For many companies, reviewing and managing financial results is simply an exercise of looking at the P&L and balance sheet after the close of a month. Management then makes a brief determination as to the results usually based on how current month compares with the prior month close, or the same period of the prior year. In essence, the company is informally benchmarking and budgeting against its own actual results. This style of financial management does not take into consideration how the company’s results compare with its industry or competitors, or even with the goals of management and investors. Establishing and utilizing benchmarks and budgets to gauge and improve financial results should be a part of every company’s best practices.

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The allocation of capital in small and middle market companies is as important as it is in large enterprises. Given their lack of access to capital markets, capital budgeting is often more important in small and middle market companies because the funds necessary to correct investment mistakes may not be available. Also, large firms allocate capital to numerous projects, so a mistake on one can be offset by success with others. Smaller companies do not have this luxury. Even though capital budgeting is vitally important for small and middle market companies, very few do a good job of it.  

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I have recently heard a commercial banker state to me “a great CFO is worth his weight in gold.” Thinking about this statement, the average CFO weighs maybe 200lbs, at the current $1,650 per ounce this statement can be interpreted as a great CFO is worth approximately $5,000,000 – which I believe in many situations is very conservative. However, the truth around this statement seems to be sorely missed in many companies to the detriment of the owners, investors, commercial bankers as well as its employees, customers and suppliers. 

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In a turnaround situation, the role of the CFO can be more important than at any other time in the corporate life cycle. The CFO’s importance is based on the harsh realities of difficult financial circumstances. Severe external and internal pressures cause this time to be one of test and challenge. Successful turnaround CFOs know that their role is much broader and more creative than a mere hatchet man or super cost cutter. Instead, the organization requires that financial perspective be injected into every area of decision-making and strategy.  Financial management tasks differ during the emergency, stabilization, and return-to-growth stages of the turnaround.

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For many closely held private companies, it’s often difficult to obtain senior debt financing to support the financial needs of the business. Although the company may be well beyond the start-up stage, it may lack the financial resources to fund sales growth, new product or market developments or capital projects. The use of hybrid debt/equity investment known as mezzanine financing can be a viable solution to this financing dilemma. Recent market conditions have re-established mezzanine financing’s appeal as a tax-efficient source of long-term capital. With the reduction of traditional senior bank credit and the reluctance of banks to lend under the lenient terms and low rates offered over much of the last decade, mezzanine is one of the more effective vehicles for owners of closely held private companies interested in facilitating liquidity for wealth diversification or succession purposes, pursuing acquisitions, or funding organic growth.

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The top financial risks reported by executives facing their own companies in the current economic environment are listed in order as:

1.  Ability to maintain margins
2.  Cost of healthcare
3.  Ability to forecast results
4.   Attracting and retaining qualified employees and maintaining morale/productivity
5.  Working capital management
6.  Balance sheet weakness
7.  Supply chain risk

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Many CFOs view asset-based lending as a financing outlet of last resort. While that may sometimes be the case, such a view can lead to lost opportunities. As companies confront the tight credit markets coupled with the potential for weaker operating results, many CFOs now view asset-based lending as a viable option to finance operations and growth initiatives. Historically successful companies that have recently experienced losses may find the stringent bank underwriting parameters increase the risk that their existing traditional bank loans may be called and the company may be limited as to qualifying for increased or continued financing. Asset-based lending (ABL) arrangements can be an option to be used to retire existing bank debt and provide operating and growth liquidity until traditional bank financing becomes available.

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In most portfolio companies, no executive other than the CEO plays as significant a role in the success of the venture as the CFO. Partner to the CEO and the private equity sponsor, the CFO has a uniquely challenging position, requiring exceptional technical skills, an entrepreneurial mindset and a hands-on, get-the-job-done orientation.

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The role of the successful CFO in an entrepreneurial company is to enable the CEO to fulfill their vision of building a successful company and creating success. Entrepreneurial CEOs who achieve their vision of growing great companies and creating success view their company’s finance function as a key enabler for the CEO and the company to be successful. The role of the CFO in an entrepreneurial company is to make a good CEO a great CEO. This is achieved through providing to the CEO financial leadership to shield the CEO from having to focus on financial risk. The CFO is an enabler to the CEO’s vision by ensuring the financial and operational aspects of the business provide the CEO the necessary support for decision making.

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The value of a company is the result of the earnings and related cash flow that it generates over time. Taking steps to increase earnings and cash flow increases company value. Increasing earnings typically requires making investments before the company realizes the future returns derived by the increased earnings and cash flows on those earnings. Earnings for this purpose are typically referred to as EBITDA which means earnings before interest, taxes, depreciation and amortization. The amount of value that is created by the investments ultimately depends on the investments made and the amount of future cash flows generated, which results in the company’s return on invested capital (ROIC). Therefore, value creation is ultimately driven by a company’s ROIC, revenue growth and the ability to sustain both over time.

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