A finance and accounting (F&A) team’s functional skill sets and ability to deliver accurate and timely financials are the top functions necessary for optimal growth, with 20% of CFOs citing each, followed by delivering Key Performance Indicators (17%), scalable infrastructure and software (15%), efficient processes and workflows (15%) and experienced leadership (13%), according to a survey from Wakefield Research and the finance-as-a-service company (FaaS) Consero Global of 100 finance chiefs at private equity-backed firms.
Private-equity CFOs must juggle operational and strategic responsibilities, pegging the ideal allocation of a finance chief’s time at a 47%/53% split between daily operations of the finance team and strategic planning, even as they estimated spending up to 13 hours a week on recruiting, hiring and assessing talent, according to the report.
The majority (75%) of private-equity firms CFOs surveyed said a company with an annual revenue of $10 million should have fewer than 10 full-time employees in its finance and accounting team.
There’s often a mismatch between what a private equity firm wants and what its new portfolio company wants in the first 100 days of their partnership but a CFO can play a key role in helping align the newly paired parties.
The results of the survey of institutionally-backed companies with annual revenue between $10 million and $200 million underscore some of the challenges that time-pressed CFOs at private-equity backed companies face, especially early on in their organizations’ development, as they grapple with quickly building a more sophisticated and larger F&A team, oversee the migration to a state-of-the-art enterprise resource planning system (ERP), and guide the company’s strategy.
CFOs of companies coming off their first infusion of private-equity cash are typically under intense time pressure to build out F&A teams and transform their IT systems to serve up the faster and more precise range of data that institutional investors demand, said Bill Klein, president of Consero, which helps companies set up and scale finance departments, in an interview.
The necessary transformation of the finance team can be significant and swift for many small or family-owned businesses that go the private-equity route but may not be used to the financial reporting requirements, he said. “It’s pretty quick,” he said. For example, investors typically expect companies to begin generating annual audits within a year of putting money into a company, he said.
“When companies don’t have the foundational stuff right when it comes time for an audit they have to do a lot of prep which means cleaning everything up,” he said. For instance, some companies before entering the private equity space do a soft close of the books each month, he said. That means they’re not reconciling the balance sheet accounts and making sure they have details to support balance sheet entries, he said.
Then, too, while many young or smaller companies operate with a single person overseeing finance, a private-equity backed company’s F&A team must have the talent and ability to provide speedier and more granular reports.
For instance, many earlier-stage companies are used to providing financials 30 days after a month’s close but investors will want reports within days after the month end, Klein said. And investors will typically want more information beyond company-wide data. For example, they’ll want to be able to break out profitability for various locations, he said. Investors want “much more detailed information to help understand what’s going on so they can make the right decisions and keep the business moving along,” he said.
The short hold period of many PE investors puts pressure on CFOs to quickly set up their teams so they can focus on strategy, the report on the survey said. “Receiving an infusion of capital from private equity backing puts the F&A team squarely in the spotlight as it is tasked with meeting elevated expectations at an accelerated pace …This places a far greater emphasis on the role of the CFO as a strategic partner to the CEO and board vs. being dragged into day-to-day tactical accounting activities,” the report states.
Despite the need for a fast-paced upgrade of the finance system, many CFOs are caught off guard by the time that it takes to implement new systems, the survey found. Eighty-eight percent of the CFOs at private-equity backed companies said they underestimated how long it would take to migrate financial and accounting processes to a state-of-the-art ERP and software stack.
The Consero survey was conducted in November 2021 by Wakefield and included 100 U.S. CFOs in software, technology or business services with annual revenue between $10 million and $200 million.