Withum Sounding Board

Podcast: Life Cycle of a Technology Company – CFO Transition

Podcast: Life Cycle of a Technology Company: Episode 2

Jim Bourke, Withum Partner and Technology Services Group Practice Leader and Chris DeMayo, Partner and Startup and Emerging Growth Team Leader, discuss theimportance of having an outsourced bookkeeper and when is the right time to transition to a CFO.

Don’t miss out on new episodes from Withum Sounding Board Podcast, a series of practical audio-based information for today’s on-the-go professional. Listen and subscribe on

This podcast was transcribed through a third-party application. Please disregard any misrepresentations.

Speaker 1: Thank you for joining us for this segment of Withum Sounding Board, practical audio based information for today’s on the go professional. A production of Withum Smith and Brown PC.

Speaker 2: I am Jim Bourke practice leader of the technology niche here at Withum Smith and Brown and I’m here with Chris DeMayo team leader of the startup and emerging growth technology group within the technology niche here at Withum. We’ve put together a series of podcasts consisting of three podcasts, that breakdown that lifecycle of a technology company. You can listen to three independently or you can listen to the entire series where you hear Chris DeMayo and I go through the entire life cycle from birth to exit of a technology company. The second part of our series that you’re listening to is dealing with outsource bookkeeping. It’s dealing with the importance of having an outsource bookkeeper and when is the right time and the life cycle to make that transition from an outsource bookkeeper to a CFO. When is the timing, when is the right time to bring a CFO in place? So obviously engaging a CPA firm to do internal bookkeeping and accounting that could become cost prohibited for that startup company.

Speaker 2: So why don’t, why don’t we talk a little bit about the model that we see? I mean, I’m the first one to recommend an outsource bookkeeping services to many of our clients, so let’s talk about that relationship that we have with some of those and what that may make life a little bit easier for us and be more cost effective for the client. For sure. Yeah. You know, in the life cycle of a startup and emerging growth company, when it comes to finance, there’s a lot of different points in time inflection points where things have to change. When you first start up and you’re bootstrapped, we have very, very early capital, say a couple of hundred thousand dollars or $500,000. Oftentimes our clients will say, look, we’re pre-revenue where we have minimal revenue and we’ve got QuickBooks set up. A lot of this stuff is automated. We don’t need anybody to help us with our accounting, and I certainly don’t disagree with that.

Speaker 2: I think it’s a great way to save some capital to just do it yourself. I mean, you can, Oh, maybe only spend a couple hours a month believe it or not, managing your own QuickBooks. What I often talk to my clients about is the value of their time. When they asked me, when’s the right time to bring in an outside bookkeeper, we talk about value of your time. At some point in time, your time becomes too valuable to be spending time doing books and records. Do what? Do what you do best. Look, you’re an entrepreneur, right? You develop it was your idea, your concept for this technology. Now you’ll spend your time and effort developing, fine tuning that technology, taking that technology to the next level, meeting yo sources of capital, things like that are out there not doing bookkeeping, right? When bookkeeping becomes a distraction, that’s the telltale time that it’s time for an outsource solution.

Speaker 2: So you don’t want to bring somebody in house full time because quite candidly, it’s like taking a cannon to kill a mouse. You don’t want to spend $80,000 a year for a controller and worry about employee benefits and worry about all the other things that come along with bringing employees on board. So that’s why we wind up often recommending go find an outsource accounting group or an outsource bookkeeper. And what these guys can do is they can take over your entire accounting function and they’ll do it at either a standard hourly rate or they’ll do it at a fixed fee on a monthly basis and allow somebody to own the process in a piecemeal fashion where they don’t need to be there 80 hours a month or a hundred hours a month. Maybe you only need them for 30 hours a month or 15 hours a month, but allows you to at least, you know, divest yourself from that responsibility and give somebody who has the experience, the ability to put together good financial for you.

Speaker 2: Think about this, many CPAs out there are intimidated about referring to that. I got to tell you, I love referring outside bookkeeping services to our clients because it’s the right thing to do. I love nothing more than at you know, tax planning time or on a quarterly basis internally prepared by the outside bookkeeping service balance sheets and P&Ls that I can now sit down with our entrepreneur clients and talk intelligently about the financials without having to go and create the financials. To me that’s a, that’s a win-win kind of relationship. Yeah, and I think it’s all about bringing value to the clients. Right? And if we can have an outsource solution at a lower cost than us bring that value. Now we can focus on bigger picture items rather than having been in the weeds on, you know, data entry and reconciliation. As you said, we can sit with our clients and now sit back and say, let’s talk strategically about what we’re doing.

Speaker 2: I think it’s a major win and it’s an interesting transition when you get to a point where the volume gets even higher. Yeah. So, so let’s, let’s move into that. So the volume is higher. So the form, the entity, they chug along for maybe a six months to a year with the entrepreneur and maybe trying to handle the bookkeeping, the development, the marketing and all of that. Company’s getting bigger, segregating duties, have an outsource CFO type relationship that’s interacting with the CPA, which is all good, but inevitably, you know the company’s growing, company’s doing well. Things are starting to happen and the next logical step in that progression is the thought process of bringing in their own in house CFO controllers. So why don’t you talk a little bit about that for the next couple of minutes? Yeah, it’s a really interesting point in a company’s history, especially from a finance perspective and if you’re, if you’re with a good outsource CFO, we’re outsourced accounting firm, they should be talking to you about that because they should know when they start a relationship with you that the goal for everybody is for them to be transitioned out because if they’re transitioned out, that means the company’s successful and the company now premier in house.

Speaker 2: And I think what happens is where you’ll typically start seeing that pivotal point is when your needs become so intense that you know, an outsource solution, they just, they can’t be there five days a week because they have multiple clients and they can only give you as much attention as they have during the day. And when you get to a point where you have more work that they can handle and things start to become, you know, problematic, you just can’t move at the right speed. That’s the point where I think you’ve got the alarm bells that it’s time for a full time dedicated solution. Somebody that will have to spend 40 hours a week just thinking about your finances. Yeah. So let’s think about that for a second. So you know, we’re always recommending to the outsource CFOs, the bookkeepers and you know that relationship pretty much they process transactions.

Speaker 2: So they’re, they’re pushing through the transactions, the receipts disperse, mr payroll generating financial statements. But it’s when a company starts to get a little bit more complex, it’s when to start a company starts to get a little bit more involved. When I’m talking about is revenue recognition issues and equity transactions dealing with convertible debt. You know at that stage, yes you can call on us the outside CPA, but again that could become expensive after a while. So you look to work with, bring a CFO in, a CFO that has experience, especially in the tech industry, right? Dealing with those complex transactions and then now the CFO has a good working relationship with us and is able to bounce issues and challenges and questions in front of us dealing with many of those things. Like I said, the equity issues, the revenue recognition, all the kinds of things that we see day to day right before.

Speaker 2: So that CFO, yeah. You know, correction all the time. Chris. Jim, when do we bring a CFO into the fold? When is the right time to do that? You know, a lot of times from, if I want to relate it to a money perspective, I most often we’ll see that around a large a round or typically a B round really raised sort of the big dollars, the 10 to 15 plus million dollar rounds at that point in time. You’ve got the capital to really invest in infrastructure prior to that, it’s probably a little early cause you gotta remember CFO hire is an expensive hire and there are few of the most important hires. You’re gonna have a quarter million dollars for a good CFO for a tech company that may have a massive day round the large B round. It’s time. Yeah, absolutely. Now where do you get the bang for your buck and a CFO at that point in time when you’ve raised that type of around, you have sophisticated institutional investment and for example, when they have a board meeting with you, they’re going to challenge you.

Speaker 2: If they’re a good board, you’re going to get challenged on what you’re doing operationally. They’re going to challenge you on what your financials look like and what your thought process is from a strategic perspective. And that’s when you really want to have a high pedigree CFO to be that person that best prepared for those meetings. Because the last thing you want is to be ill prepared or be challenged in a way and you appear to have not really thought that through. No, absolutely. So think about this. So if I’m an angel, if I’m associated with an angel or let’s say a at the [inaudible] stage, I am actually going to demand that the company have a CFO in place. I’m going to demand that the right team is in place because you think about it, my capital is at risk. So if my capital is at risk, I’m going to make sure that we are instrumental in either insisting or placing.

Speaker 2: You know, how often do you, and I see on the a round and a B round com the placement of CFOs of in counsel of individuals that are demanded by the investors on that side. They don’t want to see the traditional entrepreneur immersed in that them to be able to take the business to the next level. Yeah, and I think when you get to that, that type of a B round, a lot of the founders and early employees need to keep in mind that those types of investors, the day that their money’s going in, they’re already thinking about when that makes it come out right. And that exit right and planning for an exit and a truly well-planned strategic exit. Whether it is a strategic acquisition or whether it’s an IPO or what have you, or a merger, you really have to have people that have good experience that have been there before and that’s when you’re really building out that C level suite of executives. And that’s when a CFO really, really brings value, which is how to prepare for an exit, how to get the company in a good position, and to know what that exit might look like and to know what those, what those hurdles are going to be. For more information and more content, which includes white papers and information. Allow you to subscribe to our newsletter. Come visit us at [inaudible] dot com

Speaker 1: you’ve been listening to Withum Sounding Board, practical audio based information for today’s on the go professional. How can with them help put you in a position of strength. Contact us with your feedback or suggestions for future podcast topics, visit www.withum.com for additional information, send an email to [email protected] or follow us on Facebook, Instagram, or Twitter @withumCPA, thank you for listening.

Previous Post

Next Post