When to Hire a CFO: The Revenue Threshold Most Startups Get Wrong

A CFO hire takes 20 weeks on average. Most startups think over bringing in a CFO after reaching $500,000 to $1 million in Annual Recurring Revenue (ARR). This decision usually comes too late and leads to financial mismanagement and missed opportunities.

Growing companies face their biggest problem with CFO hiring timing. Founders often lack the financial expertise needed to raise funds and manage finances strategically. The need becomes significant during growth phases, IPO preparations, and tough financial times. Companies with Series A funding typically run without a CFO. However, those getting ready for Series B or C rounds scramble to build proper financial leadership.

Let’s dive into the signs that show your company needs a CFO. This applies whether you’re pre-Series A or preparing for an IPO. You’ll discover how to assess your organization’s financial needs. The discussion covers five vital dimensions that shape an outstanding CFO: leadership, long-term vision, an always-on mindset, knowing how to tell compelling stories, and serving as a true peer to the CEO.

The True Revenue Thresholds for Hiring a CFO

People often say you should wait until your company makes $50 million yearly before bringing in a full-time CFO. But this cookie-cutter approach doesn’t work for businesses with different financial challenges. Let’s get into what really counts beyond just the numbers.

SaaS Startups: $5-10M ARR vs. Industry Standard

SaaS companies face substantially more complex finances when they hit $5-10 million in Annual Recurring Revenue (ARR). Your team will need to handle multiple subscription tiers, proper revenue recognition, and precise tracking of customer acquisition costs. All the same, many SaaS founders wait longer – Bessemer’s CFO Community shows 37% of companies bring in a CFO at $10-25 million ARR.

Your company should have a seasoned finance lead by $2 million ARR. This early investment helps you avoid common pitfalls in collections, ARR measurements, and churn calculations that often trip up growing SaaS businesses.

Hardware Companies: Why the Threshold is Lower

Hardware businesses just need CFO expertise at nowhere near the revenue levels of software companies. Physical inventory, supply chain complexities, and heavy upfront costs create financial challenges that require expert oversight sooner.

These companies typically run on smaller margins with higher initial costs. This makes precise financial modeling and cash management vital for survival in early stages.

Service Businesses: When Client Volume Matters More Than Revenue

Client numbers and complexity matter more than pure revenue for service companies deciding when to hire a CFO. More clients mean more complex invoicing, collections, and resource planning across projects.

So, a service business with 50 clients making $5 million might just need more financial expertise than one with 5 clients earning $10 million. The right time comes when client finances become too complex for founders to manage part-time.

Why Most Startups Apply the Wrong Measure

Founders often make the mistake of using generic revenue targets instead of reviewing their business model’s financial complexity. Companies handling customer funds, like marketplaces, just need CFO guidance earlier.

Growth speed makes a big difference too. A company growing 150% yearly has very different financial needs than one growing at 25%. Instead of focusing on revenue milestones, look at how much time you spend on finances versus growing your business. When financial tasks take up more than 20% of your schedule, you should think over getting specialized help.

Warning Signs You Need a CFO Regardless of Revenue

Companies need to look beyond revenue milestones to spot warning signs that signal the need for a CFO. These red flags point to financial complexities that demand expert guidance, whatever the company’s size.

Financial Reporting Takes More Than 10 Days to Complete

Your decision-making suffers when financial reporting takes too long. Monthly or quarterly reports that consistently exceed a 10-day completion window clearly show your financial processes need professional oversight. Late filings shake investor confidence, lead to financial penalties, and public companies see their stock prices drop.

Your business operates blindly when financial data becomes a “stale weather report”. This lag makes it hard to spot liquidity issues quickly, and you might face a cash crunch that timely reporting could have prevented.

Investors Are Asking Questions You Can’t Answer

The need for a CFO becomes clear when board members or investors ask financial questions that leave you puzzled. Many startups face awkward moments during investor meetings because they can’t handle subtle or complex financial questions properly.

A CFO helps tackle tough questions and equips you with high-level financial knowledge to make strategic decisions. Professional investors look for sophisticated financial strategies and detailed forecasting. Your credibility takes a hit and valuations might suffer if you struggle with these aspects.

Your Burn Rate Calculations Keep Changing

Numbers that keep changing in burn rate calculations raise serious concerns. Burn rate shows how fast a startup spends its capital before generating positive cash flow – a crucial factor in determining your runway. Unreliable figures suggest you lack the financial structure to make sound decisions.

Experts note that founders often run into trouble because “they plan for what they’ll do with the next funding round rather than plan based on the funding they already have”. Success depends on understanding unit economics and growth costs to manage burn rate. The 32% of founders worried about burning too much cash in 2023 have good reason for concern.

The Hidden Costs of Hiring a CFO Too Early

Hiring a full-time CFO is a big financial commitment for any company. Founders need to weigh the upfront costs against future benefits and look at other options that might work better right now.

Salary vs. Value Creation: The Break-Even Analysis

A full-time CFO’s median salary in the United States is over $400,000 per year. This is a big deal as it means that early-stage companies need deep pockets. The real cost runs even higher with benefits, equity, recruiting fees, and office space.

Companies must run a break-even analysis to see if a CFO makes financial sense. This helps show when the CFO’s impact on growth and savings matches their pay. Many startups find it hard to calculate their CFO’s potential value creation accurately.

Great CFOs add value by steering key decisions about opportunities, risks, and products. The catch is that this value shows up gradually. Small companies often struggle to justify such a high salary until they hit certain revenue marks.

Opportunity Cost of Executive Bandwidth

Business owners often miss the hidden costs of going without proper financial leadership. Research shows they spend about 100 hours each year on financial tasks. That’s worth about $20,000, and they miss out on roughly $100,000 in potential earnings.

Leaders who tackle complex financial work themselves can’t focus on growing the business or developing products. This becomes a real problem during fundraising or financial tight spots when expert financial knowledge would be a great way to get through challenges.

When a Fractional CFO Makes More Financial Sense

Fractional CFO services are perfect for companies not ready to commit to a full-timer. These experts charge hourly ($150-$500) or monthly ($3,000-$10,000), based on what you need.

You get targeted financial leadership from fractional CFOs without the big overhead costs. They help you learn about your need for full-time leadership, free up your time, and offer fresh financial viewpoints. Startups can tap into top-tier financial expertise at approximately 25-30% of the cost of a full-time executive.

This setup works especially well for companies before Series A or during growth transitions. Your business can adjust the fractional CFO’s role as needed and move to full-time leadership when the numbers make sense.

When to Hire a CFO Based on Growth Stage

Understanding when to hire a CFO depends on your company’s funding stage more than revenue figures. Let’s get into the best timing based on your growth phase.

Pre-Series A: Why You Rarely Need a Full-Time CFO

Pre-revenue and seed-stage startups don’t need a full-time CFO. Simple financial oversight, bookkeeping, and foundational finance structures work well at this stage. Early-stage businesses should build their product instead of hiring expensive executive talent. Most pre-Series A companies get better value from fractional CFO services that provide specialized expertise without major costs. This lets founders focus their resources on product development and market validation while getting professional financial guidance.

Series A to B: The Transitional Phase

Financial complexity rises between Series A and B funding rounds. Companies in this phase (usually between $3-10M ARR) face sophisticated financial challenges that need strategic oversight. A fractional or part-time CFO makes sense during this transition. You get financial leadership without the full cost burden. Companies that have raised only a Series A typically don’t have a CFO or VP of Finance. They start looking for CFO services about three months before their next funding round.

Series C and Beyond: When It’s Time for a Full-Time CFO

A dedicated CFO becomes vital once you reach Series C funding. Companies typically exceed $10M in ARR and face major scaling challenges. Financial operations become more complex and need an experienced executive to handle strategic operations, system implementations, and investor coverage. Your business needs an in-house CFO rather than fractional services by Series C or D. This shift happens as financial decisions drive your growth strategy.

Pre-IPO: The Non-Negotiable CFO Requirement

A qualified CFO is a must for pre-IPO companies. You should bring in your CFO at least two years before your planned IPO. This executive sets up financial systems, implements reporting processes, and develops the investment thesis needed for public markets. A pre-IPO CFO puts the right people, processes, and technology in place to meet compliance obligations. They manage investor perceptions and communicate with analysts effectively—these responsibilities shape your stock’s performance after going public.

Conclusion

Startup founders must make a crucial decision about when to hire a CFO. Successful companies look beyond basic revenue standards and assess their business model, growth rate, and financial complexity.

Our analysis reveals several important insights:

Revenue thresholds alone don’t tell the whole story. SaaS companies might need a CFO at $5-10M ARR. Hardware businesses need one sooner because of supply chain complexities. Service companies should watch their client numbers more than revenue.

Warning signs can appear at any size. Late reports, questions from investors that go unanswered, or burn rate calculations that don’t add up – these red flags need quick attention before they hurt growth.

Fractional CFO services are a great way to get financial guidance, especially before Series A funding. This helps startups save money for their core business needs.

The growth stage tells us a lot. Most companies do well with fractional services before Series A. They switch during Series A to B, and need full-time CFOs by Series C. Companies planning to go public should have experienced CFOs at least two years ahead.

Smart founders know that delaying financial leadership can mean missed chances and costly mistakes. The best time to hire a CFO isn’t about hitting specific numbers – it’s about understanding your company’s financial needs and complexity.