Going from zero to one employees is a difficult process in any function of the business. It's an exciting sign of progress, but it's also a leap of faith. How can it make sense to hire one person and expecting them to master everything?
In very broad terms, the finance roles we commonly see in startups can be split into three categories:
The CFO focuses his or her attention on the strategic aspects of the finance function. This might include negotiating with investors or debt providers to raise finance, interpreting key results to inform decisions and planning ahead for the future. Other common job titles include Finance Director, Head of Financial Strategy or VP of Finance.
The middle tier of the finance team is usually occupied by an individual who focuses more on the operational aspects of the function. This includes designing processes that work well around the rest of the business, and ensuring that they are carried out effectively. They might have job titles such as Finance Manager, Financial Controller or Head of Finance.
The lower rung of the finance team is usually taken up by a bookkeeper or a Finance Assistant. An individual with the Bookkeeper title is more likely to be an experienced contractor, compared to a Finance Assistant who might be at the earlier stages of their career, but it is difficult to generalise. Either way they are typically responsible for carrying out the processes built by the operational finance specialists, such as bank reconciliations, payment runs and payroll.
Each of these three tiers has a different focuses, and therefore attracts a very different sort of individual. The position you create first will shape the strengths and weaknesses of your business going forward, so it's decision worthy of consideration.
Below I'll highlight the relative advantages and disadvantages of starting with each position.
Starting with the CFO might seem like a logical choice, as they traditionally head up the function. Therefore you might expect them to know how to operate at all of the levels below them, and indeed the very best CFOs certainly can.
However as most CFOs are individuals who have chosen to specialise in a strategic problems, they are sometimes less capable, or motivated, to engage with detailed problems around bookkeeping. Even where they are, the higher salary that they command makes it an uneconomical use of their time.
This lack of operational finance expertise can manifest it in a number of pain points as the business increases in complexity. You might find that your CFO needs to spend more and more time on the bookkeeping, resulting in a lack of time available for strategic questions, and frustrations in the reporting process.
In conclusion hiring a CFO first is a good option if you have one of the rare candidates who is equally competent in operational and strategic matters, and you can afford to hire them. It's also sensible for businesses that demand a lot from the strategic skill-set early on, or where the founding team knows that they need help securing investors.
Starting with the Head of Finance provides a balanced solution to the most common problems that rapidly growing businesses face. They are close enough to the detail to develop adaptable processes, but should also possess the commercial understanding to assist the founding team with financial analysis.
A finance function is made up of two elements, people and processes. As it is operational finance people who build those processes, the sooner you can bring in this skill-set the better off you will be.
The Head of Finance role is a good starting point where the founding team feel confident in their own abilities in fundraising and strategy for the short term. It's also highly beneficial where the size or complexity of the business is expected to increase rapidly.
There aren't any statistics available, but from our anecdotal experience hiring a bookkeeper first is probably the most common choice for startups. This is most likely because their first experiences of frustration in finance come from mundane tasks like finding receipts and making payments.
From a practical standpoint hiring a bookkeeper is the cheapest, and therefore feels like the safest, choice. Compared to the Head of Finance role they are much more likely to be available on a part time or freelance basis.
However whilst hiring a bookkeeper first can work for a simple or stable business, we find that it is less likely to well for organisations that are growing quickly. Freelance bookkeepers, in particular, commonly work remotely on a part time basis, and therefore find it difficult to develop a good commercial understanding of the business, or relationships with the other team leaders.
The majority of bookkeepers are skilled in following processes, but they are not often enthusiastic about investing time in developing new processes. Where they work across a variety of businesses they are incentivised to increase their own efficiency by using the same software and processes across all the businesses they work with. This can result in a lack of process development, or off the shelf templates being applied to highly complex business models.
We find that hiring a bookkeeper is not typically a good option for startups, although of course there are exceptions and some outstanding bookkeepers can be found.
It wouldn't be right to complete this article without mentioning Quantico's role in building finance teams. We experienced the pain of trying to run a finance function in a rapidly changing business, and did our best to create the ideal solution.
When it doesn't make sense to hire one individual and expecting them to know everything, Quantico provides you with a fully managed in-house team.
The service is structured around a Finance Business Partner, qualified ex-big 4 accountants and startup specialists. They spend time in your office, getting to know your team, implementing improvements and planning for your future growth.
Our Finance Operations team then login to the systems set up, and complete the transactional work in the most efficient way possible. Because we see the same problems come up again and again we're always on top of what needs to be done, no matter how fast you grow.
For more information visit www.quanticofinancial.com.