A 10-step playbook for new PE-backed CFOs

Article June 22, 2022

For the first 100 days to be a success, the plan must focus on measuring, managing, and scaling.

Post-deal, private equity (PE) investors retain the existing portfolio company CFO only 25% of the time, which means 75% of PE-backed CFOs will be fired, or more politely asked to move on from their role.

Given the accelerated turnover in the top finance position, many PE-backed CFOs are relatively new in the seat. There’s no shortage of guidance to help those CFOs navigate the critical first 100-day period. These playbooks differ in the details, but they’re usually some compilation of the following steps:

Understand company business drivers. That includes how the company makes money, its margin advantage, and historical returns on invested capital (ROIC).
Conduct a strategy/value audit. Evaluate the company from an investor’s perspective to understand how the capital markets would value the relative impact of revenue versus higher margins or capital efficiency.
Align on CFO expectations. Understand where sponsors and management want the new CFO to focus on: Being an active member of senior management? Ensuring the optimization of finance? Challenging company strategy? Bringing a capital markets perspective?
Assess the finance organization. CFOs must assess the core team and identify areas for improvement, including an evaluation of IT system efficiency, finance staff skills, and organizational structures and processes.
Manage performance actively. Learn about the company’s current performance dialogues, understand where performance must be improved, and develop a long-term reporting strategy.

The current guidance isn’t wrong, but during this era of certain uncertainty, it’s also not incredibly helpful, for three key reasons:

The problems with the old playbook

Too Long.

The list is a bit overwhelming and, in practice, is nearly impossible to tackle in 100 days. What must be prioritized? How do you accomplish all the assessments? What do you start with? What’s the right cadence?

Too Antiquated.

Gone are the days when the PE-backed CFO’s chief role was the controller. The modern-day CFO’s role may be among the hardest within enterprise management, and it’s only gotten more difficult from pandemic-induced volatility and access to an avalanche of helpful but overwhelming data. The PE-backed CFO’s role now includes three critical functions: managing the business, measuring the business, and scaling the business. Any effective 100-day playbook must address how and in what order new CFOs tackle those requirements.

Too Amorphous.

The old playbook does not address the reason the sponsor or management fired the last finance chief. Spoiler alert: They weren’t getting the very basic foundational measure and management functions of the role done effectively.

This isn’t just our view, it’s backed by data.

According to the recently published State of the PE Sponsor-CFO Relationship report, which surveyed 100 sponsors and 100 PE-backed CFOs, CFOs are not living up to sponsor expectations across all three functions of the role.

Eighty-one percent of the partners said their portfolio company CFOs were not completely living up to their “measure the business” expectations. Measuring the business is defined broadly as “collecting clean data to inform insights.” More specifically, it’s collecting accurate data, having the systems integration capabilities to produce timely reports, and having the appropriate leading and lagging key performance indicators (KPIs) to understand the data. Put more plainly, it’s the basic, table stakes part of the job.

In addition, 91% of sponsors said their PE-backed CFOs weren’t meeting their “manage the business” expectations. Managing the business is defined as turning clean data into analysis and then into insights to make informed business decisions. It’s a tough task, no doubt, but it’s still very much foundational to the CFO role.

Finally, 87% of sponsors said their portfolio company CFOs were not living up to their “scale the business” expectations, which is defined as utilizing value levers to help the business transform to achieve strong growth and returns in a PE-backed environment.

PE firms are not happy with their CFOs, and their CFOs know it. CFO performance has proven underwhelming in all three core areas of the function. To close the performance gap, new CFOs must take a new approach, which all begins with a new 100-day playbook.

The new playbook

Research indicates that while PE teams ultimately want a strategically inclined, transformative CFO, market disruption has made even the very basics of the job that much more important. What sponsors really want, and what new CFOs must prioritize, is for finance to first revisit and rebuild the foundational parts of the job.

That means the new “first 100-day plan” must focus on measuring, managing, and scaling, in that order.

The first 50 days: Measuring the basics

Step 1: Check liquidity.

PE portfolio companies don’t carry excess cash by design. Quickly kick the tires on the company’s 13-week cash flow forecast, examine the frequency and quality of receivables, and immediately identify any large vendor, debt, or one-off payments. New CFOs should look for “death-blows” lurking in the near term, such as liquidity crunches. Address them immediately and proactively with the board.

Step 2: Fix the data.

CFOs need constant visibility into granular metrics to understand variances and the root cause of performance or underperformance. As part of this data exercise, CFOs must review all financial and operational data funnels, for both quality and consistency, across different business units.

Step 3: Assess IT.

To better clean and consolidate data streams, new CFOs must assess and invest in the right suite of integrated architecture to close system gaps and drive optimized financial and operational reporting. Does the enterprise resource planning (ERP) system cover core business operational and financial processes? If not, can the company live with it and augment it with tools such as corporate performance management and business intelligence software, or does the company need to migrate or replace the ERP?

Step 4: Invest in the right talent.

After, or concurrent to, investing in the right systems, a CFO must also invest in a team that can guide and navigate those systems — quality financial technology experts are always in short supply. Beyond that, a CFO must assess broader financial team needs. Every team should be well-rounded, with expertise in FP&A, accounting, corporate development/M&A integration, procurement, and business applications.

The second 50 days: Managing the basics

Step 5: Revisit reporting.

After getting the appropriate tech stack and personnel, new CFOs must tackle reporting inertia. Too many finance departments measure against outdated investment theses. As a result, the reports provided to sponsors and management don’t align with the right KPIs, and finance is fielding too many burdensome requests for ad-hoc reports. CFOs can get in front of those issues by revisiting the investment thesis with sponsors and identifying the KPI and reporting cadence needs. Doing this will also ensure finance converts granular data into the high-level insights management and sponsors need to make informed decisions.

Step 6: Introduce automation.

As a general rule, finance is spending too much time producing data and not enough time analyzing it. As part of the reporting exercise, CFOs should identify opportunities for increased automation in data collection, consolidation, and analysis.

Step 7: Steward the budgeting process.

When the new CFO joins, they must tackle annual planning immediately. They can start by revamping the budgeting process so that the CFO drives business planning (in coordination with the business units). Beyond just stewarding the process, the CFO must also serve as a strategy leader. That means rigorously challenging assumptions, creating processes to hold business leaders accountable, and pushing to develop targets in-line with historical trends and realistic drivers.

Step 8: Address forecasting.

Forecasting is at the core of managing the business; sponsors expect CFOs to see around corners.

According to Mike Attinella, CFO at Integrated Supply Network, while forecasting is a critical component of the CFO function, it must also be a collaborative effort. “Forecasting needs to be owned collectively by the leadership team, and they must understand that meaningful forecasts extend beyond revenue, margin, and EBITDA. Cash flow forecasts are equally, and arguably, more important to organizational success,” said Attinella. “Many times, cash flow is a byproduct of a forecasting process, not an integral component.” New CFOs should make cash flow an ongoing and integrated part of the process. At the same time, it is essential that they educate, inform, and develop accountabilities for company leadership in all realms of cash flow.

Beyond the first 100: Scaling the business

Of course, CFOs want to ultimately play a role in transforming the entire organization and scaling the business by leaning into and driving enterprise-wide transformation. But let’s be clear, that’s not (or, at least, shouldn’t be) the priority for the first 100 days. After the new CFO addresses the measure and manage fundamentals, then, and only then, should they turn their attention to transformational initiatives.

Start the transformation journey by:

Step 9: Prioritize performance levers.

These include but are not limited to operational improvements such as business process outsourcing or robotic process automation, process re-engineering, operating model re-design, cost-cutting or ongoing cost management, and M&A.

Step 10: Align with sponsors on finance-led transformation initiatives.

Does transformation mean finance process optimization? EBITDA improvement initiatives? Digital transformation? All the above? The answers will set the course for what the years ahead will look like for the CFO. Tailoring transformation initiatives to where the company is in its holding period will ensure that the company is prepared to maximize valuation at exit.

Once the CFO has deployed the new playbook and addressed the roots of measurement and management requirements and misfires, the foundation is established. Then the CFO will be positioned to have an informed conversation with sponsors about:

The value creation plan (VCP) for the post-pandemic company
The KPIs required to understand progress against the VCP
The state of the technology stack and the requirements for new systems, system integration tools or overlays, and system expertise to harness clean and accurate data
The resourcing requirements demanded by an optimized but superior finance department
The importance of appropriate and targeted sponsor investments in the finance function to ensure it can attain the highest possible exit multiple

The steps above will help CFOs of PE-backed companies set themselves, the finance department, the portfolio company, and the sponsor up for long-term success.

Understand company business drivers. That includes how the company makes money, its margin advantage, and historical returns on invested capital (ROIC).

Conduct a strategy/value audit. Evaluate the company from an investor’s perspective to understand how the capital markets would value the relative impact of revenue versus higher margins or capital efficiency.

Align on CFO expectations. Understand where sponsors and management want the new CFO to focus on: Being an active member of senior management? Ensuring the optimization of finance? Challenging company strategy? Bringing a capital markets perspective?

Assess the finance organization. CFOs must assess the core team and identify areas for improvement, including an evaluation of IT system efficiency, finance staff skills, and organizational structures and processes.

Manage performance actively. Learn about the company’s current performance dialogues, understand where performance must be improved, and develop a long-term reporting strategy.

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