How Should Startups Structure the Finance Function (Team)?

Byfractionalfin

As startups navigate their early stages and experience growth, establishing an effective finance team becomes vital for financial management and strategic decision-making. In this article, we will dive into the key considerations and best practices for structuring the finance function, ensuring startups are equipped with the right financial expertise, processes, and capabilities to drive success.

Finance teams may look very different from business to business, even for those close in stage and size. As is true of other organizational functions, how the finance function looks depends on many things beyond annual revenue (including growth ambitions, industry, team experience, and financing partners). Nonetheless, below we provide a very rough breakdown of how the finance function may change to meet the demands of a growing business.

Pre-Revenue: Founders Solo

For most startups, before there’s any revenue, financial operations are an afterthought. And for good reason—besides focusing on cash/burn management, the small team has most of its attention on developing a great product. 

At this stage, the founder(s) is typically capable of tracking expenses in spreadsheets or with the help of simple accounting software like QuickBooks. The founder(s) can then effectively pass along this information to a tax accountant during the year-end filing. If there is a payroll, this can easily be outsourced as well.

Early Revenue ($0 – $2 million): Bookkeeper + Financial Controller

Once a company begins to sell a product, accounting and financial discussions become a bit more complicated. Now, both revenue and expenses need to be reliably accounted for while team ambitions will likely result in the need for slightly more sophisticated financial operations.

Cash/burn management will continue to be of utmost importance, but now the founder(s) will likely also have to get more serious about funding (or bootstrapping), billing management, revenue and pricing metrics, team growth, team compensation arrangements, and, as the company nears $2 million in annual revenue, some more serious system and procedure development.

Bookkeeper

Depending on the goals and capabilities of the founder(s), these are all things that can (and largely should) be self-managed without the help of a finance or accounting professional. However, often, as a business approaches $1 million in annual revenue, a founder(s) benefits from hiring a part-time bookkeeper on a contract basis to manage bookkeeping. There are countless affordable bookkeeping service companies, many of which specialize in a given industry.

This should result in accurate accounting of all business transactions while the founder(s) remains in control of how the financial data will be used strategically. Although understanding the profit and loss statement and related financial metrics will be important for funding and cash management (especially for planning purposes and attracting investor interest, if applicable), a founder’s time in the early-revenue stage is often more focused on customer metrics, such as unit economics, usage data, and growth. This is especially true for SaaS businesses that hope to establish an economically sound revenue model before spending resources on rapid growth.

Financial Controller

As the company surpasses $1 million in revenue, it sometimes makes sense to also hire a Financial Controller. The Financial Controller (essentially the chief accountant) of a business of this size can manage bookkeeping services as well as much of the business’s regulatory compliance activities, including sales and income tax reporting, HR compliance, audit requirements, and spending controls. 

Additionally, some more strategic Financial Controllers of these businesses will play the role of a quasi-CFO, providing the founder(s) with valuable financial planning and analysis skills (the interpretation and projection of financial data), plus knowledge regarding funding and process development that will aid future growth.

As a company continues to gain revenue or gears up for rapid growth, the Financial Controller role will likely become focused more exclusively on accounting activities and internal controls, while a different team member is brought on board to develop and execute a more formal financial strategy. This is often the financial director or fractional (or full-time) CFO.

Note: As is true of other team members, a Financial Controller at an early-stage startup should be half-entrepreneur and half-finance professional. Someone who has spent his or her entire career working in financial operations at an enterprise is unlikely to possess the agility needed to work from the ground up within a scrappy, unstructured environment.

Early Growth ($2 million – $20 million): Financial Controller, Finance Director, Fractional CFO, or Full-Time CFO

For companies with more than $2 million in annual sales that are growing controllably without overly straining the bookkeeper and/or Financial Controller, there may be little reason to promptly add to the finance and accounting team. However, many businesses, especially those experiencing high growth, will need to further bolster the finance team once reaching the $2 million to $10 million annual revenue range. 

Accountant 1

Once bookkeeping becomes a full-time task, businesses often benefit from transitioning from a third-party bookkeeping service to an in-house accountant who works under the management of the Financial Controller to help maintain accounting records. This is typically a relatively junior and standard accounting position, so hiring is often not expensive or difficult. 

The benefits of bringing bookkeeping activities in-house include:

  • Direct control and oversight
  • Tailored (customized) solutions with improved flexibility and scalability
  • Deeper integration with the business
  • Enhanced data accessibility
  • Confidentiality and data security
  • Expertise in development and cost efficiency

Finance Director (FD)

For most businesses growing well beyond a few million dollars in annual revenue, there comes a time when the Financial Controller is at capacity or does not have the strategic finance expertise required to guide the executive team to the next level. 

In these circumstances, hiring a Finance Director to oversee financial reporting, budgeting, financial analysis, internal controls, compliance, and team management may make the most sense. The Finance Director also collaborates with various departments to support financial planning, reporting accuracy, and operational efficiencies. For lean teams, the Finance Director can provide a stronger link between the accounting team and the leadership team than a Financial Controller alone. 

Because there can be significant overlap between the duties of a Financial Controller and Finance Director for smaller businesses, these two roles are sometimes blended into one.

Fractional (or Full-Time) CFO

Although financial directors (FDs) and chief financial officers (CFOs) are similar positions, a Finance Director often reports to the CFO and has responsibilities related to the day-to-day financial operations, while a CFO is often a higher-level business leader, synthesizing the finance and accounting function with the company’s broader strategic goals.

While it is true that many Finance Directors may provide strategic insights like those offered by a CFO, Finance Directors are typically more in the weeds, working internally, whereas CFOs are more senior with a more holistic view of the business and its stakeholders.

As previously mentioned, for larger businesses, the Finance Director often reports to the CFO. However, with smaller businesses not having resources or need to hire for both positions, the responsibilities of a Finance Director and CFO are often blended into a single, full-time role, still called the Finance Director or CFO (or something similar, such as the “head of finance”). 

In other circumstances, a business may find value in strategic guidance from an experienced CFO but does not have the resources or need for a full-time CFO. In such cases, a fractional CFO may make the most sense.

Fractional CFO services provide an alternative to the traditional full-time CFO role for growing businesses. These services offer access to a part-time or project-based CFO who can provide specialized financial expertise and guidance, without the cost of a full-time executive.

How a Fractional CFO fits into the organizational structure depends on many circumstances. Some businesses will hire a relatively experienced fractional CFO to build out the finance function and provide consultant-like services to the Finance Director, controller, and executive team. Smaller businesses already with a Financial Controller may instead rely on a more entrepreneurial fractional CFO to temporarily fill a void in the finance function before a full-time Finance Director or CFO is hired.

You can read more about Fractional CFOs here.

Note: Hiring a Financial Analyst can be a good way to expand the finance function’s capacity. A good Financial Analyst can do much of the leg work for the Finance Director or CFO and can be especially helpful in addressing a variety of ad hoc requests.

A Note on Payroll

There has been an ongoing debate about where payroll should be placed—within the finance or HR function. Although there is no clear consensus, today payroll is commonly nested under the HR department once a company develops distinct HR competencies. 

However, payroll will always require a very high level of integration between finance and HR departments. In fact, similar to legal, it is not uncommon for a startup’s forming HR function to be under the purview of the CFO until it becomes a more established, relatively independent department of its own.

Rapid Growth ($20 million – $100 million): Build Out the Finance Function 

For rapidly growing startups who are beginning to think about the road to $100 million in annual revenue and beyond, a more mature finance team should emerge. The growing finance team may include:

  • Chief Financial Officer
  • Finance Director
  • Financial Controller
  • Treasury Manager
  • Tax and Controls Manager
  • Internal Auditor
  • Accounts Payable Manager
  • Accounts Receivable Manager
  • Financial Operations Staff; Managerial, Financial, and Tax Accountant
  • Systems Support

For those businesses taking a calmer approach to growth in the $20 million to $100 million range, the finance team will not have to be as comprehensive as its rapid growth alternative. Without growth disruption, a finance team with well-established procedures, controls, and systems, can be very efficient while remaining relatively lean, even in this revenue range. However, a skilled accounting team led by a CFO will still be vital.

We will take a closer look at the finance function for companies in this size range (and larger) in a future article.

Note: Similar to the previous note, it is important to make sure that each hire matches the stage of the business. Early growth startups will continue to need relatively entrepreneurial finance team members who are comfortable in a startup scene, which can be harder to find than expected due to the tendency for finance and accounting professionals to like certainty and structure.

As a business moves toward and through the rapid growth stage, the finance leaders should possess significant experience working with both relatively sophisticated finance teams and rapidly growing startups. At this stage, team members need to be effective at implementing the team structure, processes, and technical systems that will be foundational as the business morphs into an enterprise.

Conclusion

To conclude, structuring the finance function is a critical consideration for startups as they navigate their growth journey. The finance team’s composition should evolve as the company progresses from pre-revenue to early revenue, early growth, and eventually rapid growth stages. While the specific structure may vary based on factors like industry, growth ambitions, and team experience, certain roles tend to emerge at different revenue milestones.

In the early stages, founders often handle basic financial operations, but as revenue begins to flow, the addition of a part-time bookkeeper (typically outsourced) and eventually a Financial Controller can provide more comprehensive financial management. As the company grows beyond $2 million to $5 million in annual revenue, considerations arise for roles such as an Accountant 1 to manage in-house bookkeeping, a Finance Director to oversee financial reporting and budgeting, and/or potentially a fractional or full-time CFO for strategic guidance.

During rapid growth, as revenue reaches the $20 million to $100 million range, building out the finance function becomes crucial. This may involve roles such as Chief Financial Officer, Finance Director, Financial Controller, Treasury Manager, Tax and Controls Manager, and various other financial operations staff. The team’s size and composition depend on the company’s growth trajectory and specific needs.

While this article provides a general framework, it’s important to note that every startup’s finance function may look different, and decisions should be tailored to the organization’s unique circumstances. By structuring the finance team effectively, startups can leverage financial expertise, processes, and capabilities to support their growth, make informed decisions, and drive long-term success.