Early-stage technology companies often have a laser focus on cash management. Some founders, being mindful of conserving cash, may prioritize hiring developers over hiring accounting and financial personnel. However, decisions about when to hire Chief Financial Officers (CFOs), controllers and other personnel can have significant long-term implications that impact expansion, fundraising and other plans.
Tech companies should think strategically about their accounting and finance teams and be prepared to put the proper staff in place at the right time.
- For tech companies, it’s important to have a finance and accounting infrastructure in place to support rapid growth.
- A bookkeeper is necessary as soon as a company has any economic activity.
- As a startup grows, a strategic Chief Financial Officer (CFO) can help determine the company’s target valuation and prepare for big liquidity events.
“If you scale your teams too quickly, you incur excess costs – which is the last thing investors want to see,” explains Jack Perkins, Founder and CEO of CFO Hub, a CFO services firm providing outsourced finance and accounting executives, as well as services such as HR recruiting. “However, the risks of waiting too long can be catastrophic. A lot of small changes and errors early on can cause the balance sheet to be a mess, just when you are facing heightened scrutiny from investors and partners.”
First Republic interviewed Perkins for tips on how tech companies can help ensure they have the right financing and accounting teams in place at any growth phase.
The functions of a finance team
The three primary members of a finance team are an accountant or bookkeeper, a controller and a CFO.
- An accountant or bookkeeper is responsible for recording and monitoring financial transactions, reconciling bank statements with the general ledger and closing the book at the month’s end.
- A controller is a senior-level leader who oversees a variety of financial and accounting operations, including financial reporting, compliance, treasury management, budgeting and forecasting.
- A CFO is a C-suite executive tasked with managing and monitoring the accounting and financial analysis teams while outlining their vision for the business to forge a path forward.
Additional accounting and financial personnel can include billing specialists, payroll specialists, tax preparers and accounting managers.
Preparing for rapid growth
Technology companies, more so than most industries, can hit inflection points when they scale rapidly, according to Perkins. So it’s vital that a company has a finance and accounting infrastructure in place to support rapid growth.
“The best way to do that is to be proactive and hire for tomorrow, not just for today,” Perkins says. “The best practices are to create redundancies and train multiple team members on overlapping responsibilities in the case of vacations, turnover or other disruptions.”
Startups need to have their financial house in order when venture capital firms and banks perform external financial audits. This means elements such as the company’s finances, revenue recognition and data room should be ready for institutional-level scrutiny.
“All these elements don’t need to be set up from the get-go,” Perkins explains. “However, a company should plan for how it will provide these capabilities as it goes through different stages of growth.”
Those stages can be divided into the early stage, growth stage and established stage. Each stage can affect the type of accounting and financial personnel a company needs; below are guidelines from Perkins.
- Angel, Fund of Funds (FoF) or seed funded
- Developing product
- Series A or B funded
- Revenue up to $50 million per year
- Launching product
- Revenue $50 million-plus per year
- Expanding markets and/or product lines
||Full finance team
Too often, entrepreneurs overlook responsibilities around finance and accounting after they receive initial seed funding or investment from an investor.
Best practice: A bookkeeper is necessary as soon as a company has any economic activity. “The bookkeeper should be familiar with complex industry regulations, the accounting system the company uses and be able to adapt to changes that can come quickly with the new breed of cloud-based technology,” Perkins says. “Many bookkeepers focus on cash-basis accounting, but they should also understand accrual-basis accounting.”
Tip: Tech companies with as little as $500,000 in revenue should consider a part-time or fractional controller to ensure financials are reported in accordance with Generally Accepted Accounting Principles (GAAP).
When a company hits $10 million to $50 million in revenue, it should consider bringing in a fractional or part-time CFO.
At the growth stage, a company typically forms a board of directors and becomes subject to its first financial audits. A CFO is essential to oversee the process and ensure financials and quarterly reports are reliable.
Best practice: Perkins advises that “the earliest point a business should consider a part-time CFO would be at $1 million in annual revenue.” And when hiring a CFO, it’s important to determine if their personality and skills are in sync with a fast-growing startup.
“A lot of entrepreneurs think one-size-fits-all for CFOs and controllers, but you might need different characteristics and skills at the company’s different stages,” Perkins says. “A company with $10 million to $50 million in revenues might need a CFO or controller who knows how to roll up their sleeves and are still willing to post and code transactions in the financial system.”
Tip: During the growth phase, many companies are focused on the next funding round, a merger and acquisition, or a possible sale. A strategic CFO can help determine the company’s target valuation and prepare for big liquidity events. “Controllers, accountants and bookkeepers may not necessarily feel comfortable engaging in these strategic discussions,” Perkins says.
At $50 million to $100 million in revenues and up, a company should consider hiring a full-time CFO with a full-time accounting and finance staff. This can help the company expand product and service lines and prepare for an initial public offering, according to Perkins.
Best practice: “As the company grows, you might need a CFO who is skilled at managing large teams and is familiar with sophisticated external reporting requirements, such as from the Securities and Exchange Commission and other regulators,” Perkins says.
Tip: A strong CFO who is coached appropriately can often shift from the growth stage to the established stage, but sometimes the transition requires someone with new skill sets.
Thriving in a challenging economic environment
Scaling financial and accounting teams during a recessionary environment can be difficult; founders may be hesitant to spend more money on staffing finance teams. However, Perkins advises that these functions are critical and must remain in place.
To weather tough financial times while still maintaining proper controls, companies can automate tasks so fewer staff are needed or hire part-time or fractional personnel.
“Many tech companies are pre-revenue, so effective cash management is critical,” Perkins says. “Bringing in the right people at the right time, even on a part-time basis, can help you develop strategies that conserve cash and extend your runway so you are able to hit key milestones.”
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