Startups have a lot of moving financial elements, especially in the earlier stages. You’re figuring out the pricing strategy, fine tuning costs, searching for investment dollars and keeping an eye on cash in the bank.
Early on, these factors cause many founders to see the need for a financial professional — beyond basic bookkeeping.
But what level of expertise does your business need?
Two common choices are a Certified Public Accountant (CPA) or a Chief Financial Officer (CFO). (Many times these roles are provided by an accounting firm with practicing CPAs or a fractional CFO service.)
So which does your startup need? A CPA or CFO?
Defining the Roles of Both CPAs and CFOs
CPAs for Startups
An accountant doesn’t necessarily require licensing, so many bookkeepers and tax prep firms aren’t suited for startup accounting. CPAs, on the other hand, have extensive experience and rigorous certification standards.
CPAs are beneficial to startups, due to some specific abilities including:
- Deep tax knowledge: Instead of tax prep, CPAs understand the tax code. The ability to reduce unneeded tax burdens is especially beneficial for startups. Often, CPAs will understand details, like the R&D tax credit, crucial to tax planning.
- Detailed report creation: CPAs understand the benefit of detailed financial reporting, beyond a simple budget and cash flow statement. Startups often track dozens of metrics/KPIs, both financial and non-financial.
- Some advisory services: Since they hold an in-depth understanding of the financial landscape, CPAs typically offer useful advice from financial data. Founders can use this advice to make important decisions quickly (important for early-stage companies).
Outsourced CFOs for Startups
An outsourced CFO includes all of the benefits of a CPA, with a bit more detail. Plus, there are things a CFO brings to the table that CPAs may not. Where a CPA firm provides services and delivers reports/advice, a fractional CFO builds out (or handles) the accounting system, tracking and reporting of your business.
A CFO skillset is particularly useful for startups including things like:
- Financing/Fund-seeking: A CFO digs in to improve profitability, prepare slides and develop accurate forecasts. When the deal is done, they’ll keep track of all investor agreements and company obligations, too.
- Structuring/Dashboarding KPIs: The company has goals/objectives. A CFO understands the key performance indicators (KPIs) that will help achieve those goals. And they’ll set up dashboards to quickly show the executive team where the company stands.
- Forecasting/Cash Planning: Accurate, rolling forecasts are vital for startups. Whether you’re seeking to attract venture capital or get to a place of profitability — predicting future revenue helps you plan.
- Full Advisory: A CPA does often offer advisory services. Typically these are in the form of a regular (e.g. quarterly) meeting. A major benefit of a CFO (even a fractional one) is a more “in the trenches” partner, who’s monitoring and tracking things all the time.
Things to Consider for Your Startup Accounting Solution
Knowing what each service (CPA vs CFO) brings to the table is one aspect of your decision-making process. The specific needs of your startup is another element to consider, when choosing the best service.
Two things to consider are the stage of your business and its growth trajectory.
Startup Stage
Since there are multiple stages of startups, this is an easier criteria for choosing between a CPA or CFO service. Although, there are other elements that influence the choice. (For example, if the business is growing rapidly or you’re actively seeking a seed round of funding).
Pre-funding: In many cases, a CPA is great here. Even a bookkeeping service may work. That is, unless you’re already profitable and potentially looking to reinvest profits into growth marketing to rapidly drive up revenue.
Seed round: If you’ve attained a seed round, a CFO will help you spend it wisely, track runway, and help you attain profitability (or prepare for another round quickly). If you’re seeking seed funds, you may consider working with a CPA to get a valuation and prepare reports many investors want to see. Then, keep them on to do your reporting during the hunt for funds.
Seeking other rounds: After your seed stage, you can either use a CPA or CFO. But when it comes to seeking further rounds, investors will want to see some structure to your financial ecosystem. Plus, the detailed level of expertise, reporting and advice will likely improve your chances.
Growth Trajectory
The stage of your startup and the amount of funding you’re seeking heavily influences your need for a financial professional. Another element is how quickly you’re growing (or plan to grow).
Many startups use growth marketing techniques to rapidly increase the number of users/customers for their company. These tactics are often complex, and lead to a high amount of things like:
- Ad spend
- Incoming revenue
- Hiring
Having “hockey stick growth” is something many startups want, but may require some pre-thinking when it comes to your infrastructure. Having a fractional CFO in the seed round, for instance, may be a solution if your company expects rapid growth.
Further reading: Here’s a full guide for startups to determine if they’re ready for a fractional CFO service.
Pasquesi Partners Understands Fast Growing Startups
Pasquesi offers startups a range of services to serve whatever level you find your company. A full team of experienced CPA professionals can help to provide detailed reporting and advise, or our Outsourced CFO team is there to ensure you get the most out of your financial data and use it to propel your business forward.
We’d love to hear from you. Schedule a time to get the conversation started about where your startup is headed.