One thing that always lurks in the shadows of any start-up's growth journey is 'key person risk' - the risk that the departure of a crucial member from your team could destabilise your operations.

In the world of fast-growing start-ups, addressing key person risk, particularly within the finance department, is essential for ensuring continuity and stability.

Keyperson Risk: A Start-up Reality

It's a familiar story - a start-up's operational teams can often revolve around one or two key individuals. And when it comes to finance, the reliance on a single Finance Director or a small team can be pronounced. The departure of a key person in such a setup could have a ripple effect, causing uncertainty, hampering day-to-day operations, and potentially impacting the start-up's financial stability.

I remember working for a very small FinTech and we had just the one person doing all of the daily reconciliations that were very manual.  Being a junior, they only had to give 1 month's notice.  When we hadn't found a replacement in time, myself and the Financial Controller had to spend way too much time reconciling while we waited for the new person to start.  It wasn't pretty.

This is why managing key person risk is so important for financial leadership and should be a significant part of strategic planning. But how do you go about it?

Mitigating Key Person Risk

1. Develop a succession plan: As the saying goes, "Hope for the best but plan for the worst". Having a solid succession plan in place for the critical roles can help ensure business continuity. This can include grooming potential successors or outlining a process for finding a replacement.

I have always discussed with HR who could be my next 2IC and who could replace me in my role.  By having those discussions early with both HR and the potential successor, you can establish their interest early, potentially encourage retention and take your time filling in their gaps in knowledge or skill.

2. Cross-training and skill development: One of the most effective ways to manage key person risk is to cross-train your finance team. By enabling your team members to develop a broad skill set and gain understanding across multiple areas, you can build a more resilient department that can absorb the impact of losing a key person.

In the above example of reconciliation, we had multiple junior members in the team who would job swap temporarily so they could cover anyone who would go on holiday (and future resignations).

3. Document processes and institutional knowledge: A common challenge in managing key person risk is the potential loss of institutional knowledge when a key person leaves. By ensuring critical processes, decisions, and knowledge are well-documented, you can mitigate this risk.

I'm not going to lie, this was the hardest thing to produce in the past, but nowadays when you don't have multiple team members to learn each other's job this is your only option and it's super easy! 

Either encourage your team to do a task and record it on something like Loom or even record it via a zoom call to yourself and then upload to AI to create the transcript for you.  Easy as.

4. Building a robust finance team: For Finance Directors in start-ups, one of your key roles should be building a strong and diverse finance team that is capable of stepping up to challenges.

By having a team with complementary skills, you can help ensure that the departure of a key person does not leave a skills gap that impacts operations.  Make sure that you don't hire "mini-me's!"

For financial leadership, managing key person risk involves a delicate balancing act. On the one hand, you want to empower individuals to take on significant responsibilities and contribute to the start-up's growth. On the other hand, you need to ensure that the loss of a key person doesn't disrupt your operations or slow down your momentum.

By acknowledging the reality of key person risk and taking proactive steps to address it, financial leaders can contribute significantly to their start-up's resilience and long-term success.

Remember, as a Finance Director, your goal is to not only steer your start-up towards financial stability but also to build a robust finance department that is prepared to handle whatever comes its way.

As always, I'm here to guide you along this exciting journey of financial leadership. 

Links:

1. Get your FREE Guide: Stepping into the role of Finance Director or CFO
2. Register for the mini-course, Upgrade your Management Accounts and get noticed by the business 
3. Work with me in the Financial Leadership Foundations course  that includes monthly Q&A sessions where we can discuss all of your questions and how to apply your learnings to your current role.