How a Finance Transformation Can Help Maximize Your ROI
Private equity firms have different focuses and resulting strategies for how they will get the most return on their investments. For those firms that invest in small to mid-market companies, the finance and accounting organization in new portfolio companies is often a good place to find optimization opportunities, which can be grouped into three main buckets: people, processes, and technology. Some combination of the following steps will then help get the company where it needs to be, prior to sale.
Install the right professional financial management (if it’s not already in place). This could mean a CFO for some companies, or maybe a Controller/VP of Finance is sufficient if the company is smaller and there won’t be much M&A, financing activity, or balance sheet management. Good financial team management will be the foundation to effectively accomplishing the rest of the next steps.
Perform an assessment of the current processes. Process deficiencies can be the #1 culprit that contributes to a trickle down of other major problems:
- When created for legacy purposes and never reviewed, processes typically require unnecessary steps that take too long to perform. These additional steps slow down reporting and, therefore, slow the business’ ability to react to changes and new information. In this case, accounting becomes a bottleneck, so streamlining or removing poorly constructed or obsolete processes can improve monthly close, reporting time and accuracy.
- Processes leave room for human error. These mistakes can result in inaccurate reporting, or worse, incorrect invoicing of customers or handling of vendor bills. This could show up in the form of revenue leakage-unsent or incorrect customer invoicing, unclear payment timeframes, or unmonitored profitability. It can also take the form of vendor bills being paid at a time when they shouldn’t be, or possibly paid multiple times. The time required to correct these inaccuracies can cost even more. What are some remedies? Physical controls and separation of duties can help with these problems, but can often slow down processes. So, this is where the next step comes into action.
During and after a review of processes, an assessment of the technology stack and how it is being leveraged needs to occur. Does the company need a new ERP (such as NetSuite), or does its current one need to be optimized due to incorrect configuration or use? The information that was gathered in reviewing processes should now be used to help select and optimize a set of technology solutions. An important factor during this process, is having a dedicated implementation expert or external partner to project manage and help you get the most out of the technology, based on specific business processes.
Here are some other things to consider:
- Accounts payable (including expense reports) and accounts receivable can be highly automated through workflows and AI that has been built into most new ERP’s or 3rd-party software. This automation creates a paperless environment which is much more efficient for record-keeping and dramatically minimizes the risk of human error, while still making the process move quicker because of its electronic nature.
- If there is complexity around project tracking, inventory, commissions, leases, revenue recognition, among other things, it should primarily be managed by an ERP or a third-party tool. If most or all these functions are being handled in Excel, then there are ways to improve the accuracy and decrease the amount of time being spent.
- Reporting (including BOD and KPI’s) can largely be automated as well. Even in environments where lots of M&A is happening, if consolidation software and processes are setup correctly from the beginning, then integrating new companies can be significantly accelerated.
After working with the organization to look at current processes and technology, the quality of the current accounting and finance team should be more transparent. Hiring people to compensate for a process or technology problem is usually the wrong approach. Instead, take the opportunity to determine if roles can be eliminated or consolidated. Performing the previous activities is vital to ensuring the success of this step.
Things to keep in mind here, include:
- Do you have the right team with the right skill sets to accomplish what needs to be done?
- Would training help in bridging the gap on missing skills? Training is often more cost-effective than hiring new people, so definitely consider this option.
- In many companies, we often find that Financial Planning & Analysis (FP&A) is a function/area that many people understaff because it is viewed as something that someone else can do as part of their job (the CFO or Controller, usually). When companies are small, this can be the best option, but as they grow, team members need to be specialists. Also, both internal and external reporting needs to increase, which creates even more of a requirement for a dedicated person or team to fill this role.
BRINGING IT ALL TOGETHER
Going through a finance transformation process will result in finance and accounting becoming invaluable business partners that support the owners in achieving corporate milestones and goals. Better and more timely analytics and reporting, as well as creating a culture of continuous improvement, will lead to a more responsive and scalable organization.
HOW BRIDGEPOINT CAN HELP
As a go-to partner for private equity firms and their portfolio companies, Bridgepoint Consulting, helps clients create value, manage risk and seize growth opportunities. We have a large team of consultants ready to support you with asset-optimizing private equity advisory services — including finance and technology transformation, operational improvement, and ERP implementation and systems integration. If you have any questions or would like help creating and maximizing value throughout the private equity life cycle, please get in touch. Learn more about our services and areas of expertise here.