It’s rare to see finance people between the first hires of a startup and that can be a serious mistake. Learn what FP&A is and why you need an FP&A team
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Your startup is finally at that moment when it can afford first hires (did I just hear a whoop, whoop?). So you start lining up your dream team for the first roles to hire in your startup. Of course, I need developers to build my product. I need marketing and salespeople to do product discovery and get our solutions out of the door. And we as founders are already onboarded to overlook operations and work on sharing the mission, hiring, and fundraising.
Sounds about right, doesn't it? Well, almost.
Aren't you forgetting one other area that can make or break your startup from day 0, Juan? 👀
Yep, it's finance. And finance for startups, might we add, because you have some more players to look out for in this game.
That friend who knows a bit of Excel is not enough. Having a financial planning and analysis (FP&A) team is a fundamental part of any startup that wants to be successful.
The glass half empty is that the finance team is usually formed way down the line in startups 😔. The glass half full is that you'll be different after reading this article 😎.
We'll answer all your questions about the first hire in finance for your startup. Like:
Startups take their time to make the first hires for their FP&A team because founders usually only think of basics when we say finances. And they only hire finance professionals once these basics go out of control.
But you're #notlikeotherfounders. You shouldn't think of finances for startups only as a necessary evil. A finance team is fundamentally strategic, our friends at a16z say. Yeah, just like your product and sales teams.
So let's stop talking only about bookkeeping and get real about financial planning and analysis (FP&A).
Here's what an FP&A team can do for your startup from day 0:
We know that at first things seem too simple and that you're thinking this degree of detail is unnecessary.
But it's precisely when things are simple that you should start being intentional. And hear us out: things get complex real quick. What really happens if you don't invest in an FP&A team from day 0?
First, you prevent your startup from growing healthily from one milestone to the next.
You already know that decisions are changing all the time in a startup. So you always need to re-evaluate your finite resources, rework your KPIs, and recalculate your runway so you can get to the next milestone. That means FP&A is even more a continuous process in a startup, rather than a once-in-a-lifetime effort.
You don't wanna waste time growing your pie only to realize you followed the wrong recipe at some point in time and now the pie has no substance to it.
If you do so, you also reduce your chances of receiving a check from VCs. Investors are now demanding sound financial fundamentals even at earlier stages, SoftBank's Paulo Passoni shared with us recently. You gotta show your strategic thinking also in finances.
By now you've jotted down that FP&A means financial planning and analysis. Right?
You've also realized an FP&A team makes and analyzes financial forecasts and plans, and that their goal is to not only anticipate financial outcomes but also guide your company's decision-making process.
Let's see financial planning and analysis in more detail so you can explain even to your mom why FP&A is sooo different from traditional accounting, and why you really do need it in your company.
Cálmate, Fernanda. There's a reason we made this mess and started at the end of the FP&A acronym.
It's because there's no proper financial planning without thorough financial analysis. You need to collect financial data and draw insights into a company's financial performance from it.
Financial analysis includes a ratio analysis, which means taking various pieces from your financial statements to analyze important metrics like efficiency, profitability, and liquidity.
You can also compare these ratios in time (trend analysis) and to competitors (benchmarking), helping your startup to understand how it's performing in relation to the old industry standards or to other new competitors on the block.
Financial analysis identifies areas of improvement, both from a cost-saving or quality revenue-growing perspective. You can then prioritize your current resources accordingly and, chop chop, 👏 make 👏 it 👏 happen!
Like financial analysis, financial planning is just what its name says. You can say it's… an open book (insert laughing track).
Financial planning means looking at your startup's financial situation and using that to develop strategies that will help it achieve the defined goals.
That could mean identifying the best financial KPIs to track and then calculating them the right way constantly. And with that, updating you on if and when you'll reach your goals based on your numbers and suggesting where's the opportunity you need to focus more.
Besides working on the offense, financial planners can also work on the defense and identify and curb potential risks. That could mean looking at your assets and only keeping what's essential. It could also mean developing contingency plans for tough economical times.
If by now you're still not sure why you should create an FP&A team instead of just hiring that accountant that takes care of the finances of every mom-and-pop shop in your neighborhood…
We can understand. It's cheaper and it always worked out somehow.
But we beg to differ. And we've put together some food for thought that can convince even the most skeptical of the need for an FP&A dream team instead of a traditional accountant:
A traditional accountant focuses on financial recordings and tax compliance. An FP&A professional uses similar raw materials but goes beyond the daily financial records. Budgeting, cash flow management, and cost-benefit analysis are just some of the financial strategies your FP&A team can offer you (and your investors).
An FP&A professional work goes beyond the financial sphere. Numbers can also provide valuable lessons on the overall performance of the company. Your CAC can be too high, your LTV too low, and your runway too short, for example.
Traditional accounting is less adaptable to change and tends to follow standardized business reporting processes. An FP&A professional that has some experience with startups can help you navigate the financial world based on the changing needs of a scalable tech company.
All the support we mentioned above reflects on more informed and strategic financial decisions, which can lead to faster growth.
That growth is also more sustainable. As we've said, FP&A's goal is to anticipate and plan the company's actions based on financial analysis and planning. Traditional accounting, on the other hand, focuses only on keeping financial documents in check to make your company tax compliant.
After realizing FP&A is the thing for your startup, you can go two ways: posting a job ad for an FP&A professional or googling the best companies that outsource this area for startups.
What's the best way to go?
As with everything in life, it depends.
But we're not leaving it at that.
Here are some points to consider for outsourcing your startup's FP&A team:
Outsourcing FP&A may be a good option for very early-stage startups that do not yet have the resources to hire a full-time professional.
But if your startup is at growing and getting close to its Series A, it may be more helpful to have an in-house team to manage the finances. On Series B, that needs is even more pressing as you might start attracting private equity firms as well.
There are other key events, such as a significant annual run rate and proximity to exit or liquidation events.
Complex business models might find it more strategic to have an internal team focused on FP&A. Consider if the lack of constant and proper financial data visualization, such as CAC and LTV, can make or break your startup in relation to competitors.
Outsourcing FP&A can be more cost-effective in the short term for startups that do not have the resources to hire a full-time professional.
But it's also important to check the long-term cost-benefit. Take into account the value that an in-house team can add to the business over time, especially considering your growth and how financial data can provide an edge to your business.
Also, keep in mind that mixed solutions may work. Think of your startup's specific needs and search for the most cost-effective solution.
Some examples of creative solutions are hiring fractional/part-time CFOs or bookkeeping firms so that your smaller FP&A team can focus only on analysis and planning.
The good, the bad, and the ugly.
Sugar, spice, and everything nice.
Good things come in threes. And finance is not an exception.
When deciding on your first hire in finance, look no further than the triad CFO, Head of Finance, and Bookkeeper. We'll know more about them below so you can choose which one fits your startup best.
That's the dream, right?
Still, hiring the right Chief Financial Officer (CFO) is not always cheap or necessary.
So let's know more about the role of a CFO in a startup and when your startup should hire one.
The CFO is the most senior executive when it comes to the financial management of a company. A good CFO ensures that your startup has a sound and effective financial strategy, aligned with the company's business objectives.
A Chief Financial Officer (CFO) leads the company’s finance team, being the higher financial position in a company.
The smaller a company is, the more hands-on a CFO will be. But ideally, the rest of the team handles accounting, treasury management, financial analysis, financial planning, financial modeling and forecasting, financial reporting, risk management, and financial compliance.
The CFO is then responsible for leading the long-term strategy. For example, thinking about how to drive revenue and profitability across the company. And because of that, the Chief Financial Officer can also take a closer look at legal aspects, payroll, and even product and operations.
Another role of the CFO is to communicate effectively with other executives in the company and even external investors about the startup's finances, assuring them that the company’s fundamentals are sound and aligned with the goals. The CFO can be a great ally when fundraising.
(Warning: in some companies, you use both CFO and Finance Director/VP of Finance interchangeably. In others, you have both positions and the CFO stays above the VP. Both act as business partners, looking at how to impact the business strategy.)
CFO sounds a little bit too much for your startup right now?
Maybe a Head of Finance is the way to go.
Mid-level seniority roles are always hard to define. Still, we can summarize that a Head of Finance works in defining and implementing processes for the finance team.
A Head of Finance will pay much more attention to operational and internal aspects than the CFO. Their function is not so much to help you with VCs but rather to make your company more efficient (which btw is still more strategic than what traditional accounting firms usually do and will help you with VCs down the road).
So the Head of Finance effectively leads the startup's finance team, going from accounting and FP&A to financial compliance.
Not the sexiest option. (Unless you compare it with Batman: he's not the hero you deserve but the one you need right now.)
The bookkeeper is a finance professional that manages and organizes the financial transactions of a company.
This professional is responsible for recording all income and expenses, ensuring that everything related to finance is accurate and up-to-date. The bookkeeper also prepares regular financial reports and bank reconciliations.
Someone must be assuming his role by the very beginning of the operations. Probably the co-founder who is more finance-savvy is more suitable for this task.
And if there is no such thing in your team… Well, it might be a good idea to hire out outsource a bookkeeper.
This is by far the easiest (and more recommended) finance spot to be outsourced. And this may be a good idea as well if these functions are taking too much of your time and keeping you from doing more strategic tasks, like hiring and fundraising. Bookkeeping is essential but operational.
Still, if you have absolutely no experience in finance, consider having an in-house Head of Finance or FP&A analyst handle the communication with the bookkeeper.
It's a daunting task to find and hire a finance team that has experience in managing finance for startups. But here are some tips on how to actually make that first hire for your FP&A team easier:
Each stage of your startup translates into different needs, and therefore a different finance professional. Focus on what your company really calls for and choose someone that will fit this role like a glove.
Even so, a certain set of skills are fundamental in most beginnings. Finance teams have a lot of repetitive monthly and quarterly tasks, so experience in automating processes can be a nice way to stay lean.
And no matter the team, always look for people with the ability to work autonomously and that are eager to collaborate: we all know that can be fundamental, especially in early-stage startups.
If you are really early-stage, try looking for finance people that have already worked in a startup before. It's a completely different world – and hires that come from traditional companies can get very frustrated with the lack of structure, from processes to tools like ERPs.
Accounting and management softwares are really sophisticated nowadays. And you can use them to achieve great results with a smaller finance team. Consider if you are using every software you can before hiring people to do operational tasks.
We've been here before: a finance team can be expensive but that's no reason to leave financial analysis and planning aside.
Creative solutions can help you fit finance into your startup's budgets. Consider fractional and/or outsourced CFOs, Heads of Finance, and Bookkeepers.
Ok, specialists are cool, but they can’t do everything. For startups that are constantly evolving, building a finance team with generalists can be especially valuable.
They're more flexible and, when the time comes, you can create a finance strategist role that supports business growth.
Even following these steps, it may be hard to find and attract the right professional. What's the right approach for hiring in an early-stage startup?
First, consider going proactively after the professionals you’re after. Just posting a LinkedIn Ad can be not very effective, especially when you still don’t have a big name to make eyes shine. In the beginning, the founder needs to be and sell the vision.
Another good tip is to trade hiring experiences with other startup founders. You know just how we value finding your community here: there's no better way to learn than by hearing people that were once in your shoes, made mistakes, and then found creative solutions.
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