IT services firms that want to grow and make their mark know they need to invest for future gains. Nine times out of ten, those investments are directed at the sales, marketing, and people functions. It makes sense. In a people-based business, you can’t deliver without great talent. Prospects and partners won’t know you exist without sales and marketing. Finance, on the other hand, is seen as a necessary but supporting function, often relegated to the back seat when it comes to investment.
As an investor in growth-stage firms, we’re here to tell you that’s a mistake. A sound finance function can be a growth accelerant, and a poor one can be a growth inhibitor. Investing in the function early can pay rich dividends down the road. Neglecting it until it becomes a problem can come back to bite you.
The Pitfalls of Underinvesting in Your Finance Team
A strategic finance function can help you not only with looking back but also with planning ahead. The team can bring objective, data-driven insights to ensure you are planning and budgeting realistically, as well as identify root issues in your key metrics, fine-tune gross margins and optimize cash. They can ensure you are forecasting accurately to make sure your hiring meets your demand, and that you don’t get too far ahead of your skis. They can also make sure you have your financial house in order if you’re thinking about taking on capital or pursuing M&A.
A sound finance function can be a growth accelerant, and a poor one can be a growth inhibitor.
On the flip side, underinvesting in your finance team can set your firm off course. You might end up hiring too many people too fast, miss out on opportunities for growth because of a lack of resources, or make bigger investments than you can afford (building into new geographies, product development, etc.). We’ve even seen cases of a company’s financials being such a mess (books too complicated, revenue not recognized correctly, etc.), that it resulted in investors walking away from deals.
Tercera has worked with hundreds of IT services firms over the years – firms of all shapes and sizes – and we have seen a pretty standard playbook when it comes to scaling your finance team in lockstep with your business’s growth. There are always exceptions to every rule, but it looks something like this:
The Start-Up Years: Scrappy Cash Management
In the early stages of a company, every employee is expected to wear multiple hats, and finance is no exception. While it would be ideal to have a dedicated finance professional, it is a luxury that most start-ups cannot afford. Which is why in this stage, finance is typically handled by a contractor/fractional employee or an employee who dedicates one or two days a week to overseeing the function. Often, this person’s other responsibilities, in addition to finance, may include handling operations or other administrative tasks. We’ve seen instances where the CEO takes on the part-time finance role, although we would argue that this is not the best use of their time.
The primary responsibilities of this fractional finance leader include items like keeping systems up to date, ensuring employees are paid, sending out invoices and establishing even a simple P&L statement. They’re also responsible for making sure that the bank account never hits $0.
Contracting or accessing a CFO-level expert even just half a day a month can help establish finance closing routines and provide valuable insight beyond just financial matters.
Even with a part-timer, getting some level of strategic finance input can make a huge difference in keeping your company on track. Contracting or accessing a CFO-level expert even just half a day a month can help establish finance closing routines and provide valuable insight beyond just financial matters. Even better if they can attend board meetings or assist with the annual budget process.
The Scale-Up: Building the Foundation of Your Financial House
As your business grows, you’ll eventually reach a point where it makes sense and you’ll have the budget to hire a dedicated finance person. This typically happens when your business is ~20-25 people or as you approach $4-5M in revenue. The finance hire here should be a head of finance who can scale with your firm and continue to be the finance leader through the next phases of growth.
The ideal candidate at this stage has either handled leading finance for another early-stage firm or has been second in command at a larger firm. While a senior hire here is nice, you need to make sure the person is still willing to roll up their sleeves and dive into the weeds, since they won’t have much support.
The ideal candidate at this stage has either handled leading finance for another early-stage firm or has been second in command at a larger firm. While a senior hire here is nice, you need to make sure the person is still willing to roll up their sleeves and dive into the weeds, since they won’t have much support.
Look for candidates with a CPA and accounting background who can balance competing demands within the firm and provide a strong voice in financial decision-making. Overall, this person will be a jack of all trades, handling the full finance function, with their title typically being anything from Director / VP of Finance to CFO.
Responsibilities at this stage include shoring up the accounting practice (moving to accrual-based, starting to measure gross margins, etc.), professionalizing the budgeting process, and starting to make sure the hiring and backlog are growing in lockstep without straining your cash. At this stage, you should also consider segregating duties and automation. For segregation of duties, consider outsourcing payroll or combining it with HR, or including invoicing and revenue recognition in the operations. For automation, there are many tools available to automate payment processes, accounts payable, and integrations to ERPs and CRMs that save time and improve accuracy.
However, hiring a senior finance leader can be expensive so many companies will instead hire mid-level professionals with titles like Controller or Finance Manager to handle just the day-to-day accounting tasks. While this can work for a time, eventually you’ll need a true finance leader to help with more strategic functions. If you do go this route, be aware that tensions may arise if you later hire a head of finance to manage this person. Not always, but it happens more often than you think.
Scaling: Keeping Pace with Growth
As a company grows to between 50-150 employees and reaches $15-$25M in revenue, it’s time to start thinking about an additional hire for your finance team, but also not expand too quickly. Of the companies we’ve interacted with at the 50-100 person scale, half had one finance person and half had two. However, all companies at the 100+ person scale had at least 2 finance personnel.
If your first finance hire was a Director / VP of Finance or CFO, it’s time to start building out their team to free them up to focus on more strategic, forward-looking work.
On the other hand, if your first finance hire was more junior, you have two options. If you think that person has high potential to be the long-term finance leader, you can promote them to Director / VP of Finance and hire below them. If that’s not the case, you’ll need to find a more strategic finance leader that can take you to the next level.
During the scaling phase, the finance function will likely focus on more forward-looking initiatives such as creating recurring forecasts that help guide decisions on hiring, modeling to determine cash needs, and helping the firm align on KPIs. They should also be able to handle financials across multiple geographies if the company has started to expand globally.
During the scaling phase, the finance function will likely focus on more forward-looking initiatives such as creating recurring forecasts that help guide decisions on hiring, modeling to determine cash needs, and helping the firm align on KPIs.
The budget process here begins to undergo a change too, with the introduction of operational budgets that feed into an overall budget. Managing budgets becomes more complex with an increase in the number of salespeople, geographies and/or channels. It requires a control mechanism that allows for delegation of decision-making and approval, and moves from a centralized budgeting approach to a more decentralized one.
At this stage, you might also have an investor, and the finance team will be critical in both helping in the investment process and the investor reporting post-close. Often, the finance team is also in charge of maintaining the cap table (although this can also fall in the CEO or general counsel’s responsibilities).
The Corporation: Specialization and Strategy
As your firm begins to mature into a corporation with more than 150 people or more than $25M of revenue, your finance team should be a well-oiled machine with a clear understanding of their roles and responsibilities.
At this stage, maintaining a finance headcount of 1-2% of total headcount is the benchmark. Of all the firms we’ve observed at this stage, 70% maintained their finance headcount within this range, while 25% had a higher number of personnel and only 5% had lower. So, for a $50 million managed service provider, this might be 7-10 finance personnel, but for a multi-national digital engineering firm or global systems integrator, it could be in the hundreds or even thousands.
With a CFO or VP of Finance at the helm, you’ll be adding more specialized hires to support the growing needs of the business, such as accountants, invoicing and payroll specialists, tax experts, treasury managers, and financial planning and analysis (FP&A) professionals. The finance function should now be able to provide real-time visibility into the financial performance of the business and contribute significantly to strategic decision-making.
The finance function should now be able to provide real-time visibility into the financial performance of the business and contribute significantly to strategic decision-making.
The team’s responsibilities at this stage will now also include managing relationships with investors and lenders, ensuring compliance with tax laws and regulations, leading annual audits, exploring M&A opportunities for growth, and providing guidance and support to business leaders in negotiating contracts and other financial agreements.
When scaling up a business to a corporate level, it’s crucial to focus on factors that influence valuation. It’s important to have a finance team that understands the valuation drivers and manage the business accordingly, to maximize its value, especially if there’s an intention to take on further investment or sell in the future.
Turn Your Finance Team into an Asset
The finance team for IT services is not just a back-office function. It’s an integral part of your business that can provide insights you need – insights that grow in importance as the company scales. It may be tempting to put off investing in finance, but there are consequences.
Growing your IT services firm without scaling your finance team alongside the rest of the organization is like setting sail on a ship without a compass.
Growing your IT services firm without scaling your finance team alongside the rest of the organization is like setting sail on a ship without a compass. You’ll be directionless and prone to financial turbulence. Having a strategic finance partner, and the right team to support them, can help you keep the wind in your sails and navigate through treacherous waters.
