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You spend months networking with investors and hours preparing your pitch deck—and then they ask you a question about your finances using an acronym you’ve never heard of. You smooth talk your way through an answer, and hope your enthusiasm is enough to end the presentation on a strong note. Deep breaths; you’ve got this, right?
Startups face new questions and decisions daily, and economic uncertainty only adds to the challenge. However, opportunity and uncertainty are two sides of the same coin, and your support system means the difference.
While learning as you go and wearing multiple hats is thrilling, it isn’t always the best business decision. This guide covers how fractional CFOs help your startup thrive this year. By the end, you’ll have actionable next steps that give you a competitive advantage despite external challenges.
3 challenging trends affecting startups in 2023
Every startup journey is unique, but there are common concerns that everyone contends with.
Change has been a constant in the past few years, and some founders feel uncertain about what lies ahead. A Stripe study revealed that 82% of businesses are concerned about the current economic state, and 45% are worried about cash flow.
Yet, a simple shift in perspective lets you work with trends rather than against them.
60% of businesses in the Stripe survey also said that recessions are a ripe time to innovate. External challenges are opportunities to think critically and creatively about how you run your business.
We’ve identified three key challenges that startups will face this year.
1. Slowing VC investments means raising capital will be more competitive
After a peak in the last quarter of 2021, venture capital investments have trailed downward this year. The second half of the year saw some of the largest investors pull back dramatically, like SoftBank cutting the value of its investment rounds by 82% between Q2 and Q3. As investments slow, competition for cash increases.
What should you do this year:
- Focus on customer retention to cushion revenue outside of growth
- Identify financial weak points and create a plan to manage them
2. Inflation makes business and consumer spending more cautious
While your family members and non-tech peers might be unaware of the retraction of VC investments, nobody has escaped the topic of inflation. Consumer prices in the U.S. had the largest increase in 40 years, and a survey of CFOs found their optimism about the U.S. economy sits at 53 on a scale of 0 to 100. For reference, the historical average is 60. As the prices of goods and services increase, businesses may see a pullback in spending. 31% of CFOs expect negative real growth in 2023.
What you should do this year:
- Look for cost savings measures to increase cash runway
- Analyze ROI to cut back on under-performing projects or investments
3. Layoffs force responsibilities to change
Over 1,000 tech companies laid off over 150,000 employees in 2022, and 2023 is on track to surpass that. Less than a month into the new year, nearly 40,000 additional tech employees were unemployed. Some of these layoffs come after aggressive growth, while some companies might want to thin their roster to preserve cash. No matter the cause, founders and their teams have to decide how to manage shifting workloads.
What you should do this year:
- Think strategically before hiring new full-time employees
- Take stock of the strengths, weaknesses, and specialties of your team
How Fractional CFOs give startups a competitive advantage
On top of your existing goals and day-to-day challenges, now you have a list of action items to weather potential economic storms. There’s good news, though—you don’t have to do it alone, and you don’t even need to make a full-time hire.
A fractional CFO (sometimes called an outsourced CFO or virtual CFO) is a financial professional who provides CFO services on a part-time or project basis. Fractional CFOs bring the expertise of a CFO without the investment of a full-time salary or commitment to a professional with a particular set of background experiences.
Fractional CFOs are a great option for startups because they are:
- More affordable than a full-time hire. You pay for part-time help when you need it instead of a $300,000 - $500,000 per year salary.
- Experienced in a variety of topics. You can work with a fractional CFO with a specific background or expertise for a given company stage rather than relying on a single generalist.
- Actively learning from other companies. Fractional CFOs that solve a problem at one company can bring the blueprint with them to help your startup work through the same issue.
Startups and fractional CFOs have always been a natural fit, but 2023 will strengthen that relationship. Startups that leverage fractional CFOs to make strategic decisions come out on top in economic downturns.
Here’s how.
Stand out to investors with expert preparation
Despite VC investments slowing down globally, a third of SaaS CEOs plan to raise money in 2023. If you’re in that group, you’ll want a fractional CFO. Wouter Osinga, Controller at Zeni, notes that,
“Fractional CFOs can help when technical questions are hard for founders to answer.”
A fractional CFO knows how to prepare for meetings and can handle any questions or concerns. Thorough financial documentation could give investors the extra confidence to choose your startup in a competitive VC environment.
A fractional CFO is still a competitive advantage even if they have yet to work directly with your investors.
Wouter shared that “when fractional CFOs help founders build a robust plan for investors, it adds a bit more credibility.” Investors feel more confident in a fractional CFOs due diligence or projections since it's their area of expertise. It also helps that fractional CFOs aren’t as close to the company as a founder since they’re less likely to be overly optimistic in the eyes of investors.
After you secure funding, fractional CFOs help you prepare documents your board of directors wants to see.
A fractional CFO will:
- Give you a third-party perspective on your financial outlook for pitch decks
- Add credibility to your projections
- Field complex or technical questions
- Prepare documents for investors and boards
- Coach you on what financial information you need to share
- Create an equity and debt financing strategy
What do investors look for in financial statements? Investors consider:
- Revenue
- Profitability
- Debt Level
- Cash Flow
Manage day-to-day operations for founders without finance backgrounds
Think about the first time you tied your shoes versus your most recent time—experience brings speed. Rather than slowly learning about and creating financial documents, founders can hand the task to a fractional CFO. Chris Ortega, the CEO of fractional CFO agency Fresh FP&A, said that,
“Fractional CFOs have the skills, passions, talents, and the experiences in areas the business needs that maybe that CEO doesn't have.”
Letting a fractional CFO manage day-to-day operations ensures accuracy and compliance while freeing up founder time. Every moment counts in a startup, and fractional CFOs let you focus on the areas you can impact most.
A fractional CFO will also implement bookkeeping automation, leading to safer file storage, faster data retrieval, and more accurate records. More than 70% of CFOs view implementing tools to improve efficiency and effectiveness as a top priority, and a fractional CFO sets your company up correctly the first time.
A fractional CFO will:
- Manage day-to-day financial operations
- Offer on-demand answers to tough questions that arise daily about your business
- Advise you on in-the-moment financial decisions
- Work closely with your bookkeeper or accountant
- Review your bookkeeper or accountant’s work
- Ensure that your team is staying on track with it’s budgets, cash flows and financial plan
- Give you daily, even real-time, insight into your financial data
Identify cost savings
If your startup is concerned about maintaining a solid foundation despite a recession, a fractional CFO can help. They’ll identify potential cost savings, bring your attention to risks, and offer suggestions to increase your cash runway. Chris shared,
“The number one thing startups need to be mindful of this year is cash. I always say ‘profits are a dream, but cash is reality.’”
Sometimes getting a fresh perspective enables you to find opportunities you were too close to see, especially when you call on a fractional CFO with experience in your industry.
A fractional CFO will:
- Analyze cash flow and runway
- Identify cost-saving opportunities
- Find applicable startup tax credits
Fractional CFOs work with your startup to find cost savings opportunities unique to your current situation. You can also reduce your operating expenses by:
- Working remotely
- Pausing hiring
- Outsourcing services
- Automating repetitive processes
- Identifying inefficiencies
- Freezing large investments
Develop and implement financial strategies to plan for the future
Startups don’t have crystal balls, but they do have financial modeling. Financial models vary by business type, but they generally identify what influences growth, track milestones, and summarize your financial health.
Fractional CFOs help you build predictive models and analyze potential scenarios, which 47% of CFOs list as their top priority in 2023.
Wouter added that,
“Fractional CFOs bring specific knowledge to apply to financial modeling. You can use one with experience in a specific aspect of a particular industry who knows what to include in your modeling versus sticking with the same general full-time CFO.”
A fractional CFO will:
- Choose the correct forecasting model for your company
- Create budget forecasts to determine if you need to raise capital (before it’s too late)
- Advise you on which details to use in your financial models
- Use financial planning as a strategy to mitigate risks and increase business stability
Act as an on-call advisor
Fractional CFOs offer the right advice at the right time. Rather than going through the costly and time-intensive process of hiring a full-time CFO, you can choose the fractional CFO you need for a particular growth stage. Chris noted,
“For example, a CFO may come from an accounting background, and much of the knowledge will come from that tactical operations side. They may not have experience with strategy, investor relations, treasury management, or taxes. However, that CEO, founder, or board member may want to have a more strategic finance person that's grown organizations from seed to startup to scale to enterprise.”
Fractional CFOs are also constantly gaining new perspectives and experiences. Wouter added, “fractional CFOs work with multiple businesses, so we can take what we’ve learned from other companies and apply that knowledge. For example, if we already solved an issue at eCommerce company A, then we can mentor eCommerce company B with what we’ve learned from previous experience.”
A fractional CFO will:
- Advise you through challenges or decisions
- Educate non-financial leaders on relevant topics
- Apply what they’ve learned from previous fractional CFO roles
How Zeni can help
Fractional CFOs help startups expertly manage finances to get investments, grow their business, and prepare for any economic situation. You might need a fractional CFO if you:
- Struggle to create or understand financial reports
- Need to pitch financial information to investors and answer questions confidently
- Feel overwhelmed by day-to-day operations like managing cash flow and paying vendors
- Need advice on which financial strategies to choose
- Need a plan to extend your runway and make your existing capital last longer
Zeni is an all-in-one finance and accounting platform for startups that offers fractional CFO services. “The main benefit of using Zeni’s fractional CFOs is that everything is in one place. Everyone has the information in one place and can communicate without messaging between companies,” Wouter commented.
Zeni’s AI-powered finance dashboard and fractional CFOs help you plan for the future, track and trim expenses, and share info with investors in real-time.
Want to learn more about how Zeni can help? Book a consultation today.
*This full report is also available for download and shareable here:
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