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Please note that an abridged version of piece was first published on Inside Small Business.

With funding conditions tight, it is more important than ever for startups to be fully across the financial health of their business. 

The KPMG Private Enterprise Venture Pulse report revealed that following years of record growth, VC activity in Australia dropped 55% to US$176.9 billion in the first half of 2023 compared to the same period in 2022. This has changed the equation for founders when it comes to fuelling growth - with a renewed focus on achieving profitability and operational efficiency. Moreover, investors are demanding that founders intimately understand their business as well as their product, which means being across the numbers and what these indicate about the health and viability of the company.

As startups grow, so do their requirements when it comes to financial maturity. In the early stages, financial responsibilities are generally handled directly by the founders themselves, potentially with a financial controller or accountant, and sometimes a neighbourhood bookkeeper. 

However, when a startup scales, the finance function becomes more complex and an increasingly essential strategic tool for growth. It stops becoming about reporting on the past and more about predicting the future.

should i promote my finance manager to cfo?

At some point, generally following an injection of capital from a funding round or when sales reach a certain level, startups face a critical decision: how to build out the finance function and who will lead it.

Josh Geelan and Eddy Moh share their views on how to approach your finance function at different stages of growth.

The instinct is often to promote the finance manager or accountant to CFO. After all, they understand the startup’s history and have been deeply embedded in the day-to-day operations of the finance team. 

While many finance managers have historically made that transition into a generalist CFO, we often see that these finance professionals have a traditional skillset that skews towards accounting, bookkeeping, and ensuring that financial records are accurate and up to standard.

As organisations scale, what the CFO really needs is to bring a forward-thinking mindset, not unlike that of investment bankers. They should be concentrating on strategic aspects such as calculating the return on investment (ROI) of a new project, growth modelling, exploring M&A opportunities, and financial planning. 

For a startup to successfully scale, they need both sides of the same coin. However, many struggle with the latter – either introducing this role too late, too early, or not at all.

when should the role of the cfo evolve?

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The way we see it, there are face two significant triggers that can necessitate a shift in financial skillset:

Increasing sophistication on the cap table: In the beginning, startups often rely on friends and family funding or angel investors who may not delve deeply into financial intricacies. As the business gains traction, they need to attract larger sums of investment from institutional or experienced investors. To secure these investments, sophisticated investors demand a comprehensive understanding of the startup's financial health and growth prospects. A CFO with an accounting background may struggle to provide the latter of those.

Growing complexity of the business: The second trigger is the natural growth and complexity of the business itself. As startups expand their operations, enter new markets or develop new products, their financial needs diversify. It's no longer enough to focus solely on bookkeeping and basic accounting. Questions about cash flow management, financial modelling, and long-term financial strategy come to the forefront.

three considerations when hiring a strategic cfo

KPMG Enterprise Partner, Robyn Langford, talks about how she loves working with founders and their teams and the value of outsourcing your finance function.

1. Outsource the strategic CFO role to begin with…

Hiring a full-time CFO, especially one with the right experience and background, can often be costly and time-consuming. At the same time, most startups may not need a strategic CFO on a full-time basis – you might need the advice for a few hours a month, or at specific periods of the business, such as leading up to a capital raise or a significant change event. In these instances, outsourcing can be a cost-effective and flexible solution to plug the skills gap without the need for a long-term commitment.

2. …but don’t outsource forever

As you scale your business, investors expect founders to have key skills in-house and in the management team, particularly when it comes to mission-critical roles like finance, product, and operations. For example, a Series A startup with a reputable outsourced CFO will likely be looked upon favourably by investors; whereas a Series B or C startup with a fully outsourced CFO may raise more questions than it answers.

While outsourcing can be an ideal solution in the growth phase, it’s not a permanent one. You should be leveraging an outsourced expert to upskill your in-house team or working with a CFO advisory team to plug knowledge gaps within your existing outfit.

3. Look for a CFO that adds accountability to innovation

There’s a common misconception that founders and CFOs are in a constant battle in how the company fuels its numerous growth initiatives. However, the role of a strategic CFO isn’t to say no – it’s to educate key stakeholders of a business on the trade-offs between allocating limited resources to specific growth initiatives over others. Startups need to make carefully thought-out bets, and to bring accountability to those bets with financial modelling, cost benefit analyses and regular reviews.

As a startup evolves, the finance function should evolve alongside it – shifting beyond the role of reporting and more towards a strategic enabler of growth and success. Outsourcing the role of the CFO to an experienced advisor provides much needed breathing room for a founder and the team as they scale up their product, processes and operations, without compromising performance or profitability.

Learn more about KPMG High Growth Ventures and how we can support you throughout your startup journey.