During the early stages of startup growth, you’re stretching every dollar of that Series A and B funding to make it count. You can achieve this by using a strategic finance operation. And you can have one even if you don't currently have the resources to assemble an entire finance team.
Andi Ruda, a former CFO of the jewelry retailer Alex and Ani and the founder of Rainbow CFO, a company that provides fractional CFO services to startups, is skilled at avoiding excessive spending, implementing solutions that meet business needs, and maximizing the return on investment.
Ruda advises avoiding three pitfalls in order to optimize your startup's spending: overspending on marketing, rushing into full-time hires, and mismanaging new capital.
3 Common Startup Sending Pitfalls to Avoid
1. Overspending on Marketing
The debate between investing money in marketing to continually increase the topline and achieving profitability on the bottom line is one that frequently arises among startups.
“The problem a lot of us struggle with is understanding the margin impact we’re willing to take today in hopes of acquiring customers that will return time and time again over the long haul,” Ruda said. “For many startups, acquiring customers is expensive and a key reason for seeking venture funding. Understanding your own business’s CAC/LTV economics is critical in ensuring you’re not in a never-ending cycle of pushing all cash flow right back to Facebook.”
When comparing forecasts to actuals, Ruda works with customers to identify meaningful differences in marketing spend, particularly with digital platforms like Facebook. She advised conducting small tests with alternative marketing strategies that might be just as effective but are less prone to getting out of hand. Ruda also recommends establishing budgets based on CAC and ROAS rather than fixed dollar-amount marketing budgets that, if inefficient, may empty your bank account.
2. Rushing into Full-Time Hires
“Once you raise a round or revenue starts picking up, there is a rush to bring on your full-time team,” she explained. “Maybe I’m biased as a fractional CFO, but I believe whole-heartedly in the contractor model for delivering expertise and accountability in roles that may not be ready for 40 hours a week yet. Especially as your business model is evolving, you may not even know the exact expertise you need most to invest in and work with longer-term.”
Once you receive Series A/B funding and beyond, it is more important than ever to hire for key full-time positions as investors turn their attention to rapid growth and a possible path to going public. Paying resources a salary and utilizing their full attention to your company is now the best use of your money.
3. Mismanaging New Capital
For so long, you've kept your spending in check and tightened your belt. It's tempting to start using the credit card and running up debts for all those wish-list things when a new round of money is received. In Ruda's experience, a financial infusion causes businesses to go from a state of famine to one of a feast.
Ruda advises founders to keep new funding in a separate interest-yielding account and move their monthly budgets into a business checking for spending to avoid unnecessary splurges. A solid indicator that a founder's burn rate may be accelerating beyond initial plans is having to transfer more than allocated.
How to Optimize Finance Spending at a Startup
You’ve got common spending pitfalls to avoid. So what can you do to get personalized financial advice while continuing to save on back-office expenses?
That is not to say you should never make investments in the finance function. Instead, it refers to reducing costs by hiring temporary staff, automating routine tasks, and gradually expanding your internal finance team. Ruda's timeframe and strategies for optimizing finance spending at a startup should be noted by founders and early finance leaders.
Stage 1: Lay the Groundwork for a Full-Time Finance Lead
Organize your books using an outsourced accounting team
Never undervalue the impact of clean books and a routine close. Before a founder ever considers adding a finance job to the company, spending a few hundred dollars a month on an outsourced accounting team is an economical method to ensure that your home is in order in the early stages of your organization.
Consider a Fractional CFO
While the books are in order, founders can take full advantage of a fractional CFO's value when creating their first financial model and strategy.
Ruda wouldn't have founded Rainbow CFO if she didn't think the fractional CFO model makes sense, particularly for startups that aren't yet ready to hire their first full-time finance chief.
Finance technology is an investment that keeps paying off over time, especially when it replaces the need to hire people to complete labor-intensive manual tasks or gather crucial data for strategic financial decision-making. “We live in a world where the data is the most valuable resource you can invest in,” Ruda said.
Grow to a full-time finance leader
You'll ultimately arrive at a point where a fractional CFO won't suffice. Time to start hiring!
“There’s not an easy formula, but basically plan that by no later than your Series B, you’re going to need a full-time senior finance leader,” Ruda said. “It may be sooner for some companies, and I help my clients determine when they need someone devoting their full attention to the business model.”
Stage 2: Optimize Your Back-Office Spend as the First CFO
Maintain your outsourced accounting team
You don't need to immediately hire a whole team after your CFO is in place. According to Ruda, an outsourced accounting function can be significantly more effective than many founders believe. “I love working with an outsourced accounting function because it spreads accountability across parties and allows for a checks-and-balances mentality between Accounting and Finance.
Invest your time in strategizing
The initial financial recruit at a startup is not yet under the pressure of managing direct reports. However, they also lack a crew to handle the more minor details of running a business. You'll have a lot of things to do that will take up your time, therefore it may be challenging to always prioritize the 30,000-foot view at all times.
“Strategic finance to me is taking the numbers and data that are laid out for you, organizing them in a way you can make sense of, and providing recommendations on pricing, hiring, marketing spends, and other key business decisions,” Ruda said. “It’s easy to get pulled so in the weeds of the day-to-day tasks at an early stage company that there are not enough hours in the day to focus on what matters most. Make the time for that higher level strategy always, and seek out automation to minimize the tactical aspects of finance wherever possible.”
Own Your Seat at the Strategic Table
A startup's financial leadership role develops simultaneously. In essence, that characterizes a successful CFO. You'll probably always be the one who has the best understanding of the business's internal operations because you are familiar with its operating model and how every dollar comes into and goes out of it.
But that vantage point only helps you optimize spend and drive growth if you’re prioritizing collaboration. Share your business knowledge with partners in sales, marketing, the leadership team, and all other departments.
“Honestly, that’s why I love being a CFO so much, is because it gives me a seat at the table to actively participate in the decisions that shape the future of a business,” Ruda said.