Amid tighter access to financing and stubbornly high interest rates, CFOs are under mounting pressure to deliver greater equity value following a private equity recapitalization, without relying on traditional value drivers like multiple arbitrages or leveraged financing.
Their livelihoods are on the line. It was recently reported that 91% of CFOs “worried about their jobs following a private-equity investment,” a 25% increase since 2019. That is exacerbated by the growing need for additional reporting, deeper analysis, and quicker answers in today’s volatile economic landscape.
To gain the confidence of their key stakeholders and advance their companies’ long-term financial goals in this high-stakes environment, CFOs must craft a robust plan for driving efficiencies across their P&L and balance sheets with the goal of boosting cash flow. Then they must communicate that plan, often to multiple stakeholders— and do so wisely.
Here’s how to get started.
1. Know the Numbers and the Story Behind Them
In the world of private equity, CFOs may be the custodians of P&L statements and guardians of the balance sheets. But getting the numbers right is just table-stakes.
CFOs must be able to explain what is driving those numbers. And they should aim to present them in a way that is meaningful and easy to understand, rather than getting mired in the weeds.
Not doing so will likely attract pushback from stakeholders, who will also pose additional questions and make requests for ad hoc analysis. Eventually, PE firms and outside board members may even raise their explanations for various figures and metrics, many of which will not be relevant to the business’s operations and long-term goals, making an already difficult job more difficult. CFOs will have to divert time and finance resources to fielding a constant barrage of questions without having the capacity to deliver a “big picture” explanation of the numbers.
2. Present a Strong Point of View
PE investors may be comfortable with investment risk — but they are weary of management teams that can’t form their fact-based point of view. CFOs should ensure that the executive team does not chase goalposts that move every week. Company-wide objectives should remain consistent over time and align with those of the broader PE firm.
One way to thread the needle is to build a program that balances and trades off multiple targets, including growth, higher EBITDA-driven cash flow, and healthier balance sheets. CFOs should not be afraid to get parts of the plan wrong — a plan can’t account for every challenge. However, they should identify missteps quickly and proactively and align with the CEO and PE firm leaders on alternatives.
3. Become a Trusted Partner
CFOs should not act only on behalf of the business. They should treat their relationships with the CEO, boardroom, and PE firm — as well as bondholders and banks — as partnerships. That means being proactive and building consensus around the company’s targets and critical milestones right away.
Communication with the PE firm, for example, ought to be a moving picture rather than a snapshot. CFOs should open a dialogue with PE executives focused on delivering monthly reporting that meets their needs. This way, it will be easier to make decisions at quarterly board meetings.
4. Foster Internal Cross-Functional Collaboration
Remember: Strong FP&A teams link business goals and performance to financial performance, meaning effective CFOs — sometimes more than their CEO counterparts — will be able to see all the moving pieces at a company.
That level of oversight means that FP&A teams have the unique opportunity to serve as a bridge between a broad range of functions within the business. CFOs should capitalize on this position and engage the perspectives of critical decision-makers who operate outside their areas of expertise.
With that opportunity comes new challenges. CFOs sometimes must be strong enough to say no to ill-conceived ideas, for example. Yet finance leaders can also help different teams see contrasting perspectives, which is crucial for producing better business outcomes.
5. Drive Accountability
CFOs must hold business and management teams accountable for making progress toward long-term financial goals. They should create a culture of accountability that balances growth and profit goals. That means leading internal conversations (e.g., between sales and operations) based on data and facts, not individually held opinions.
Additionally, CFOs must size investments (e.g., in capital, product development, and technology), estimate returns, and then track them. A simple ROI pro forma is not good enough. CFOs must prove that the initial investment is yielding sufficient payback to the company and, ultimately, the PE firm.
6. Embrace Change Across the Finance Team
Business transformation does not have to rest squarely on the CEO’s shoulders. The most important part of driving equity value is putting together a competent, successful team.
This is where CFOs often falter. Given the significant workload, many CFOs are afraid to terminate an employee who is just closing the books and collecting cash—even if they recognize the employee is not meeting expectations. Further, CFOs should not be hesitant to take on the costs associated with onboarding and training a replacement.
Don’t Go It Alone in 2024
In a world where cash is king, CFOs need all the help they can get. To map out a strong post-investment strategy and corresponding reporting cadence, it can be wise to reach out to global consulting firms. Ultimately, it is not enough for a CFO to be competent at their job. They need to be procedural and strategic. They need to have a point of view. And like an athlete, they need to be coachable — willing to take advice from others, rather than deflect criticism.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.