CFO (Chief Financial Officer)

What is a CFO?

CFO (Chief Financial Officer; in German, Finanzvorstand or Finanzgeschäftsführer) refers to the person who heads a company's finance function. The CFO is responsible for accounting and financial statements, planning and controlling (ongoing management on the basis of planned and actual figures), liquidity and financing, and relationships with banks, investors and auditors.

In German law, “CFO” is not a statutory term. In a stock corporation (Aktiengesellschaft), it corresponds to the member of the management board responsible for finance. In a GmbH (German limited liability company) there are two forms. Either the CFO is a managing director (Geschäftsführer) with responsibility for finance, or the CFO is a senior employee, often with Prokura, a comprehensive power of representation registered in the commercial register. Common titles are then Head of Finance or, in German, Leitung Finanzen. The role matters above all in funding rounds and company sales: investors and buyers assess the management team, and the participation agreement ties information rights and reporting obligations to a functioning finance function.

Responsibilities of the head of finance

• Accounting and closing: timely monthly closing, annual financial statements in cooperation with tax advisers and, where applicable, auditors, figures on which management and shareholders can rely.
• Planning and management: budget, rolling forecast, variance analysis and the metrics against which the business model is measured, such as unit economics (the profitability per customer or order).
• Liquidity and financing: liquidity planning, bank relationships, credit lines and the preparation of equity rounds.
• Investors and bodies: regular reporting (Management Reporting) and investor updates as well as the preparation of advisory board and shareholder resolutions.
• Risk, taxes and administration: insurance, contract management and tax matters together with the external advisers. In smaller companies, HR administration and legal are often added.

The head of accounting is responsible for the past being recorded correctly. The CFO is responsible for decisions about the future being based on reliable figures. A useful yardstick is how quickly the finance function can calculate how liquidity changes if five positions are filled and the largest customer pays two months later.

Legal position in the GmbH

The CFO as managing director

If the CFO is a managing director, the CFO is appointed by the shareholders' meeting and is a statutory representative of the GmbH. The principle of joint responsibility applies. The managing directors must ensure proper bookkeeping under Section 41 of the German Limited Liability Companies Act (GmbHG), and the statutory representatives prepare the annual financial statements under Section 264(1) of the German Commercial Code (Handelsgesetzbuch, HGB). An allocation of responsibilities in the rules of procedure assigns finance to one managing director, but the others remain obliged to supervise. In a crisis, the duty to file for insolvency under Section 15a of the German Insolvency Code (InsO) applies to every managing director, not only the one responsible for finance.

The shareholders' meeting can in principle revoke the appointment at any time (Section 38(1) GmbHG). To be distinguished from this is the service agreement, which ends under its own rules. Managing directors, as statutory representatives, do not have general protection against dismissal under the German Dismissal Protection Act (Kündigungsschutzgesetz, KSchG) (Section 14(1) no. 1 KSchG).

The CFO as a senior employee

If the CFO is not appointed as managing director, the CFO is an employee. Often the CFO is a senior employee (leitender Angestellter), that is, an employee with entrepreneurial powers, such as a Prokura that is also not insignificant in relation to the company. The German Works Constitution Act does not generally apply to senior employees (Section 5(3) of the Works Constitution Act, BetrVG). Protection against dismissal exists; if the CFO may hire or dismiss independently, however, the employer can apply in the dismissal protection proceedings, without giving reasons, for the employment relationship to be dissolved against severance pay (Section 14(2) KSchG).

Statutory responsibility for bookkeeping and financial statements remains in this case with the management, which must select and supervise the CFO carefully. The CFO's powers result from Prokura, powers of attorney and internal approval rules. In growth companies, the CFO is often given a stake through a virtual participation programme, the terms of which are set out in an ESOP or VSOP with vesting and leaver rules.

When the role is first filled

There is no fixed revenue threshold. Triggers are rather the first funding round with institutional investors, debt financing with covenants, monthly reporting obligations to shareholders, a group with several companies or a planned acquisition. A step-by-step build-up is common: accounting is first with the tax adviser, then follow a finance manager or controller, later a head of finance. In practice, the CFO role is often first filled permanently around a Series A or Series B financing, that is, the first larger growth rounds with institutional investors.

Until then there are two interim models with an external person. A Fractional CFO takes on tasks of the finance function part-time on a few days a month, in parallel for several companies and often over a longer period. The Fractional CFO works on the basis of a service contract, is generally not appointed managing director and acts only with the powers granted by the company. An Interim CFO, by contrast, takes over the finance function full-time and for a limited period, for example in a vacancy or in a transaction with a high workload, often as managing director or with Prokura. Neither model replaces a permanent appointment if the need is permanent.

Importance in a funding round and company sale

Investors assess the finance function by whether the pitch deck, financial model and accounting show the same figures, how accurately earlier plans have been met and how quickly questions from due diligence are answered. The CFO runs the financial model, prepares the financial part of the data room and helps negotiate the financial terms, such as reporting obligations and covenants.

In a company sale, further tasks arise. The CFO helps negotiate the definition of net financial debt (financial debt less liquid funds) and of working capital (the capital tied up in ongoing business), both of which determine the purchase price. Added to this are the purchase price mechanics and the tasks after closing, that is, after the transfer of the company. Buyers look at whether the CFO is available beyond closing. A finance function that depends on a single person is a finding in its own right in the review.

Worked example

A software company has liquid funds of EUR 4.2 million with a monthly net cash outflow of EUR 280,000. Management wants to fill five positions immediately at full costs of EUR 8,000 per month each. A funding round is to begin in two months, which experience shows takes six to eight months.

• Current runway: EUR 4.2 million ÷ EUR 280,000 = 15 months
• Additional outflow: 5 × EUR 8,000 = EUR 40,000, new outflow EUR 320,000 per month
• Runway with the hires: EUR 4.2 million ÷ EUR 320,000 = about 13.1 months
• Liquidity at the start of the process without the hires: EUR 4.2 million minus 2 × 280,000 = EUR 3.64 million, which is 13 months
• Liquidity at the start of the process with the hires: EUR 4.2 million minus 2 × 320,000 = EUR 3.56 million, which is about 11.1 months
• Liquidity after eight months of process with the hires: EUR 3.56 million minus 8 × 320,000 = EUR 1.0 million, which lasts a good three months

With the hires, the round starts with less than twelve months of runway and, in the unfavourable case, ends with a reserve of a good three months. The CFO's task is to make this consequence visible before the decision and to calculate alternatives, such as staggered hiring or an earlier start of the process.

Distinction from related terms

• Head of accounting: responsible for proper recording and closing. Planning, financing and investor communication are not among the core tasks.
• Controller: prepares planning, reports and variance analyses in controlling. The CFO additionally bears responsibility for financing and capital providers.
• Fractional CFO: takes on tasks of the finance function part-time and in parallel for several companies, usually without a position as a company body. The CFO works permanently and full-time for one company.
• Interim CFO: takes over the finance function full-time, but for a limited period until an occasion is dealt with or a permanent appointment is made.
• Tax advisory: as an external body, ensures bookkeeping, financial statements and tax returns. It does not plan for the company and does not represent it towards investors.

Common mistakes

• Filled too late. Anyone who looks for the head of finance only during an ongoing funding round puts a strain on both the round's timetable and the quality of the selection.
• Chosen only for experience with financial statements. Experience with funding rounds, investor reporting and planning cannot be acquired on the side.
• Role without powers. A head of finance who cannot stop spending and cannot approve payments remains a reporting function with a title.
• Model without a link to accounting. A financial model that is not based on actual figures quickly loses credibility in due diligence.
• Overloaded with administration. If the CFO also takes on HR, legal and office organisation, there is no time left for planning and financing.

Frequently asked questions

Does the CFO of a GmbH have to be a managing director?

No. Many growth companies fill the role with a head of finance holding Prokura. Appointment as managing director brings full power of representation, but also the duties and liability of a company body.

Does a good tax adviser replace the CFO?

No. The tax adviser ensures that bookkeeping and taxes are correct. Planning, liquidity management and negotiation with capital providers remain tasks within the company.

What experience should a first CFO bring?

Above all, experience with the occasion that comes next, such as a funding round or a sale. A business administration background is usual, but what matters is knowing investors' questions from one's own experience.

Permanently employed, part-time or for a limited period?

Permanently employed if financial decisions arise daily on an ongoing basis. Part-time as a Fractional CFO if regular leadership is needed without a full-time requirement. For a limited period as an Interim CFO if a vacancy or an occasion temporarily demands full commitment.

The Roemer Capital view

In preparing a funding round, it quickly becomes clear whether the finance function holds up: not by the title, but by how long a follow-up question from the data room takes to get a reliable answer. We therefore check early whether the financial model and accounting match and who will answer investors' questions.

For companies that cannot yet support a full-time position, we take over the finance function for a limited period as a Fractional CFO. This includes a financial model covering at least three years with a base case, a cautious case and an optimistic case, planning, reporting and investor communication. This does not replace a permanent appointment once the need is permanent. We plan the handover in as well, so that the finance function is anchored in the company after the round.