By Brooke Evans, CEO CFO Alliance. Creating value for innovative founders with serious fun leadership since 2008.
In the startup world, cash flow is king. It became crystalline during the epidemic as cash-strapped companies struggled to keep solvent in the face of huge business barriers as usual. When the dust settled, the founders were able to pivot and adapt a well-developed financial strategy that included adequate cash reserves, extensive risk management, and agile cash flow management strategies. The epidemic crisis has served to highlight what successful business leaders already know: Stable cash flow is the driving force behind success and growth at every stage from startup to exit.
It’s about leadership
But for most innovative founders, slogging through cash flow numbers in a spreadsheet is a daunting task. The founders are champions of new ideas and strategic approaches, ready to jump at the next opportunity. They look at the big picture, and they don’t like to get caught up in the details.
So it is very important to have the right CFO on the board from the beginning. A pioneering thoughtful CFO will manage the financial structures and processes that drive the vision of the founder at each stage of growth. They will encourage the effort with the details and data needed to get everything right. And if necessary they will take a break.
How do you find a CFO like that? The first step is to know what to look for. Here are four leadership features shared by CFOs of successful startups.
1. Financial foresight
CFO provides planning and foresight to underwrite the CEO’s vision. Where an entrepreneurial CEO goes ahead with the optimism that new ideas win, the CFO provides numbers to back up those ideas — or in some cases, to suggest alternative steps. In the best case scenario, these two perspectives work hand in hand to create successful results. In terms of cash flow management, it looks like this:
Frequent Cash Transactions: Ideally, the CFO will conduct weekly cash transactions to maintain an accurate picture of money coming in and going out.
Conservative sales forecast: Leaning towards the conservative side of the sales forecast will help identify where changes need to be made. It’s also a great way to keep tabs on performance across different sectors of the business and identify which ones are performing the least.
ক্ল Close monitoring of metrics: Cash flows and outflows, order-to-cash cycles, purchase-to-pay cycles, gross margins and other cash flow metrics will help identify growth opportunities. They are also important for evaluating M&A agreements and protecting the interests of investors.
2. Strategic mindset
A strategic CFO understands that tomorrow’s success depends on building the right financial structure today. The right person will work alongside the CEO to create an effective financial plan that will take the business to the next level of growth. This includes thinking several steps ahead to reduce the risk. For example, instead of focusing business power solely on sales and profits, a strategic CFO will think about how to convert profits into cash, how to accelerate cash flow, and how cash is going out. For example, the CFO should answer such questions as:
What if we lose our biggest client?
What steps should we take to get more cash within a certain date?
How much cash should we have in reserve?
How will this increased investment affect our cash balance?
How can we improve our gross margin without costing the customer?
When and where do we need to cut?
How should we structure our financial processes so that we can scale when we are ready?
How do we position ourselves for a high-value M&A deal?
The numbers are not flexible, but must be CFO. They must be able to change direction when there is a warranty and advise the CEO on financial options when things do not go as planned. While other areas of business become unpredictable during epidemics, the CFO must have a strong understanding of cash flows and the risks involved. They must have clear information to determine how those factors will shape shareholders’ values, business impact and strategy in the face of rapid change. This data is even more important in a volatile situation like the one that emerged in 2020. Monitoring cash flow provides CFOs with important information on where and how to make strategic adjustments.
4. Appropriate counterbalance
The best CFOs are those who have a vested interest in the success of the company. They care about the outcome, and this makes them strategic partners for more effective decision making. Innovative founders tend to be optimistic risk takers, and their team needs someone who can provide insight and appropriate pushback if needed. Working with a CFO who shares the same values and motivations gives the CEO the ability to see before jumping in as well as believe that the best interests of the company take top billing.
The success of any company depends on its ability to generate positive cash flow. But complexity, ambiguity, and unforeseen crises can derail even the best-established startup plans. In this situation, strategic leadership from the CFO’s office can lead the company. When the chemistry between CEO and CFO is right, their unique leadership qualities will sharpen each other and work together to get the best possible results for the company.