Midmarket CFOs are pulled in so many directions, so the question of what to spend time on is often affecting. Dustin Williamson, fractional CFO and managing director of VCFOs, says that a mantra suitable for such a CFO is “delegating or deferring it if the action does not promote value.”
When an owner or investor exit is looming, value creation may be the best of the mind, but otherwise more pressing concerns can blur it. Revenue is important, but the most powerful value creation may come from revealing hidden opportunities.
Williamson has led many middle market companies through this terrain. He spoke about focusing on creating value for a company, finding the general blind spots of a journey to growth, and reassessing financial planning and capital structure in an age of macroeconomic pressures.
The CEO and board of directors look forward to the financial chief playing a strategic role beyond finance. How do you balance operational financial leadership with broader business strategy?
Limited resources make achieving balance more difficult. First, delegate your daily accounting and reporting to a capable controller or financial team. Secondly, communication. Book weekly for strategic sessions and sensual collaborations and look for individuals with spare capacity or, more importantly, excessive problems.
Third, leverage data analytics to link operational metrics to strategic KPIs. Creating complex calculations and numbers that all interested parties can understand is an important CFO function.
“Frequently, we have discovered that financial practitioners at the helm of downstream middle market companies have lost sight of the woodland.”
Often, the financial figures at the helm of the lower mid-market company are found to be missing the woodland. Numbers may make sense to a person, but no one else gets them. In M&A situations, it immediately causes a reliable vacuum.
What is the best way to increase the creation of corporate value? And where are the blind spots in your financial strategy that will hinder your business's long-term growth?
Some areas of focus must be essential to your playbook, regardless of industry, as CFOs navigate the most decisive path of corporate value.
First, the quality of revenue: repetition and one-time. Second, increased margins through operational efficiency. Third, working capital management and cash conversion. Finally, we are building scalable infrastructure to support future growth.
Common blind spots in the value building process include, but are not limited to, underestimating the impact of customer concentration, ignoring digital transformation and automation for productivity, and ignoring financial planning while focusing only on EBITDA and total margins, while ignoring factors for quality of acquisition, resulting in errors like misunderstanding.
CFOs who are interested in building long-term sustainable value in their businesses tend to prioritize all the value they focus on. At the same time, they separate and minimize the blind spot. Measurements are essential for CFOs to communicate their daily, weekly and monthly progress to building values. It is also important to understand this progress through regular value driver analysis and preparation assessments, even if sales are not imminent.
How should CFOs reassess financial planning and capital structure due to economic uncertainty, inflationary pressures and escalating political risk?
CFOs must be familiar with building financial models. This is standard practice. Here are some things that take this type of financial planning to the next level:
- Dynamic prediction. Moves beyond static annual budgets by implementing rolling forecasts and scenario planning.
- Stress test. Model Best, Base, and Worst Results to Guide Decisions on Liquidity and Debt Contracts.
- Reorganization of capital structures. Reassessing debt levels and terms. Hedge interest rate exposure if necessary. To maintain flexibility, consider undiluted capital or alternative financing.
Inflation stays here [in the short term]. This makes it the best time to identify structured cost pass-through strategies, reviews of pricing elasticity, renegotiation supplier terminology, and inventory optimizations.
The role of CFOs in M&A and exit planning has become more important than ever. What advice do you have about CFOs who will guide their business through sales or acquisitions?
First and foremost, start early. Exit preparation should be an ongoing process, not a fire drill. Clean books, documented processes, and strong internal controls are important. I've never heard anyone say no to start that early!
The CFO drives the story. They play a central role in shaping the company's narrative in diligence, knowing the numbers and what they say. If this fails, the buyer will replace you, even if the transaction is successful.
In addition to the value extension focus items mentioned above, it is up to the CFO to normalize revenue, remove non-repeated items, or to adjust and engage in the quality of revenues implemented by external advisors. This is essential to gain buyers' trust in the cash flow of their business.
Identifying synergies and integration risks is essential in buy-side trading. The transaction does not stop with signing. That's when the actual work begins.
The CFO acts as an anchor between the company's legal, tax and transaction advisors. However, ownership of the results should not be outsourced. CFOs in particular in the mid-market market should recognize and understand that buyers will scrutinise more closely with smaller transactions, but the strong leadership of CFOs can significantly increase the certainty and valuation of the transaction.
