Congratulations are in order for the CFO when private equity funding comes in—but the celebration will have to be kept short. There’s a lot of work to be done, and your role will expand seemingly overnight to help lead the company through this transition. You’ll still have the same responsibilities but now, as a portfolio company CFO, you’ll have a whole new world to adjust to, as expectations will be different, reporting cycles will be shorter, and the demand for reliable, actionable data will be constant. You and your team will act as the bridge from the business to the private equity firm—and be expected to provide a steady stream of information about the business.
All of this change presents opportunities to better the company and streamline processes and make improvements that have perhaps been long overdue. But how to keep up with the change in pace, the higher level of complexity, and the increased scrutiny? From working closely with private equity and venture capital investors over the years, I can tell you that by focusing on the following five areas, you can set yourself up to meet expectations during this exciting time at your company:
Adjust to a New Frequency
Your sponsoring firm wants data—and lots of it. You may have grown accustomed to preparing for quarterly meetings to the board, but now you’re going to be asked to put together more reports and at a more frequent level. Monthly reporting is the norm at many PE-backed companies. This can put a strain on the finance team at first—until you can quickly find a way to greatly improve processes and the accounting system. Realize that better, deeper financial reporting will be in hot demand for the immediate future.
Know Your Cash
Companies will typically focus on the growth and revenue prior to funding. However, after the financing arrives, the CFO’s experience in managing cash flow and debt service is critical, especially if leverage is involved.
Cash forecasting becomes a core critical function of a funded company’s finance group, and most likely you’ll be required to furnish at least three reports to the senior management team: a full year forecast for long-range planning; a mid-term projection, covering three to six months (especially useful for managing seasonality issues); and a weekly report, which is meant to be the most granular, lowest level of cash flow forecasting but, in most cases, is the most important.
Know Your Covenants
Along with the infusion of equity, funded companies can typically find themselves significantly leveraged as well, going from something like 2-3 times debt to EBITDA to 8-10 times. It is easy to underestimate the significance of financial covenants in loan agreements and the implications of failing to meet them.
The days of managing your financial reporting in spreadsheets is over. Investing in a new ERP system can achieve immediate returns by integrating all departments and functions across your company into a single system while still serving each department’s specific needs. It should be designed to help your business make smarter decisions, serve your customers better, and work more efficiently overall with automated processes and workflows.
Access the Right People
Having access to the right skills at the right time is always important—but it may be even more so at this point in the business’s lifecycle. With so much output by the finance team, you need to stock up on “doers”— people who will actually roll up their sleeves and do the work. You may need to fill in the gaps through outsourcing for a time, and you may need to pull in experts who are familiar with the exact needs of PE portfolio companies and can help you upgrade the way you operate in finance. Look for people who know how to manage and forecast your cash; interpret and monitor your financial arrangements; and identify inefficiencies in your financial reporting process right away.
Very likely, at this point these are key skills the company is lacking and unable to keep up with at the cadence level that your new investors want to see. By supplementing the finance leadership you have developed with strategic and tactical finance expertise, you can get at the timely financial information that the management team, board and investors need. You can do this while helping to unlock the value that made your business a smart investment in the first place.
Vineet Singh joined RoseRyan earlier this year as director of business development. He has extensive experience meeting the complex requirements of businesses funded by private equity and venture capital, as well as implementations of enterprise applications. He previous worked for eFront Financial Solutions, Brookfield Asset Management and Canadian Imperial Bank of Commerce.
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