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.
Commercial bank lending is the most common source of business financing and is also usually the least expensive form of capital. Across industries, the recent financial crisis has decreased access to bank financing making this form of historically available financing more difficult for companies. Lending standards have also become stricter, and the declining value of real estate has reduced available collateral. Access isn’t the only thing that’s changed. Tighter oversight of banks has brought a renewed emphasis on bank loan covenants, which can put constraints on a company’s growth, increase the overall cost of debt, and raise business risks.
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.
Business owners/investors and management are often so consumed with operating their businesses day to day they do not adequately prepare their company for sale. When owners finally decide to sell all or part of their businesses, they may miss opportunities to maximize the value of their company. Deficiencies in key areas can discourage potential buyers from bidding for the company, delay the transaction (which increases the chances it will not close) or lead to a lower purchase price. Similarly, unaddressed problems can result in greater retained liability of the seller or reduced payouts on earn-outs. The expense of trying to resolve the issues while in negotiation often far exceed the cost a seller would have spent fixing them before the transaction arises. Poorly prepared companies may even face a lack of buyers for the company.
Traditional finance skills of analysis, reporting and control are in demand outside of the finance function and the role of the CFO is broadening far beyond its technical heartland into a role that is much more “strategic” — in the broadest sense of the word. Leading CFOs are overturning outmoded perceptions of finance as “business prevention units” and repositioning the function as an enabling partner to the business. For many CFOs, the acid test is the extent to which business managers consult them for advice on key aspects of strategy. For leading CFOs, this goes beyond being an “information provider” or “aggregator presenter.” Their business understanding and analytical skills mean that this proactive, yet supporting, role is a vital part of understanding how different decisions will lead to certain outcomes.
While managing inventory may seem like a mundane afterthought, CFOs need to recognize this task as a key part of a company’s overall business strategy. Inventory management should not be an afterthought. It is a critical element of a company’s business and should be considered early in the growth cycle and will need to adapt and change over time as the business matures. The term inventory management really describes the effective method of controlling objects and activities and ensuring that they get to the right place at the right time all within a cost parameter. Ultimately bad inventory management represents money that is being lost to a business as a result of excess inventory, or lack of inventory – which can result in lost customers.
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.