When is the right time to hire a CFO

I am a long-time CFO and I hire CFOs (among others) for a living, so I get asked this question a lot. The truth is that there is no firm guideline as to how large a company needs to be to have a CFO. I have seen very small startups succeed with a CFO and very large companies succeed without a CFO. For those of you unfamiliar with the application of accounting principles I will introduce you to a concept that applies here, “facts and circumstances”. That is, many accounting rules may be applied differently based on the facts and circumstances involved at that particular company, their industry, and where they are in their life cycle. Well, the same can be said of finding the right time to hire a CFO: it depends. Do it right and you’re poised for greatness. Do it wrong and you’re wasting money or worse.

To answer the question I look not only to size or industry or money raised, I look more closely at the company’s current and expected growth, the makeup and strength of the leadership team (especially in areas where a CFO would traditionally play, such as fundraising), and what the company needs to do now and in the coming year where a CFO could lead or significantly contribute. These factors all start with this question: what does a CFO do?

What a CFO does is a matter of some debate What a CFO does is a matter of some debate, so let’s start there. CFOs are typically the leader of the finance and accounting organizations within a corporation. There may be a Chief Accounting Officer leading the accounting organization and/or a VP of Finance leading the finance organization, but those are less common and they often report to the CFO themselves.

As the leader of the accounting organization the CFO is responsible for all accounting (capturing all cash, income and balance sheet activities) including accounting treatment for all transactions, financial reporting, internal and external audits, tax (which may be a separate organization under the CFO but not necessarily under the auspices of the accounting group), SEC reporting, and Accounts Receivable and Payable (which may reside on the finance side of the house) along with a host of other accounting duties.

As head of the finance organization the CFO is responsible for financial analysis, budgeting, forecasting, vetting and negotiating deals (which may be part of a Biz Dev organization not necessarily under the CFO), treasury and cash management (which may be a separate organization), fundraising, investor relations, and creation and execution of financial strategies among other finance tasks.

As a member of the executive team and a leader in the eyes of employees and the board the CFO must have and maintain the highest level of integrity, must do as he/she says, must have great depth and breadth of knowledge in accounting and finance as well as most other aspects of business and must be highly effective in all of the areas mentioned above. The CFO is also regularly called on to be the head of HR, IT, legal, facilities, and administrative personnel and practices.

That is one heck of a lot of responsibility but notice we still have not addressed when a company should bring in a CFO. I answer that question by assessing the importance of each of the responsibilities noted above and determining whether the company needs them and whether or not someone else (with a different title) can do the tasks.

Accounting, while critically important to cash management and communications with the board and shareholders, does not require a CFO. A skilled controller with a good team (or solo at small companies), or even a bookkeeper or CPA at a really small company, can keep the books in good order. Furthermore, outside accounting and tax expertise are readily available should your Controller have questions or issues, so there is a good support system available for your accounting group without having to rely on a CFO. Therefore, maintaining good books and good accounting practices is not in itself a reason to bring on a CFO.

Financial analysis, strategy and execution (including fundraising) are more interesting reasons to bring on a CFO. You don’t find many financial analysts at small companies. There is a threshold quantity of analytical work that needs to be reached before you could rationalize such an addition. Further, many analyses benefit greatly from extensive real-world experience which a CFO brings and an analyst simply doesn’t have. If your company’s business model is still forming and you want an expert analysis from all angles, and you want to continually tweak and try different inputs and outputs, you may want to consider bringing in a CFO. Clearly you would not bring them in solely for the analysis, but this could be one highly compelling reason to bring in a CFO over other possible additions.

If your business is a financially driven entity insofar as you are in the business of leasing or you expect to build a large asset base and the return on those assets drives your profitability or in similar situations, you will probably want to bring someone on board sooner rather than later to work with the CEO and executive team on the strategy around how assets will be acquired, financed and deployed, and at what return on investment. These tend to not be point exercises, but rather ever-changing and complex analyses and strategies which need continuous care and feeding. In this instance you would want to bring on a CFO to help set and execute your strategy.

Fundraising is a critical part of the CFO discussion Fundraising is a critical part of the CFO discussion. There are certainly a large number of CEOs who are perfectly capable of putting a round together solo, and then leaning on a good Controller for execution of due diligence and strong outside counsel for putting together the deal documents. Many companies get their first funding from angels or other early-stage investors without the benefit of a CFO. Part of being an entrepreneur is doing these things yourself. Until, that is, it no longer makes sense to do. Sometimes the CEO is simply not a great pitchman (or woman) and the company needs someone who knows the players, knows how to put together and present a fundraising pitch, and can help drive the negotiations and close the docs. If the CEO’s time is better spent figuring out how to build and sell the product and the company has fundraising needs, it may well be time to bring in a CFO. A good CFO will work with the CEO and the exec team (and the board) to put together the pitch, arrange the roadshow, deliver the pitch with the CEO (sorry, you can’t get out of that), work all of the logistics including the due diligence, act as advisor in the valuation negotiations, and help drive the docs to completion with both the company’s and investor’s counsel. As CEO you can decide whether you want this help, or perhaps your board will decide for you. Remember to think ahead as many financings take four to six months to complete from start to funds in the bank, and your new CFO will need a few months to come up to speed before being maximally efficient in the fundraising process.

Some companies get off the ground fine under the sole power of the CEO. But not every CEO can drive everything from market and marketing strategy to sales to financial analysis and budgeting and the other myriad details of an organization. In fact some CEOs who try this find themselves mired in operational details when their investors would be better served with the CEO out in front of the company singing its praises to all who will listen and keeping the revenue-generating side of the house on track. If this is the case, it may be time to consider bringing in a CFO to run the finance, accounting and administrative operations of the business. This can include the aforementioned HR, IT, legal, facilities and other administrative activities. The hiring of a CFO can free a CEO up for all sorts of creative and revenue generating activities. If you find yourself as CEO (or your CEO as a board member) absolutely buried in the operational details to the detriment of your top-line growth, you should strongly consider bringing in a CFO as the inside partner.

Which brings me to the final point: leadership. Some CFOs make great leaders. They are the rock that many companies lean on and are the quiet complement to the CEO. Most companies being built to last (to borrow a phrase from Jim Collins) are not the product of a single charismatic leader, but rather the result of a team of top performers each of whom does their job with an eye to both functional and total-company excellence. CFOs are well positioned, and you could almost say “trained”, to play the role of scalable and effective institution builder at growing companies. If your growing company is ready for this (and many are not ready for quite some time) then you would want to consider hiring a CFO.

A final note is that some companies find an interim, or contract CFO works for them. Once again, this depends on what skills you need and how often you need them. There are many excellent interim CFOs out there.

All told, the CFO plays a central role in any successful, large company. The question of whether to bring one on board is not about the size of the company or how much money it has raised. Rather, bringing on a CFO is about hiring the skills and leadership your company needs when it needs them – not before.