By Ed Watson, Partner, New Bridge Consulting Group
A robust Financial Framework is critical to ensure and demonstrate financial control and provides the tools necessary for effective decision making and financial analysis. While many CEOs focus on activities such as managing strategy, product management, client acquisitions and cash burn rate, they must also fundraise, manage their investors and their board. The CEOs in many early stage companies may be doubling as both the CEO and CFO.
As such, it is critical a CEO has the tools to demonstrate effective control of the organization’s financial statements as well as the tools to demonstrate understanding of the financial drivers and control dynamics of the business.
Additionally, given the economic impact of Covid-19 on projected revenue streams, emerging companies are keenly aware of the need to manage their cash burn as fund raising has become more challenging due to venture capital firms re-aligning their investment strategy and investing with greater caution. However critical functions, such as the finance function should not be shortchanged.
Given these budget constraints, and the company’s inability to afford a full time CFO, organizations should consider utilizing a Virtual CFO (“vCFO”). A vCFO (also called a fractional CFO) is essentially a part-time contractor/consultant that fulfills finance functions at a fraction of the cost of a full-time employee or employees.
A vCFO can provide services ranging from basic bookkeeping functions to being an essential member of the C-Suite providing strategic guidance and a senior presence. These capabilities can assist in building credibility with the Board and your investors. Although the CFO function is essential to business success, a full-time CFO is expensive and often provides excess capacity for the finance function. Clearly as a company grows it does become essential to hire a full-time CFO that is an essential member of the senior team.
Another consideration is as an organization nears the time for a monetization event, management must demonstrate a mastery of the business as well as a strong internal control environment that reduces the risk control deficiencies that are discovered during the due diligence process. The following practices give the CEO/CFO the tools necessary to demonstrate financial control of the organization and the tools to effectively manage financial outcomes:
1. Bookkeeping
2. Financial Reporting
3. KPIs such as:
- Revenue Retention
- Cost of Customer Acquisition
- Customer and Business Segmentation
4. Cash Flow and Capital Management
5. Performance Tracking
6. Business Strategy
7. Budgeting and Expense Management
We have found, it is best to have a clean set of books and records along with a robust set of KPI’s from the onset of one’s business. It’s a very expensive and time-consuming effort to recreate a set of books and records. Additionally, it is difficult, if not impossible to optimize a business without KPI’s which serve as decision support metrics.
In summary, the value a vCFO delivers far exceeds the cost of the service. The C-Suite benefits from a senior presence that contributes to strategy and strategic analysis. The CEO and management benefits from both the experience of the vCFO as well as the robust set of actionable KPIs. Lastly, the firm avoids a tremendous cost down the road since it has a clean set of books and records.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.