CFOs are increasingly are playing a larger role in the management of pricing decisions and profitability at many growth and middle market companies. CEOs and owners of these companies view pricing trends as a primary competitive challenge. Historically CFO focus has predominantly been on the administrative side of pricing – tracking and reporting, managing exceptions and enforcing policies. But within some industries, especially Manufacturing, Retail/Wholesale and Services, finance is playing a more strategic role around aligning pricing with corporate strategies, driving pricing approaches and getting value out of customer-specific investments.
Salespeople can be notorious for making overly optimistic sales forecasts that can result in a number of negative outcomes for the company. CFOs need to play a key role in the sales forecast process to ensure that the methodologies and disciplines lead to sales forecasts that enable timely and value-add decision making. The CFO who partners with the sales leader to implement sound sales forecasting disciplines adds value across the company.
CFOs at growth and midsize organizations retain their core financial planning and analytical responsibilities as they are increasingly taking on responsibility for a larger number of organization-wide activities. At the core, the CFO is responsible to the company’s owners and management team for all accounting and financial matters. The CFO core functions include managing risk and providing a foundation for success by establishing company-wide objectives, policies, procedures, processes, programs, and practices to assure the company of a continuously sound financial management and reporting structure. This article addresses the key core CFO responsibilities that enable growth and success.
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. There are a lot of factors to consider in your CFO search for a private equity portfolio company.
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 increases 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.
To get through the recent recession, growth and middle market companies were forced to adopt a more disciplined approach to financial management. Nearly four years later, financial discipline has become a way of life for successful companies. CFOs at these companies understand the importance of a strong balance sheet, and that having sufficient cash on hand gives them financial flexibility and improves their ability to respond to an ever-changing marketplace. Maintaining such a strong level of financial discipline over time isn’t easy. As growth increases, and spending and investment needs put pressure on a company’s cash reserves, it becomes more important to manage working capital effectively. From negotiating better payment terms with suppliers to finding new ways of improving their cash flow, CFOs need to lead financial discipline at their companies to ensure they are in a strong financial position, so they’re prepared to compete in today’s unpredictable business environment.
Commercial bank lending has risen steadily during this past year. However, it is still difficult for many companies to finance their operations with traditional bank debt. There are always companies (and industries) that are just not bankable. These include companies that are cash-flow negative, early stage companies with intellectual property but no customers, and early stage manufacturing companies that need to finance fixed assets before entering into increased production phase. The lending situation for these types of companies can get worse in the next few years, as pieces of the new Basel III bank capital rules may force banks to be more selective with their capital commitments, especially when lending to companies of marginal creditworthiness.
On average, each $1 in cost reduction can equal $5 in new revenue. In an economic environment where sales are flat and customers resist price increases, cost reduction becomes the primary way to improve the company’s bottom line and increase shareholder value. Companies have traditionally viewed cost reduction as a one-time annual exercise. For CFOs to drive meaningful improvements in a company’s financial and operational efficiencies, cost reduction should be an ongoing process. Typically the major barrier to continuous cost reduction is not from suppliers; instead, the internal resistance to change by employees is often the primary reason companies can lose out on valuable cost reduction opportunities. This is why the ability to see these opportunities is a good skill to look for in your CFO search.