One of the challenges for cannabis founders is determining the most capital-efficient way to build our their management team. Typically, a company starts with the founder(s) and then adds “revenue generating” headcount (positions like trimmers, budtenders, or manufacturing labor). However, once a company has a viable product, meaningful revenue, and an established distribution and supply chain, it is time to consider the need for a corporate function like a Chief Financial Officer (“CFO”).
WHY do companies need a Chief Financial Officer?
One of the key benefits to having a CFO for strategic finance contributions is driving the processes and data necessary to run your business based on quantitative rather than qualitative metrics. Financial data is critical to making data-driven decisions on how to run your business and to determine how well your business is running month-after-month. If you have investors or are looking to raise capital, you’ll be expected to have financial projections and provide informed and accurate financial updates. Finally, financial governance and planning are critical, especially in a regulated industry.
A CFO can perform the following types of duties:
- Business planning – proforma and other quantitative elements for your business plan
- Financial projections
- Operating budget and cash forecast
- Key performance indicators and management dashboard
- Balance sheet management – management of debt and equity positions and terms
- Pricing model
- Strategic (3 and 5 years) planning
- Mergers and acquisitions
- Investor materials and investor relations
- Liquidation strategy – distributions
WHO would make a good Chief Financial Officer?
A CFO is typically going to be a business professional with a relatively traditional (finance, economics, business) education. You’ll need a seasoned leader that loves opening Excel first thing in the morning, knows the industry best practices, and can interface and instill confidence with your partners and investors.
WHEN should I bring on a Chief Financial Officer?
Historically, mainstream companies have waited to hire a CFO until they had significant ($100M+) revenue or were about a year out from an IPO. However, in an underdeveloped industry with so many legal landmines, limited access to financial services, and complicated accounting and regulatory requirements, the need for a CFO is accelerated.
Determining whether it’s time to bring on a CFO should start with a few basic considerations. The first consideration is whether you have raised outside capital. Most companies that have raised at least $1M will start to feel internal or external pressure to hire a CFO for tactical as well as strategic input to their business. If your company is self-funded, you should start by considering the depth of your business background, knowledge, acumen, and how much you enjoy the back-office elements of running a business.
CFO talent is expensive – $200-300K per year – any in many cases you “get what you pay for”. Most start-up companies cannot afford this type of overhead until they have brought their product to market and are generating significant revenue. This situation can put a founder into a catch-22: Not generating enough revenue to justify a CFO, but needing the CFO skill set in order to make strides in fundraising and move towards profitability and scale. In these cases, it can be tremendously beneficial to bring on a strategic investor or advisor that has a significant finance background and a willingness to assist with some of the days to day management of the company. If that isn’t an option, there are “outsourced” CFO services. I decided to start my CFO consulting business to fill this specific need in the cannabis industry.
If you find the right part-time “consultant” CFO you’ll find a flexible, efficient, and extremely beneficial offering that will help you propel your business. The CFO should be able to turn “data” into “information” that can help you make informed, strategic business decisions. He or she can set up business metrics that will allow you to run your business efficiently and effectively and ensure that capital is optimized and the finances are prudently managed. Other considerations for whether or not you need a CFO include the size and scale of your expenses, a number of transactions you are running, and the complexity of your business model.
Please feel free to reach out to me if you have any questions about hiring a CFO, the types of duties of a CFO, or for a complimentary evaluation of your business plan.
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