This article describes the areas I focus on as a Fractional CFO when starting with a new client, and the value add elements that are layered on top once the foundation is in place and working well.
Foundation
Cash
If there is a <6 months cash runway, this is the top priority. We need a weekly report showing cash, AR, AP and any other short-term assets or liabilities that quickly turn into cash flows. We then generate 4 and 13 week averages to understand trends. In addition, we should capture any known or likely large cash flows that are not part of standard business operations. This is not a forecast, but gives us a historical trend which is one basis for managing the company’s cash position. Forecasting requires a capable financial model which comes later, and even then, high accuracy is rare in high growth businesses due to volatility in the numbers.
P&L and Balance Sheet review
A GL code level review, understanding what bookings are made to each account, on what frequency, and the accounting policy that governs them. Where accounting policy is not documented it needs to be, clearing up ambiguity if multiple people are involved, and adding resilience to the team by capturing knowledge. The review is based only on actuals, looking at monthly, quarterly and annual movements.
The most difficult issues to spot are figures that should change but don’t, or those that are not moving in line with the business. These areas are problematic in the first pass due to a lack of business understanding, so the process needs to be repeated after one month, and again after six months.
Key Process Review
All key processes are walked through to identify weaknesses or lack of scalability. This will inform where systems replacement or process reengineering are required to ensure accuracy and completeness, as well as efficiency. The most important processes are around payroll, cash management, and month end close. Over time processes need to be documented to build resilience in the team, and speed up onboarding of new team members.
Team Structure, Assessment and Hiring
The core finance department consists of Financial Control (FC), and Financial Planning and Analysis (FP&A). FC is headed by a Financial Controller, and covers transactional finance areas such as accounting / month end close, payroll, audit, accounts receivable and accounts payable. FP&A is responsible for budgeting, financial planning, and P&L variance analysis. Over time, the FP&A function will become a partner to the business below c-suite level, and help improve business understanding through insights. This latter function can be broken off into Business Intelligence, and potentially Data Science as the business scales.
The existing team is assessed into three categories: strong performers, solid performers, and those who need to improve or be managed out. Much of this assessment will be done during the P&L and key process reviews.
Understanding the roles, responsibilities and capability of the existing team, combined with the growth plan for the business, and pain point feedback from stakeholders, allows the development of a planned team structure. This in turn informs hiring priorities, which is likely to start with a Financial Controller if one is not already in place.
P&L Structure Analysis
It is common for the P&L to be structured in a way that reflects accounting practices, but does not aid business understanding. The first step is to ensure we have GL codes that provide the required level of detail, and that costs and revenues are correctly booked. The next step is to ensure that variable and fixed costs are distinct. This is critical to second order metrics that will be specific to the business, and can be calculated from the P&L, as well as to inform unit economics.
Unit Economics
This should define the ideal state where costs are efficient, and revenue is maximised as well as the current position. An accurate split of variable costs from fixed is critical, as is understanding where scaling is not linear, and requires a more complex model to understand how the business will grow over time. The gap between actuals and ideals helps leaders identify priorities, as well as validate if the definition of ideal is realistic. This exercise can lead to a fundamental shift in business approach or focus.
Financial Model Review
A true financial model responds to changes in assumptions the same way the business would. This enables scenario planning. Many financial models are just forecasts that assume the business will behave in the same way it has historically. The model should be as simple as possible without removing essential complexity. Creating such a model can be very involved, requiring a team and months of work, depending on the complexity and dynamics of the business. I do not suggest doing this work until an FP&A leader is hired unless the business is simple to model. In the interim, a forecast will suffice. However, the existing forecast needs to be validated for critical errors.
Culture
Over the long term, company culture is the most important contributor to success. It is the one competitive advantage that can be maintained while others are lost. The best book I have found to describe my approach to company culture is The Promises of Giants by John Amaechi. Within the finance team, I view the following as key.
Integrity
The team must operate ethically (judgement needed), within the law, and in the best interests of the company which includes the best interests of its employees, and the communities it serves, as well as the shareholders. In the long run, all of those elements are aligned, see The Infinite Game by Simon Sinek.
Psychological Safety
Psychological safety is the belief that you won’t be punished or humiliated for speaking up with ideas, questions, concerns, or mistakes. If there’s a problem any of the team knows about, and the leader doesn’t, that’s almost always the fault of the leader through not establishing psychological safety in the team. Financial problems can snowball quickly, and the sooner they are identified and resolved, the less likely they are to be major issues. The leader should invite challenge, helping the team understand that testing ideas, and sharing concerns, is part of doing their job effectively, and should never feel like a risk. Depending on how previous leaders ran the team, they may be hesitant at first, and initial questions should be warmly welcomed to establish the practice, even if they are of limited merit.
Continuous Improvement
Finance is a support function that many others lean on, whether they realise it or not. Typically, that is only felt when it is not working well. In a rapidly growing company, systems and processes that are sufficient now may not be in six months, and identifying bottlenecks in advance can prevent later pain. The team should be encouraged to identify the root cause of mistakes and problems proactively, adjusting or creating processes or systems to prevent the same thing from happening again. This is not a blame placing exercise, but rather, how do we make things better for the future.
Accountability
Team members should feel responsible for, and empowered to, take care of their areas of ownership. This requires clearly defined roles and responsibilities, responsiveness to questions or concerns, and a willingness from the leader to protect and develop the team.
Teamwork
While accountability is primarily focused on the individual, there should be a shared sense of responsibility that even if your responsibilities are covered, the team doesn’t succeed unless everything is done. Building knowledge adjacent to their own, and offering help to colleagues who are struggling builds team cohesion and leads to better outcomes.
All of these values must be modelled in the behaviour of the company’s leaders. Irrespective of the written company values, employees respond to the behaviours that leaders exhibit, encourage, and dissuade. A lack of alignment between written and practical values erodes employee trust, and ultimately damages performance and retention.
Value Add
Strategy
Ideally, the strategy of the company is captured in a well-written, live document, and is updated and reviewed at least every six months. The document is deeply understood by all senior leaders in the organization. It describes the problems being solved by the business, defines success, what each department contributes to that success, and how they will get there (or at least the plan to work that out). The tactical pillars the strategy is executed through become a reference point for operational decision-making, and anything that does not advance these objectives should normally be deprioritized. KPIs are developed, measuring the execution success of the strategy.
In most companies, if you ask the leaders for the company’s strategy you will get different answers from each. That is because the strategy is not documented, but instead sits in the CEO’s head, and evolves without being visible to other leaders. This disconnect can lead to misalignment between teams, as well as lack of confidence from the CEO in their team because they don’t feel their people “get it”. That leads to a centralised command and control structure, where all important decisions come back to the CEO, or at least to the leadership team. That is ok while the company is small, but as it scales, if decision-making cannot be pushed down in the organisational structure, the leadership team becomes a bottleneck, and business growth slows. It also reduces performance because more junior leaders do not feel empowered to control their area of responsibility, inhibiting their growth.
Business Partnering
Having established robust FC and FP&A functions within the finance team, attention is focused outward to support business decision-making, particularly the financial consequences, and identifying opportunities to capitalise on, and risks to mitigate. Within FC and FP&A, finance often acts as a gatekeeper, constraining the business, but in business partnering, it becomes an enabling function that identifies and finds solutions to business problems. Finance is one of the few functions with company-wide visibility, and as such can bring a holistic view to challenges.
Fundraising
When meeting potential investors, CEOs are typically great at sharing why they founded the company and their vision for what it can be. Talking about how that business will come together over time, unit economics, cash flow, and returns, are CFO strengths. Having a CFO who can shape the pitch deck, handle the due diligence process, and support in investor conversations, all help investors believe that the vision will become reality, which is a significant step towards getting money in the bank. We can also help identify the best structure for fundraising.