaders are unable to understand what’s causing them to miss (or exceed) their goals. Make sure that your Chart of Accounts in your accounting software is aligned with your model, meaning that the same categories are on both P&Ls. This will make it easy to download actuals each month and compare it against your forecast. Then add in dollar and percentage variances by line item, and tackle the discrepancies largest to smallest to address by order of magnitude. This process alone will help you prioritize operational issues and better understand where to spend on evolving your business.

Conduct this forecast vs. actuals monthly. Not every other month, not quarterly, do it monthly in line with the closing of your books. And remember, exceeding goals is great, but if you don’t understand the drivers behind your growth it will be difficult to replicate this success and scale your company.

Manage Your Cash Flow

Your profitability is different from your liquidity – and you need to manage both. Profitability doesn’t always mean you’re cash flow positive, and this is why it’s important to take your P&L model and create a cash view. There’s a lot of transactions that hit your bank account, but don’t hit your P&L right away such as inventory and equipment purchases, debt payments and other items tracked on the balance sheet.

The easiest way to create an operational cash model is to pull up your bank account, and make a list of all the ways that money comes into your account and all the ways it leaves your account. List those items out in the first column of an Excel spreadsheet, write the next 13, 26  or 52 Sunday dates across the first row of the spreadsheet depending on how far out you need to forecast. Then estimate how much money is going to enter/exit your account each week by line item. Subtract all the cash outflows from the cash inflows, and you have your “net cash flow” by week. Add the net cash flow to your starting bank balance over time to forecast your ending balances by week. These balances will give you a good idea of your “cash runway.” This is a term you will hear a lot which means how many weeks you will last until you run out of money (or when that ending balance goes negative). For an early-stage company investing in growth, it is very common to have a finite cash runway and is the reason why venture capital exists as an industry.

The screenshot below is an illustrative example from a Rainbow CFO template to give an idea of how this should look. Once you have this summary view, you can build out additional tabs to calculate forecasts by line item (i.e., you might have a “Headcount” tab detailing all employees that feeds the payroll lines in the summary).

As long as you know your timeline, what you’re spending on, how you’re scaling, and what type of funding is best for you (venture capital funding, private equity funding, debt, etc.), running out of money does not have to be a terrible fate. You just need to plan for it properly!

Spend your First “Finance Budget” Dollars on an Outsourced Accounting Team

If your business is in a place where you are considering professional finance help, start with accounting. There are amazing outsourced accounting firms available to start-ups that will keep books in order, bills paid and taxes filed for as little as a few hundred dollars per month. Having a clear picture of your actual performance is priority number one, and should come before you even think about hiring a fractional or full-time CFO on an ongoing basis (unless you’re hiring support to build your initial financial model).

A CFO’s role is to come up with a financial plan for profitability and growth, but if you don’t have your actuals in order a CFO won’t have the full financial picture to use as a baseline for this plan. The timing to bring in an accounting firm varies for every company, but a good rule of thumb is to get them going around the time when your revenue is commencing. If you have tremendous spend pre-revenue, then this date might come sooner. Finding an accounting partner early on ensures you are setting up your P&L correctly from the beginning and you can track actuals right away. Additionally, an outsourced accounting team will handle relevant taxes, such as sales tax, so you stay compliant without having to learn the tedious minutia of these processes yourself.

Once your accounting team is off to the races, only you will know if and when it’s time to bring in CFO support. If you’re able to manage your forecasts and cash self-reliantly, then this won’t be a top priority vendor or hire right away. But if these two areas are falling by the wayside as your time is consumed elsewhere, then bringing in a fractional CFO for just a handful of hours per week can help accelerate your business without spending a lot of money. Regardless of timing, keep it lean to start and introduce new processes and reports slowly into your business so you can actually integrate them into operations in a useful way.

Keep Things Simple and Automate

There are a lot of complicated financial instruments, tools and reports out there, but when you’re starting out stick with what you can understand and manage yourself. A financial model with fifty tabs and thousands of assumptions will be useless to you if you don’t know how to update it and understand its outputs. These tools exist to help, not confuse you. Get comfortable loading actuals, forecasting your profitability, and layering new initiatives into your model so that you can back up decisions with numbers and prioritize effectively as a leader.

We live in a world where FinTech is booming - there are so many innovative platforms available to startup founders to simplify all aspects of Finance. Do your research and talk to fellow leaders to find out what tools have worked best for others.

If you believe your company and product are going to change the world, then focus on making them the best they can be instead of spending too much time on the back-end . When you’re ready for additional finance support, check out www.rainbow-cfo.com to inquire about bringing a Fractional CFO onboard your team. There are no minimums to get going, so your finance function can grow along with your business over time. Remember that finance doesn’t have to be intimidating, and the tips outlined above are your ticket to scaling your business and achieving the outcomes you desire most.