Rapidly growing businesses are faced with many tough decisions but one of the most challenging is that of assembling and growing a financial and accounting team that can scale as growth accelerates.

When Do You Need a CFO?

Some time ago I wrote a blog titled “Is it time to hire a CFO?”. It was directed toward start-ups and small business owners. The other day one of my clients came to me with a problem. His business was rapidly growing in size and complexity (including international expansion) but his CFO was unqualified and in-over-his-head. In recommending a solution to the problem, I reviewed with the business owner, the advice in my previous blog.

Backward Looking vs Forward Looking

In that earlier blog post I had staked out the boundary extremes for start-ups and small businesses in choosing financial leadership. I described how bookkeepers are backward-looking and transaction oriented while a CFO is forward-looking and strategy oriented. A CFO can easily determine the correct financial staffing needs of a business. What I had not addressed was the full range of financial and accounting positions between bookkeeper and CFO that can be required when a company is experiencing the dynamics of growth. This is not a textbook problem with a clear cut, step-by-step easily implemented solution. Businesses grow and mature at their own unique rates, and management needs to have a clear vision of where they expect to be in 6 months, 2 years and even 5 years and how they are going to get there.

Don’t Over Commit on Titles

My client’s most serious mistake was that he had overcommitted on title in hiring his first financial leader in order to keep salary and other benefits low. He had done it in order to hire a promising candidate in the company’s early stage of growth. He had, despite advice, offered a CFO title to a qualified controller. Now, I fully support advancing people in their careers as rapidly as their ability will permit, but financial titles should be handed out carefully. The reason is that they represent your “judgement” of the level of financial industry expertise and experience of the individual you choose. If you get it wrong, then your judgement may be questioned by stakeholders. CEOs, particularly in emerging and rapid growth companies, rightfully work tirelessly to build confidence in their judgement whether it be with employees, advisors, board of directors or investors. CEOs should challenge themselves, “Will others’ assessment of my judgment be positively or negatively impacted by my choice of CFO?”

Demoting Your First Financial Hire

My client was now faced with the challenge of bringing in a qualified CFO and of deciding what to do with the existing person in that role. He had to deal with all the associated commitment and motivational issues of the person currently in place. There was a real possibility that the company would lose a very valuable, however miscast, person because he simply could not allow the demotion to appear on his resume and thereby compromise his career opportunities.

Let an Expert Design Your Finance Department

To supplement my backward-looking vs forward-looking financial roles blog, it is important that the finance and accounting departments be designed by someone who understands the roles, responsibilities and associated titles that are relevant to the business not only in the short-term but in the future as well.

Financial Department Titles

Here are a few of the financial titles along with comments on when they become relevant in a business.

  • Controller – is the chief accounting officer and is responsible for setting and maintaining the company’s accounting policies and practices. In emerging and rapid growth companies, the ability to quickly constitute policies and practices requires expertise in financial accounting standards and internal controls typically possessed by CPAs as well as management accounting standards specific to the industry. While accountants and controllers are generally referred to as historians more focused on the backward-looking aspects of financial reporting and extraction of insights from past data, the Controller is also generally tasked with producing the Annual Budget (or Financial Plan). With training and experience this person can grow into the CFO role as the firm expands. For rapidly growing companies or those entering the complexities of corporate development and capital markets the CFO role may prove too challenging for a controller to reliably grow into.
  • VP (or Director) Finance – is sometimes referred to as a “super Controller” and combines the role of the Controller with some of the activities of a CFO. By adding an MBA or similar experience to the CPA credentials of the Controller, this position tilts the firm to a more forward-looking perspective including strategy development, construction of the five-year plan, assists in identification of products and markets that can monetize the investment and they can assist with corporate development initiatives and communicate with investors.
  • CFO – is the chief financial officer and responsible for managing the financial affairs of the company. This position should have extensive financial management experience typically with credentials in finance and accounting to be relevant to the company over time. The CFO is responsible for the long run financial strategy, structure and all fiduciary filings. For emerging and rapidly growing companies, typically the CFO can be part-time and designed specifically (and narrowly) to complement the knowledge and skills of the existing full-time staff. This defers the decision on the full-time position until more is understood about the requirements; thus avoiding under- or over-hiring.

Take Care of Your Accounting Needs First

I advise clients in emerging and rapidly growing businesses to take care of their accounting needs first. Sometimes you can get by with a bookkeeper for a while. Other times you need a Controller at the outset, depending on the complexity and scale of growth. In some situations, a great VP of Finance might be worth stretching for; however, you will have more flexibility for staffing later if you start with a Controller.

What you do not want in the financial leadership role, in most situations, is an articulate and educated candidate in all areas of business other than finance and accounting where the company must have an experienced hand. I’ve seen new companies make this mistake many times. This is especially true at a young company where accounting and controllership are 80-90% of the initial job requirements of the first financial person. The pace of work in a start-up will just not tolerate this approach. There is simply too much accounting and controllership work that dominates the short and intermediate concerns. You need someone on board that has “been there, done that!”.