Securing Startup Success: Why Financial Expertise Matters
Startup founders seeking financing will need an edge in 2024 and beyond, as venture capital firms continue to reduce the pace of investing from 2021 levels. Carta reports that US startups raised ~$60 billion in 2023, down from $121 billion the previous year.1 While investment levels are expected to moderately rebound in 2024, the uptick will remain below the pace witnessed over the last few years, indicating that a recalibration is still taking place.2
As startups face off for available funds, many early-stage companies are confronting a crucial challenge: Nearly 80% don’t have a CFO.3 In fact, it’s common for startups to have no financial professionals on staff at all and rely primarily on outsourced bookkeeping solutions.
Why Startups Need Financial Expertise
Lacking a CFO, startups typically leave important financial management tasks to the founder, CEO or another employee who has the extra time. That means someone without dedicated knowledge is managing finances, and probably doing so mainly at a transactional level. They spend the majority of their time focused on operational finance tasks, such as bookkeeping, payroll, invoicing and similar functions.
While these tasks are critical to keep the company functioning on a day-to-day basis, they have less of an impact on strategically positioning the organization to receive the funding necessary for growth. Potential investors want to see that your company has the right financial foundation, by reviewing important metrics, such as:
- Customer acquisition costs (CAC)
- Customer lifetime value (LTV) and LTV/CAC ratio
- Capital efficiency metrics
- Customer cohort data by e.g. MRR, NRR and churn
- Where expenditures are made and whether the money is wisely spent
- A plan for how investments will be used to propel growth
- Length of time it will take investors to receive a return on their investment
While early-stage startups may not have data to demonstrate a “true” (i.e. proven) CAC, LTV or long-term NRR and churn, they can present available data and assumptions, indicate how costs are managed and where invested funds will be spent. Later-stage companies will need to demonstrate specific metrics, such as MRR targets or how they will reduce the company’s burn rate to reach a certain multiple.
Which brings another important point to mind. Without a finance professional to guide the process, how does an entrepreneur know what information is necessary when it comes to securing funding?
The simple truth is, 38% of startups fail because they run out of cash, and 15% drop out of the running due to pricing or cost issues.4 If you’re outsourcing bookkeeping services or dolling out finance tasks to someone without financial knowledge, you’re at a comparative disadvantage to startups that employ a CFO or have similar expertise in-house.
You could say it’s like handing the car keys to a new teenage driver without providing any training on roadway designs or how to recognize the appropriate signals along the way. In the end, a crash is bound to happen, and for the startup, this means failing to secure the funding they need to scale and grow their operation.
Tips for Setting up Your Finance Function
As startups seek funding from investors, they’re selling more than a vision. They’re selling trust in the company. The majority of that trust is established by the startup’s ability to demonstrate a route to return on investment, not just vocally and through slides, but through numbers.
To achieve a high probability for success, startups need to establish sound financial management right from the start and measure the metrics necessary to deliver insightful reporting. Advancing the finance function to this degree, requires the dedicated services of a CFO.
While the expense associated with hiring an internal professional is likely to be cost prohibitive for early-stage startups, founders can achieve the same goals by seeking outside help. By hiring financial professionals, experienced with startups, companies set a sound foundation.
In the early stages, this includes guidance on initial spending and capital acquisitions, to ensure the company is attractive to investors down the line. As the company grows, your financial experts will continue to set the company up for success, by monitoring the right metrics and influencing how targets are met.
With the average turnaround time between funding rounds escalating to over 2 years5, it’s never too early to get your finances in order, and startups who invest in building out a sound finance function will stand the best chance at securing the biggest portion of available funds.
1. Carta. Dec. 30, 2023. Everything you wanted to know about US startups in 2023 in 45 charts. [Post]. LinkedIn. https://www.linkedin.com/feed/update/urn:li:activity:7146549343984992256/.
2. Duncan Reilly. “2024 Venture Capital Outlook: Moderate Rebound to 2020 Levels Amid Economic Optimism.” Silicon Angle, Dec. 19, 2023. Web.
3. Anna Mutoh. “Many Startups Operate Without a CFO. That Was a Challenge as SVB Collapsed.” Wall Street Journal, Mar. 24, 2023. Web.
4.“The Top 12 Reasons Startups Fail.” CB Insights, Aug. 3, 2021. Web.
5.Carta. Dec. 30, 2023. Everything you wanted to know about US startups in 2023 in 45 charts. [Post]. LinkedIn. https://www.linkedin.com/feed/update/urn:li:activity:7146549343984992256/.
FAQs
All the answers you need for all the questions you’ve got.
(But also TL;DR)
How should a startup business prepare its budget?
To prepare a budget for your startup, begin by listing all potential expenses you anticipate in starting and operating your business. Next, organise these expenses into categories. After that, estimate your monthly revenue and calculate the total costs required to start and run your business.
What are the key steps to creating an effective budget?
Step 1: Determine and track your income sources.
Step 2: Make a list of your cost. Include both fixed and variable costs.
Step 3: Set achievable financial goals.
Step 4: Develop a plan to meet those goals.
Step 5: Put everything together to build your budget.
Step 6: Regularly review and revise your forecast to ensure it remains effective.
What does capital budgeting entail for a startup?
Capital budgeting for a startup involves allocating a set amount of funds for specific purposes, such as purchasing new equipment or expanding business operations. This process is crucial as it supports making strategic investments that are expected to yield long-term benefits for the startup.
FAQs
All the answers you need for all the questions you’ve got.
(But also TL;DR)
How can a startup forecast its cash flow?
To forecast cash flow for a startup, follow these steps:
Step 1: Create a sales forecast by estimating the revenue your products or services will generate over the forecast period.
Step 2: Develop a profit and loss forecast to understand your expected expenses and income.
Step 3: Prepare your cash flow forecast, which involves calculating expected cash inflows and outflows. This can often be done for longer-term by using assumptions around payment terms to forecast a Balance Sheet, and using the movements in Balance Sheet and Net Profit/Loss to calculate the cashflow.
Step 4: Consider ways of improving cash flow by improving your invoicing methods, considering short-term borrowing, and negotiate better payment terms to manage cash flow effectively.
What is the most accurate method to forecast cash flow?
The most accurate method for forecasting cash flow in the short-term is the direct method, which utilises actual cash flow data. In contrast, the indirect method is better suited for longer term forecasting using projected balance sheet movements and income statements to estimate future cash flows.
How is cash flow calculated?
Cash flow is calculated by deducting cash outflows from cash inflows over a specific period. This calculation alongside forecasts of future cash flow helps determine if there is sufficient money available to sustain business.
How do you project cash flow over three years?
To project cash flow over a three-year period, undertake the following steps:
Step 1: Collect historical financial data.
Step 2: Identify all expected cash inflows, which could include revenue, investment, grant income, etc.
Step 3: Estimate all anticipated cash outflows including expenses, suppliers that need to be paid, investments into assets, debt repayments, etc.
Step 4: Calculate the net cash flow by subtracting outflows from inflows.
Step 5: Consider your cash reserves and explore financing options if needed.
Step 6: Regularly review and adjust your projections to ensure accuracy and relevance.
FAQs
All the answers you need for all the questions you’ve got.
(But also TL;DR)
When should a startup consider hiring a CFO?
A startup should think about hiring a Chief Financial Officer (CFO) when it begins to experience rapid growth, finds it challenging to manage finances, or needs to navigate complex investment scenarios. A seasoned financial professional can provide the necessary expertise to handle these challenges effectively.
What are the indicators that my business might need CFO support?
You might need to hire a CFO or consider outsourcing this role if you notice any of the following signs: a decrease in gross profit margins despite increasing revenue, uncontrolled business growth, lack of cash reserves despite having a financially successful year, or a halt in business growth.
Does my startup really need a full-time CFO?
Recruiting a full-time CFO is an expensive hire. Given budget constraints and the need to prove the viability of your business idea, founders will often need to prioritise investing into building and commercialising their product. That's where CFO services for startups are a cost-effective solution for founders looking to take their financial management to the next level.
