How CFOs Find Growth On The Frontlines

The best chief financial officers both at the private capital level, and within private equity portfolio companies, are spending more time in the trenches this year. And they’ll need to maintain that frontline stance next year and beyond.

Data will be the key.

Basics

The pandemic and continued threats of instability are forcing reassessments. Before the pandemic, venture capitalist Fred Wilson at Union Square Ventures opined that high-flying emergent tech companies had grown cavalier about cash flow. Too many were comfortably running in the red, he argued. Today, the pandemic has further exposed the vulnerability of those companies.

CFOs with net gains don’t want to go backwards. The ongoing effects of mass joblessness, bankruptcies, evictions and other headwinds, however, signal more tough times ahead. CFOs will want to manage cash flow as closely as ever, requiring an increasingly intimate knowledge of their enterprises and portfolios. That’s especially the case with private capital tax treatment under scrutiny in 2021.

Discovering

Saying you’re going to manage cash flow is one thing, of course. Having a plan that doesn’t break every other week or worse is another. The CFO must set plans and then see to it that those plans pay off with durable results – no matter what comes. As former University of Toronto business school dean Roger Martin pointed out, strategic plans that aren’t built to handle unexpected change amount to lies.

The best plans reflect intimate knowledge of all levels of an organization, including the experience and progress of frontline troops. CFOs will want to get into the trenches with their sales teams, for example, observing and asking questions to learn how processes work and exactly how they generate revenues. That’s how CFOs avoid the pitfalls of plans that look great on paper and investor decks but set everyone up for failure when cash dries up.

This intelligence gathering is another version of the discovery-based planning that Columbia University Business Professor Rita Gunther McGrath, an expert in uncertainty, has advocated. For CFOs, it means setting cash flow plans based on insights from the frontlines.

CFOs can architect financially sound business programs and sales strategies, conduct better share analysis and assess market impact more accurately when they see the people who drive the business firsthand. Frontline data is also key to defining financial controls and organizational rigor, developing processes that align with the right financial incentives, optimizing staffing return on investment and robust reporting.

Do that and companies achieve margin rich programs that catalyze business growth by using in-depth market analysis to develop creative pricing strategies.

Who are your best customers?

By definition, creating a cash flow plan that takes its cue from what’s actually happening on the frontline means accepting there’s no one-size-fits-all approach. Best practices can be deceptive, too. Cash flow happens to be an area where the Silicon Valley sales playbook contains a vulnerability, erring on the side of process rather than situational awareness.

One illustrative mistake is failing to understand your key customers because you are looking at receivables rather than cash flow.

As McGrath has pointed out, the core customer is not the one who piles on revenues, as exciting as that is, because if those revenues don’t show up in your coffers, it’s real value is limited. What are the customer relationships that bring perhaps less money, but at a higher and more immediate velocity? Finding projects that strategically build relationships where cash flow is best can only be done when you understand those relationships and what drives them.

If CFOs determine their customers are committed to building a future, they must ensure the right customers invest in their companies’ capacity to deliver. That means putting sales, customer success teams and developers on the same page about how the right payment, at the right time, equals growth.

The big-name customer whose well-known brand validates your approach may also be too slow and suffer from too much internal politics to offer more than a press release. A customer, regardless of size, who has embraced the reality of their marketplace, and is serious about empowering change in their organization, can be more important.

If they are supporting your efforts to advance the changes they are seeking, and if they pay at a higher velocity, are you focusing enough attention on them? Are you aligning incentives to find more customers like them? Is your goal to only retain these customers or leverage them for more deals that produce more cash flow?

Kingmaker Cash

CFOs are pushing hard for cash efficiency with these lessons in mind. Cash efficiency is the smart, safe play, on one hand. But it doesn’t have to result in play-it-safe managing. In fact, it’s the best model for surviving when capital is scarce because it gives companies the leeway they need to bob and weave.

What’s more, other alternatives have fallen flat. The growth-at-all-costs model that propelled so many Silicon Valley companies to sky-high valuations in the past decade is looking increasingly outdated. Indeed, top investors know that the consumer trends that fueled growth online are changing. Founders Fund Principal John Luttig recently described the shift as tailwinds vanishing.

Skeptical? Consider how the internet, then social media and, finally, smartphones and other personal devices delivered hit after hit for big and small tech companies. That’s no longer happening. Pessimism isn’t the correct reaction, however. More jobs, services and retail will migrate online. Artificial intelligence and machine learning will alter the landscape. Innovations are still occurring.

Let’s just acknowledge we’re entering a new phase where investors and customers will be savvier, competition will be stiffer and we’ll need to be more efficient from the bottom up.

Back to Data

A key hurdle is the data available to the portfolio company CFO, and then the private capital CFO. Document processing continues to be manual at most private capital firms. Some automation is available, but it tends to be inflexible and temperamental. Too many applications force the financial team and the fund administrator to bend to the software, rather than fit to the team.

That’s why we built Harmonate, and why we offer Conductor. Ask us for a demo. Document intake, reading and processing should not be a horrible task, and the firms that make it easy, win. We can show you how. If you need sharper, faster insights and to turn those insights faster through cycles of validation that are closer to the frontlines, we can help.