If you’re a start-up or a small company CEO (especially for the first time), at some point you’ve asked yourself “Do I need to hire a CFO?” I’ve seen variations of this question pop up in online forums regularly, asked by entrepreneurs and young founders.

My view is that “It depends”!  It depends specifically on two things that CEOs focus on constantly.
1. Opportunities for growth
2. Threats to the business that can emerge when that growth is not carefully controlled.
A CFO can help you manage both of these phenomena.

Comparing Bookkeepers to CFOs

A bookkeeper or accountant generally can meet your needs early on.  When growth in a start-up accelerates, things change.  Growth means success is arriving, but in order to sustain it you have to control it. That is where the CFO comes in.  The difference between a bookkeeper/accountant and a CFO is that a bookkeeper/accountant looks back while a CFO looks forward.  A bookkeeper or accountant records transactions in a business and looks at the history of the enterprise and what took place.  Think of it as driving a car while looking out the back windshield.  A CFO, by contrast, looks forward toward the future of the business and plans that growth and how to control it and maintain profitability.  A CFO drives the car while looking out the front windshield.
Capital and the CFO

Let’s take an example.  In a start-up, controlling expenses and preserving cash is critical to survival.  As Al Shugart, disk drive pioneer and entrepreneur, famously said of start-ups “Cash is more important than your mother!” You need capital to grow.  A bookkeeper/accountant can put together financial statements and go with you to the bank or to an angel investor to explain your needs for a small working capital loan in the early stages of your start-up.  When growth takes off and you need serious capital to sustain it, you are likely talking to large, institutional lenders, or private equity or even venture capital investors.  These pros want to see the presence of CFO-level skills and look to the CFO to  help you achieve your growth objectives.  See the difference?

How Much is Enough

The CFO doesn’t have to be full-time or permanent.   Part-time or interim is often enough at the beginning and is affordable for the early-stage company. But those skills need to be present.  Even in those cases where a bookkeeper or accountant can meet the on-going needs of a start-up early on, I generally find that the start-up is helped by a CFO to design the planning and reporting based on standards in the marketplace for that industry or business model.    Oftentimes, that design determines structural elements of the recordkeeping that will open up the possibility to scale and, even, properly value the company. That is the difference between a CFO’s contribution and that of a bookkeeper/accountant.  CFOs plan the future; bookkeeper/accountants review and comment on the past.

Fred Wilson, a New York based VC, addressed this need with early stage companies in his popular blog.“This is the time to hire someone who knows about cash flow forecasting, GAAP accounting, bank lines, collecting revenues, and managing your dwindling cash balances. You can call that person a CFO, VP Finance, Chief Cash Officer, or anything else. The title doesn’t really matter, but the function does.”

CFO Valuable in Setting up Systems

A CFO can advise on how to set up your accounting system, from a strategic as well as functional perspective, to help a young company create a solid financial foundation.  Brad Feld, a Boulder, Colorado based managing director of Foundry Group, posted a hypothetical story about a pair of entrepreneurs and illustrates setting up an accounting system for a new business on his popular Finance Friday’s blog. By the way, Feld’s Finance Friday posts are awesome.  They take you through details on start-ups that amount to a great lecture series on start-up finances.
Start-ups can benefit from a CFO-level person, be it for a temporary project need  — such as developing a financial plan, setting up an accounting system, helping the CEO raise capital, etc. — or on a part-time basis to provide valuable yet affordable guidance as the company grows.