How Important Is Monthly Recurring Revenue For Investors?

Monthly recurring revenue (MRR) is the part of a business’ total revenue that’s likely to continue on a monthly basis and help companies predict annual recurring revenue. Companies with recurring revenue are generally more valuable and more attractive to both investors and consumers. Recurring revenue generation indicates stability, as the organization expects to receive revenue every month. The recurring revenue model creates tighter relationships between the company and its existing customer base. With such a loyal customer base, those companies spend less time and money on acquiring new customers, which increases their valuation. In the past, businesses increased their valuation by lowering expenses and through continued investment in marketing, strategic planning, and staff and equipment. But what every investor today wants to see is how a company boosts profits and increases sales.

Businesses are Moving to the Subscription Business Model

There are many examples of businesses moving to the subscription model to increase their valuation. For example, online pet supply stores like Chewy offer subscriptions to pet food, medications, litter, and other things pets need on a regular basis. Netflix relies on the subscription model to ensure recurring revenue and affordability, which leads to new customer acquisition. With 167 million subscribers (2019), this type of streaming service has proven more profitable and led to the downfall of Blockbuster. By switching their services and financial modeling to subscription-only, Digital Telepathy (UX firm) managed to increase revenue by 300%.

The switch to the subscription model allows companies to focus on improving customer retention through better customer service and improved customer relationships. Instead of developing project plans and focusing on their products or services, a company operating on a subscription-based business model can get more aligned with their customers’ needs.

Monthly Recurring Revenue Makes Businesses More Appealing to Investors

Introducing a subscription-based business model could increase a company’s valuation by up to 8 times. Successful SaaS businesses that can demonstrate a recurring revenue for their software platforms average a six-fold revenue increase for valuation when compared to companies that sell perpetual licenses. Private equity investors and VCs are more interested in these businesses because they can demonstrate reliable revenue streams.

MRR indicates that a business has achieved a product-market fit. In other words. It has a product or service that customers want and are ready to pay for. In most cases, monthly recurring revenue implies some type of a subscription model, which is well-proven, comes with well-known risks, and allows investors to evaluate the business much easier. Besides MRR, other important metrics that investors pay attention to include monthly customer churn, month-over-month growth, and customer acquisition costs (CAC).

Recurring revenue models are appealing to investors due to their:

  1. Predictability. Businesses operating on a monthly subscription-based model rarely miss their monthly forecasts because their financial forecast models are much more accurate. Instead of starting from zero, a company begins with a base to grow upon at the beginning of each period. Company owners and potential buyers are rarely surprised by major fluctuations in business results, and the predictability of monthly subscription comes with a range of downstream benefits.
  2. Scalability. Since they produce predictable cash flow to invest in business growth, recurring revenue model businesses are easier to scale. With the deep data insights provided by a subscription model, companies can understand their cash flow and effectively invest in business growth with minimal risk. When a product/service has reached standardized quality and subscription values, you can be sure that you will minimize churn and maximize recurring revenue from existing, satisfied customers.
  3. Expense management. With such predictability regarding their revenue, companies are able to manage their expenses more accurately. The challenge of lumpy revenue models is that you can’t know how well you did until the quarter or the year is over. With monthly recurring revenue, it is easier to increase or reduce expenses to match revenues.
  4. Flexibility. Monthly recurring revenue brings flexibility that benefits both your consumers and your company because there is no need to rewrite a contract if their needs change. You can increase the subscription to expand or speed it up, or decrease it to slow provision down.
  5. Visibility. Unexpected changes in business won’t completely blindside you if you know where you start each month and where you can expect to end up. Thanks to your monthly recurring revenue model, you can make business decisions a year in advance. If unexpected changes occur, there will be plenty of warning and time to adjust.
  6. Durability. With monthly recurring revenues, you never start a month with zero. Thanks to accurate forecasting and in-depth insights, you can use the collected information to reduce risk when making important decisions regarding taking on new business or reducing churn rates.

Thanks to the subscription model, tracking and reporting MRR, churn, customer lifetime value (CLV), and sales become more simplified. You will be able to predict monthly revenue minimums and maximums based on the types of subscribers and the number of subscribers.

Why is the Monthly Recurring Revenue Metric Important?

Monthly Recurring Revenue (MRR) is one of the most important metrics for financial growth, and it is just as important for management as it is to individual sales reps. Other important metrics include sales rep productivity, customer retention, average sales price, and growth rate, but at the end of the day, MRR shows the amount of monthly recurring revenue that your customers are willing to pay for your products or services. Investors judge the performance of companies and their teams, divisions, and individuals based on MRR. It is the foundational metric for examining sales rep and team performance.

1. Budgeting

It is challenging to run a successful business if there is no steady income stream. Monthly recurring revenue tells you how much money can be reinvested each month. The revenue you’re bringing in is one of the deciding factors when determining whether you can run a lead generation campaign or hire more business development representatives for the next month. If you’re experiencing cash flow disruptions and struggling to make a profit, you can identify MRR trends over a specific time period that might indicate financial trouble.

On the other hand, if your monthly recurring revenue is going up, the MRR metric can motivate your sales team – as they close high MRR deals and build momentum, they will be much more engaged in their roles.

2. Tracking individual, team, and division performance

With MRR, sales reps can see the size of the deals and accounts they manage. If your company is struggling to hit the MRR quota from month to month, you should take a closer look at the deals with high monthly recurring revenue that you’ve closed. Are there any similarities among the customers? Was there anything specific that you did throughout the sales cycle that impacted the sale positively? By focusing on these details, you could modify your sales approach to start closing higher MRR deals.

Besides the individual performance of sales reps, business leaders, and sales managers can look at the big picture to see how the division is performing as a whole. By calculating MRR, the sales department can make more precise sales projections and forecasts, which helps the sales team plan for short-term and long-term growth. MRR can be calculated in two ways: determining the monthly recurring revenue per customer or using the average revenue per user (ARPU).

Customers Love the Business Model

It is easy to retain customers who love businesses that make things convenient for them; a subscription-based business model offers that. Besides the recurring revenue for your company, this business model offers convenience to your customers, such as:

  • No more anxiety about running out of supplies or losing service due to missing payments (thanks to an automated billing system)
  • No more need for repeat shopping thanks to automatic delivery of products/services
  • Thanks to a predictable monthly fee, budgeting becomes more manageable for customers

To investors, the value of predictable recurring revenue is the primary appeal of the recurring revenue business model (especially in comparison to one-time transactions). For example, a $10 million business with 80% recurring revenue can count on $8 million at the beginning of each year, and that figure is predictable and stable. The company’s management can invest and plan accordingly. On the other hand, we cannot say the same for a $10 million business with no recurring revenue because that company starts each year at zero. It can plan and make predictions based on past financial performance, but there is no contractually obligated revenue stream for it to base its plans around.

Furthermore, a solid subscription-based business has robust customer insight for marketing or cross-selling, as well as excellent customer retention. In terms of pricing, recurring revenue models are often much easier to operate (when compared to other retail models) because they only have to manage a few pricing tiers (instead of an array of individually-priced products).

With in-depth insights and business intelligence, what you need to grow your recurring revenue business is the right accounting services. Depending on what type of accounting services are the most suitable for your needs, you can opt for outsourced, in-house, and back-office solutions. Consero Global can help ensure that your executive team is making the right moves and implementing the best management strategies to keep your business growing. Besides our experienced staff, what we bring to the table are cloud computing technologies and advanced financial management solutions that will help you achieve operational efficiency and financial clarity.

Investor Roundtable: Raising Capital Amidst COVID-19 – Investors Perspective

(filmed June 4, 2020)
Consero’s Private Equity Roundtables enable Investors & Portfolio CEO’s/CFO’s the opportunity to gain valuable understanding and share actionable information for the middle-market tech and PE community.

Panel:

The conversation was led by Natalie Townsend, VP of Sales for Consero. Consero is a Finance as a Service provider whose portfolio of clients include over 130 sponsor-backed software and services businesses that range from $10M to $200M. Natalie shares trends, tactics and observations that we are seeing in the small to mid-market space during this economic disruption.

Holly Maloney – Managing Director of General Catalyst
Holly invests in and partners with disruptive, growth-stage software driven businesses. General Catalyst is a venture capital firm that makes early-stage and transformational investments. General Catalyst backs exceptional entrepreneurs who are building innovative technology companies and market leading businesses, including Airbnb, BigCommerce, ClassPass, Datalogix, Datto, Demandware, Gusto (fka ZenPayroll), HubSpot, KAYAK, Snap and Stripe.

Tyler Newton – Partner, Catalyst Investors

Tyler Newton is a growth private equity and growth stage venture capital investor. Tyler is a Partner at Catalyst Investors, a leading growth equity firm focused on investing in high-growth, middle market private companies in technology-enabled services sectors. He currently focuses on investments in the software, food tech and business services sectors.

Thomas Kershisnik – Managing Director, Five Elms Capital

Thomas Kershisnik is a Vice President at Five Elms Capital, a leading growth equity firm that invests in fast-growing, SaaS and internet-enabled businesses. Five Elms partners with growing, founder-owned software and services businesses, providing capital and resources to accelerate growth and further cement their role as industry leaders.

Tanner Cerand – VP of Investment Research, Build Group

BuildGroup is an operator-led investment company that provides permanent capital to entrepreneurs building the next generation of technology businesses. Prior to joining BuildGroup, Tanner was responsible for building and leading research & business development strategies at Vista Equity Partners. Before Vista, I worked at Gerson Lehrman Group (GLG), UBS Investment Bank, and Ferris, Baker Watts, Inc.

Condensed Notes from Panel Discussion:

Raising Capital Amidst Covid-19: What is the current obstacle course for Private Equity? 

  • There is still money in the market and ready to be deployed to help brands grow. The biggest change lies in not the money itself, but the appetite for uncertainty.

The changing outlook on valuations:

  • The outbreak has turned every investor into an impact investor as they deal with the unfolding human and economic fallout of this market disrupter. A combined humanitarian and financial catastrophe requires a business approach that looks beyond the bottom line.

How are PE/VC firms evaluating market in Covid 19:

  • Need for understanding the impact of portfolio companies as they touch every corner of the economy
  • Map critical stakeholders and develop a communication plan for each stakeholder group to maintain trust and reputation. Focus on cascading quality communications to portfolio companies
  • Business that are exclusively focused on travel, teleconference, finance and enterprise security – basically all ends of the exposure spectrum
  • Net new investing activity that are certainly on those which may work significantly like healthcare, telehealth, remote work, enterprise security and other digital consumer service model that have excelled dramatically
  • Focus is on area which is well known, and not getting to know new investors/enterprise
  • Investments are active as innovation and business cycle don’t stop
  • It’s the understanding on how pipeline conversions are taking place for the next two quarters what is the cash collection going to look like, need to make sure the businesses are well capitalized
  • Great businesses are still raising money in this environment
  • Activities on both Investor side and investing side are pretty strong

How to make investments more virtual

  • No more an option for meeting publicly for conference or flying. People are trying to maximize the Zoom option.
  • The combination on so much dry powder available more than ever with public equity market
  • A big reset in valuation is expected. Big companies are still getting well-funded and healthy valuation.
  • Need to work to make those connection in this virtual world

How is the remote conference working to make transaction virtual

  •  Depends on the nature of the conference if the conference is one of the industrial balances where larger companies are trying to develop new customers relationship or to know the thematical understanding of the business rather than knowing them individual level
  • Companies have put good resources to meet more people, big companies spend time with people and they want to see how its going to work virtually
  • The companies have their own agenda that they set to get productive
  • Investment banking conference which is typically set up to meet companies back to back through out the day is quite productive because here it is focused discussion without any distraction
  • Bank conference where we have on one on one are more efficient
  • Concentration of capital is seen and businesses spend lot of time to know who got funded this week
  • The more usage of tools is required to create this special experience in long lasting trans

How is the Portfolio company progressing working remote?

  • Business have seen success. PE portfolio companies are being efficient. Product and Development teams’ productivity is higher
  • Establish a common crisis response structure for portfolio companies — one with clear responsibilities and direct accountability
  • Taking reviews and taking foot prints helps, it’s a big eye opener
  • Update scenario plans and agree on actions to cover a 3-6 month impact and a 12-18 month impact, as well as a process to update these plans weekly
  • Need to bring team together, analysis is on what it is going to happen from a year now if people are continuing to work from home
  • What do you to about the counter aspects and that busy culture at the office but it is still working fine
  • Need to recreate the environment for the young and new recruits as everything is starting virtually for them and need to induce them to culture of organization
  • How you maintain culture, build rapport and inclusion that in the virtual world

How is the Traditional Enterprise Sales Module going to get digitalized?

  • Explore the new option, know the new platforms, more usage of Software and tools that allow collaboration and able to crisply articulate the value of proposition of what is sometime a complex sale remotely – especially inside the enterprise security
  • Building a strong social media presence is essential for digital sales
  • We often find companies that have excellent operational discipline but fail to apply a similar rigor to sales
  • Improving the odds, unifying the digital experience, connecting the digital supply

How is the Management getting to know the executives?

  • Establish structured daily check-ins
  • Provide several different communication technology options
  • Everyone knows that this is less than an ideal scenario which demands more time commitment
  • Upfront of the understanding having more frequent dialogues, having more connection points on one to one basis across the whole executive team and more frequency of connection is what expected and welcomed
  • It is not the management getting to know the team/executives it is time where team getting to know the management. More direct interaction is complemented.
  • Need to be creative with respect to references and sort of engagement scores of the company and study the NPS of the culture of the businesses
  • Dynamics of the team and the scale ability of the company helps
  • Early stage partners say that this is the better time than ever to understand the people
  • This is really humanizing element like how world is getting to know each other now. More casual discussion needs to be encouraged.

Advice to the companies who want to raise funds now:

  • It’s good idea to start early in building relationship. Less travel is involved. People will have more time to have that 30min to 60min Zoom call before necessarily hit the capital.
  • High velocity outbound calls to potential portfolio investments are welcomed. Volumes with respect to travel have gone down from 40% to 30% but the quality of conference calls which is an internal measure of the quality of business have gone up.
  • Quality calls are divided into two groups one is the companies that are planning to raise capital other one who are trying to explore their options and just trying to know more investors.
  • More than 50 thousand dollars is spent for these market studies and to know any basic facility available that can help
  • Deals are getting closed without having met people personally, it is time ad value on how to meet people effectively via Zoom
  • The biggest component that is missing is the ability to enter the company and to sense the company’s culture, energy and style. You can absorb a great amount just sitting in the lobby of the office. How to sort through executive dynamics, collaboration and working style is something needs to be figured out.

If any funds fell through during COVID what is the need of reevaluating it now?

  • Those long list of committed but not yet closed investments during COVID. Days’ worth meeting when COVID hit to understand that fundamental long-term structural shift in whatever these businesses is specifically dealing with.
  • Reassessing helps to keep the promise in terms of funding

What could be done differently if the situation was known two months prior?

  • Conserving cash flow in business. Using capital wisely to grow the business and stay on it.
  • Gathering good resources in team can change the things to to the good.
  • In such downtime companies think of staying stiff on the position rather than getting large share in the market
  • Scenario planning in each company is must. Practical conservative plans need to be put in place to know its effect. Analyze the structure, capital efficient growth would last.
  • Sales has been trimmer here and there, a plan on how many sales person is required can help

How are you using your Brand/Voice to speak up about the standing?

  • We do have a recognition and platform and extensive reach to portfolio companies so it is not only our direct voice it is also about our extended support to empower the voice of the companies we have invested
  • We insist companies to make a statement of standing of solidarity and support and acknowledgment of everything which is going right now
  • We have been operating for little while but not systematically, we have to try to do better. It’s almost like dancing on the thorns, it’s not what you did yesterday and tomorrow. It is all about day in and day out what you do for the next part of the year to make the world a better place.
  • In industry network is huge part of success that everyone enjoys. Be it a investor side or Enterprise side.
  • Help someone excel. They may not have the same connections or networks of the ecosystem that you do. How can you make connections for the folks that could be potential life changing and can make changes to the industry over long term.
  • What we do as investors is build strong relationship through investments
  • CEO’s completely shift in their business model because of COVID and get back on the right track and are seeing the successful of those efforts

What kind of companies are PE/VC targeting?

  • From short term thematic perspective view we made some short-term sprints that we worked on to both potential value-oriented investments and momentum investments.
  • Certain industries that we have deep roots like for really long period of time, for example travel industries
  • For us it is to think how we envision that world of travel is going to change, what are the new business models and experiences
  • From the B to B software perspective we are tying to understand the friction of the market cycle
  • How do we make sure we invest in the short term, behind the great business that have amazing natural expansion within our customer base
  • It may be more challenging to acquire net new customer; how do you make sure you have backing platform so that they can expand in relatively low friction environment
  • Ability of the business to survive from good time to bad is something that more investors are keeping eye on
  • We believe best business model win, this concept of modern business model around. If SaaS is leading a world just, SaaS is not enough anymore.
  • In those places where it has got effected, digital players are the one who are getting share. SMB’s are trying to come up back faster

 

Why Customer Retention Is So Important For A Recurring Revenue Business

Customer retention is defined as the act of keeping existing customers that your company has already spent money to acquire. Attracting and acquiring new customers costs about 5 times more than keeping a current customer (in some industries, it may cost up to 30 times as much). Many enterprises assume customer retention is the most important performance indicator, so they focus more on customer acquisition, leaving their existing customers unsatisfied. In fact, customer retention is probably the most underutilized strategy in the business world, despite being powerful and leading to many opportunities that newly-acquired customers cannot give you. This is especially true for recurring revenue businesses that operate on a monthly subscription model.

Recurring Revenue Business Model

A company can make a profit in many different ways. It can get money through banking or private equity/venture capital investment, selling goods and services for cash, renting assets for a limited time, etc. For example, selling goods and services is a one-time transaction that can bring you a lot of money, but not as much as it could if you were to sell them over a longer period of time. When you rent an asset, you are responsible for the wear and tear, and you don’t have access to that asset while it’s rented.

With the advancement of technology, a model has grown to become one of the dominant forms of doing business: the subscription economy and recurring revenue businesses. In the past, people used to subscribe to things like magazines or utilities, but today, this business model has become ubiquitous. Just a few years ago, this business model was thought to be impossible, and the opportunities it brings can bring tremendous benefits for everyone involved.

Types of Recurring Revenue

There are three common types of recurring revenue in business:

1. Long-term contracts

When a company sells products or services on a contractual basis, its customers are bound for the previously-agreed-upon length of the contract to pay month-to-month. Typically, contracts don’t renew automatically, so once the contract expires, the parties can decide to revise, extend, or decline the terms of the business.

2. Subscription revenue

Businesses that follow the subscription revenue model charge their customers a recurring fee that’s processed every month, quarter, or year. Subscription revenue is powerful because of how growth compounds over time – revenue accumulates with each new customer instead of remaining flat month to month. The longer customers use your product or service, the more valuable they become. Since customer retention is cheaper than acquisition, businesses focused on retention will save on customer acquisition costs.

3. Supplementary purchases

For example, if you buy a quality shaving razor, you will have to keep buying replacement blades. After a significant initial purchase, regular purchases of supplementary accessories are sold at a discounted price. Despite being an old business model, it is a growing category of recurring revenue.

Why is Customer Retention Critical?

One of the most important metrics for a growing company to evaluate is customer churn because it accurately quantifies its customer retention. Customer churn is the percentage of clients that stopped using your business’ product or service during a specific time frame. Churn rate is calculated by dividing the number of customers lost during a certain period by the number of existing customers at the beginning of that period. The lower the churn rates, the higher the customer retention rate.

The reasons why your customers leave can be many, and they range from personal to preventable. However, the most common reason customers leave is that they don’t believe that a company actually cares about them – 9 out of 10 customers abandon a business due to poor customer experiences. But the good thing is that customer churn is within your control. All you need to do is find out how to improve your customer service and project management practices to make your clients feel valued.

However, customer retention is undervalued, while customer acquisition gets all the attention. The truth is that retaining existing customers is a much easier way to generate recurring revenue and is critical for the long-term success of your business. Customer acquisition does generate the initial sale, but retention brings in additional recurring revenue. The main reasons why customer retention needs to be the foundation of your company growth include:

  • Affordability. Money spent on marketing means money spent on attracting new customers to your business. However, marketing changes once you add customer retention to the mix. When you focus on retention, you won’t need to spend as much money on marketing. This doesn’t mean that you should abandon marketing; you should supplement certain marketing methods with ones that cater to retention. It can cost you five times more (in some industries, up to 25 times more) money to acquire new customers than to retain existing ones.
  • Better ROI. A mere 5% increase in customer retention can increase your revenue by 25-95%. In other words, even the smallest improvement in customer retention can translate into a substantial positive impact on your ROI.
  • More referrals and word-of-mouth marketing. People loyal to a brand often become brand ambassadors and are more likely to refer their contacts to your company. When it comes to acquisition strategies, good word-of-mouth is one of the best strategies out there, and it’s completely free. Customer acquisition can happen naturally when you make retention a priority.
  • More sales stemming from customer loyalty. You know that your existing customers already love your product or service, which is why it’s much easier to sell more to them than to newly-acquired customers. According to research by Bain & Company, retained customers spend more money and purchase more often than newer customers because they have learned the value of your product or service. Better customer retention will, therefore, convert more sales with a focus on upselling – offer your current customers upgrades or additional features to make more profitable sales.
  • Increased customer lifetime value (CLV). Customer lifetime value is the expected profit that you get from each customer in your business. The better your customer retention, the higher your customer LTV. The aim is to spend as little money as possible on customer acquisition and gain more money through customer lifetime values.
  • Getting more valuable feedback. Loyal customers always love to feel like brand collaborators. If given the opportunity, they will provide suggestions and opinions on your products/services or customer service. Having such an influx of ideas can help you see your business from another perspective and determine ways to improve your business. Also, it will have a positive effect on your retention rates because customers are more loyal to businesses that listen to and implement their customers’ feedback.

In the center of every great customer retention strategy is customer satisfaction, and you should measure it through data-driven analysis. If your customer churn rate is going up, the best way to reduce it is to stop gathering new leads and double down on your customer retention efforts. Unfortunately, many companies out there focus on new revenue, which can turn out to be an expensive mistake, once you understand the benefits that customer retention provides.

Some of the best and easy-to-implement customer retention strategies for a subscription business include:

  1. Understanding your KPIs. Engagement and usage rates are the best indicators of customer value and satisfaction. Also, customer feedback and support requests are vital metrics. Make sure that you keep accurate reports on such data.
  2. Making data available to everyone. Customer data should be available to all your employees so everyone knows where customers are within their journey. That will lead to more proactive engagement, and your customers will be at the center of everything you do (customer-centricity), which is much easier to achieve when everyone has the same understanding of the customer.
  3. Building momentum. Keep talking about tomorrow in order to foster excitement within your customer base and inspire interest in your company.
  4. Using the right communication platforms. To listen to your customers the right way, you need to use the communication platforms that they prefer. That way, you’ll always be available to help or answer questions.
  5. Improve your customer service operations.

Creating a loyal base of customers is the most desirable outcome for any business. Pursuing and acquiring new customers is thrilling, but the real value for recurring revenue businesses is in customer retention. The subscription economy has empowered modern consumers to think short-term – they can opt-in, cancel, and leave freely at any time. But as for your retention strategies, they should be based on long-term thinking.

For a recurring revenue business, customer retention is king, so find ways to focus your business efforts on creating and maintaining a dedicated and loyal fan base. In the long run, you will achieve revenue growth, but you’ll also find that these strategies are more effective and easier than any customer acquisition strategy.

When it comes to improving customer retention rates and developing the right strategies for making it happen, you need to rely on detailed business analysis and know which metrics you need to follow and how to calculate them. Consero offers a financial solution (including expert support and intuitive systems) that can help you better understand your business from every angle.

How Outsourcing Helps Private Equity Firms Manage Costs During Economic Disruption

The coronavirus (COVID-19) outbreak has drastically altered the world as we know it. As a global healthcare crisis, it has swept across all countries. As an economic event, it brings about market downturns, widespread uncertainty, and hardship for consumers, businesses, and communities. As the virus continues to affect the globe, even the largest firms in the world are worried about the magnitude of its economic effects, especially if lockdown measures are drawn out.

Amidst the numerous businesses being affected by the pandemic, private equity firms find themselves in a unique situation where multiple companies, with hundreds of employees, are looking for guidance. While this was always the case for the private equity industry, the fast-moving and unknown variables that COVID-19 brings to global private equity and private markets will require them to re-examine crisis response strategies, products, and processes to survive the downturn. This will mean looking for ways to preserve resources while increasing productivity. One of the best ways to gain a competitive advantage is by outsourcing non-core but important tasks to professionals. We will look at how PE firms can leverage outsourcing to enjoy cost savings in these difficult times.

Outsourcing – Finding Your Footing During a Crisis

Many companies are experiencing significant losses and reduced cash flows during the COVID-19 crisis. Numerous measures are being taken to ensure the critical aspects of the business continue running at maximum capacity.

Among the chaos created in the reorganization, many businesses have to sacrifice quality as they temporarily redirect resources. While this can get you through the initial stages of the crisis, it will not be enough to keep you afloat in the long term. To maintain the quality and efficiency needed to get through the downturn, many private equity firms turn to strategic partnerships with outsourced technology solutions and services providers. This is because of the benefits and effectiveness the “as-a-service” business model has to offer, especially when it comes to financing and accounting – something all businesses need to stay on top of during the crisis.

Importance of Finance and Accounting During a Crisis

Many businesses affected by the crisis are looking to handle the initial impact of events and restructure their business. This means they are looking into crisis management and business continuity measures for the short and long-term. During this critical period, businesses will need to keep a close eye on all of their activities and resources. The goal here is to cut costs and unnecessary expenses as much as possible.

This means that CFOs in charge of PE firms will need up-to-date and accurate insight into the financial situation of companies to make forecasts and create business continuity plans. This brings about the need for a good accounting team. When it comes to accounting and finances, businesses have the option of going the traditional way (In-House) or outsourcing to a third party. In order to determine which of these two options is better during an economic disruption, we are going to look at the two options.

In-House Solution vs. Outsourced Solution – What is Best During a Crisis?

In-house (traditional) and outsourced finance and accounting systems offer different workflows when managing the accounting and bookkeeping of a company. Some businesses are not accustomed to the idea of Finance as a Service, and they prefer to stick to the traditional method. The idea of having on-premise employees dedicated to the task sounds better than having a remote team handling your finance and accounting. However, the current pandemic has shown us that this is not always the case. Businesses that were once wary of outsourcing are seeing the potential benefits of an outsourced solution.

In-house solutions are considered by many to be an outdated and expensive option in the modern world, particularly if you are still using legacy accounting systems. With lockdowns forcing many to work from home, digitally transforming your company not only becomes a competitive advantage but a necessity. And if your teams are working remotely, you should also be leveraging cloud-based technology solutions. Outsourced solutions already leverage digital technology and can help companies during their transition.

Maintaining a traditional finance department carries many expenses and demands numerous resources — everything from the initial hassle of vetting applicants to the management and costs of the team. The worst part is that there is no guarantee you will find the perfect person to handle your financing and accounting. This, in turn, results in changes or additions to the team being made down the line.

What Outsourcing Has to Offer

With technological advancements in recent years, traditional approaches are not always best when it comes to managing your company’s financial standing. Outsourcing your accounting enables a professional team to handle some or all of the accounting processes, relieving you from managing full-time employees, while still enjoying the benefits. What exactly does Finance as a Service have to offer?

  • Professionals in the field: Outsourced partners work with a variety of businesses and have a team of professionals who can jump in and assist at any moment. This means that you will not be limited to a few individuals. You will have on-demand access to the expertise and experience of an entire team. In addition to that, you will also be able to customize services to your current needs.
  • The Latest Processes: If you are looking to make use of the very best systems and processes while reducing operating costs, then outsourcing is vital. It ensures you will have access to all important information whenever you want, eliminating paper-based processes that can slow things down. Such systems can dramatically improve efficiency, and essential staff members will have more time to focus on the important tasks.
  • Accurate and Timely Reporting: Outsourcing your finance department means that you will always have a team on standby to handle financial reports. Combining this with integrated systems that track all metrics means that you will have immediate insight into your financial situation whenever you need it.
  • Technology: The world has changed, and companies need to embrace digital technology, advanced analytics, and cloud solutions if they want to stay relevant. What this means for financing and accounting services is that they need modern solutions for problems. This comes in the form of accounting software that eliminates the need for non-integrated software or spreadsheets. Instead, you will have a platform that consolidates everything you need, with numerous dashboards that provide on-demand and easy to understand information.

Financial Benefits of Outsourcing

We have seen some of the things that an outsourced solution has to offer to a private equity leader. Now is the time to see how these services can help PE firms save money during a crisis.

●     More Cost-Effective

One of the biggest reasons people choose outsourcing solutions over traditional ones is the price itself. With outsourcing, you only pay for what you need, making it possible to get work done for a lower cost than if you were to employ an in-house team. When it comes to employing a finance staff, particularly management teams, remember there are regular salaries to be paid, along with health insurance, vacation pay, and other fixed costs.

●     Scalability

When work is outsourced, it removes the need for developing infrastructure. Scalability is another reason why people turn to outsourcing solutions. It provides a business model that meets your needs, regardless of your size or demand. They are not dependent on company scaling. In times of a crisis, this is extremely valuable because it eliminates the problem of having a full team when there is not enough work. This means that you will not have to pay a fixed amount for the services you get. Instead, you will be able to add or subtract services as your company fluctuates.

●     Increased Productivity and Efficiency

When you have a traditional in-house team working in your office, they will likely be handling every aspect of the job. Unfortunately, this means splitting time between big tasks and less critical tasks. Such a system can cause bottlenecks in workflow, resulting in the company having to wait longer for projects to finish. Outsourcing tasks to professional companies not only ensures that the work is done well, but it also frees up time and energy to invest in meaningful projects that will get you through the crisis.

Given the conditions of the global economy and the uncertainty we face within the next few months, PE firms must find ways to adapt and survive in the current economic climate. This will mean getting creative and looking for ways to save money without sacrificing quality. Outsourced solutions are the perfect way to do that. Consero offers services that will give an overview of your financial capabilities, enabling you to plan for the changes you are facing.

CFO & Investor Roundtable: Building a Financial Survival Kit for Portfolio Companies

Most CFOs and private equity firms didn’t build COVID-19 into any of their investment cases, but that doesn’t mean they’re powerless to respond. The pandemic is a threat to business continuity, plunging demand and disrupting supply chains, which can eventually lead to liquidity issues, pressure on covenants, re-financing requirements, and increasing third party risk.

Join us for a peer-to-peer discussion with CFOs that have extensive Private Equity expertise. Consero will share observations of our client portfolio as well as hear insights from CFOs about what tools and tactics their finance teams are using to navigate their biggest challenges.

Any CFO and private equity partner will come away with concrete ways to mitigate risks and plan for best and worst-case recovery scenarios at their portfolio companies.

Goal:

Our goal is to share what we are seeing across the companies we are involved with in hopes that it provides a nugget or two to help you navigate your companies or portfolio companies through this crisis.

Panel:

The conversation was be led by Scott Tynes, CEO of Consero. Scott will be sharing trends, tactics and observations that we are seeing in the small to mid-market space during this economic disruption.

Jonathan Holmes, CFO, CCO and Managing Director of BV Investment Partners
BV is a private equity firm that invests in North American companies operating in tech enabled businesses services and IT sectors. BV has invested in 102 platform companies across 10 funds.

Jack McCullough, Founder of the CFO Leadership Council and Senior Contributor to the Forbes CFO Network
Jack has been a CFO for 26 companies. The national membership of the CFO Leadership Council reaches 2,000 finance executives over 27 chapters.

Donald McClure, CFO of PELITAS, backed by Tritium Partners
PELITAS is backed by Tritium Partners. Prior to PELITAS, Donald was VP of Corporate Development / FP&A at Brinks Home Security with responsibilities in capital markets, corporate finance, M&A, strategy and investor relations. While at Brinks, Donald completed a $2.0 billion balance sheet restructuring, $1.9 billion of debt refinancing and $575 million of strategic acquisitions

Michael Abramo, Portfolio CFO for M33 Growth
M33 Growth is a private equity firm that makes minority, growth equity, and venture capital investments in software, healthcare and business services. Mike serves as CFO across multiple M33 Growth portfolio companies (currently AssuriCare and RHI Group) and has 20 years of strategic finance experience.

Drew Powell, EVP & CFO of Defyned Brands
Defyned Brands is an omni-channel, lifestyle-driven health and fitness company with 50+ locations. Prior to Defyned Brands, Drew led various functions at LDR Holding which was acquired by Zimmer Biomet for $1B.

Four Areas of Focus:

  • Business Continuity Planning
  • Cash Management
  • Scenario Modeling
  • Going on the Offense

Business Continuity Planning

Virtually overnight, your company must work and service clients remotely. As this unfolded you had to assess whether you could you run your business today and produce consistent service delivery for your clients.

How has lockdown affected company’s ability to maintain customer-level satisfaction?

  • Significant shifts in consumer demands and behavior impacting sectors from consumer and retail, to manufacturing, life sciences to automotive
  • Organizations that operate with transparency and open communication have inherent advantages when events require quick actions to react and reshape
  • Focus is to build positive customer
  • Challenge is in transmitting the instore transactions to an online experience

What are the focus points in terms of team management for effective business continuity?

  • Prioritize people safety and continuous engagement
  • Work location can be decided based on what suits best to the company
  • Ask employees for the concerns or challenges on operating remotely
  • Reassess if work done by each team can be paused, re-located or continued
  • Leverage multiple channels to communicate information that is in line with public health recommendations on the prevention of pandemic infectious disease outbreak to the employees

What are the challenges in operating the finance function working remotely?

  • Making the finance process cost efficient through increased automation
  • Streamline controls by leveraging technology and reducing manual intervention.
  • Change finance focus from back-office “bookkeeper” to “trusted business advisor” to the business
  • Develop the approach, architecture, roadmap and business case to support the transformation
  • Demand high accountability
  • Ensuring security in terms of data storage
  • Strong focus on streamlining and simplifying finance function to reduce manual intervention

Cash Management

The panel talks about the one thing that is top of mind: Cash. Let’s share some data points on what you have done to strengthen your cash position.

Successful key’s –

  • Maximize the use of government support policies like PPP programs
  • Regional community banks look more reliable and quicker in terms of processing loan
  • Additional guidelines received from SBA and the treasury in terms of cash management
  • SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities
  • Documenting the need for cash or the access to credit in terms of cash balance of the company
  • Loans greater than 2 Million are going to be audited
  • Keeping people fully employed is going to be beneficial
  • Ventures to keep their debt burdens at manageable levels
  • Businesses that compromise on growth temporarily by keeping indebtedness low are likely to sustain a good momentum of growth over the longer period
  • Determine whether the organizations have adequate visibility into their cash positions, determine their cash needs, and address any shortfalls
  • Develop a plan to sustain a stable liquidity position over the next 12 to 18 months and beyond

Internal steps to strengthen the cash position –

  • Coding the Sick leaves related to Covid-19 separately from that of PTO and documenting it with an anticipation to get some funding
  • Clear, transparent and timely communications are necessary when creating a platform to reshape the business and to secure ongoing support from customers, employees, suppliers, creditors, investors and regulatory authorities
  • Working smoothly with bank and good communication may help as more affluent bank customers can gain access to better interest rates than what is advertised to the general public

Covid-19: Rent mitigation and negotiations between landlords and tenants

  • Requests from tenants to pay less rent for a fixed period of 3 or 4 months, for the period during which the Covid-19 virus affects business
  • Remainder/Extension of lease period
  • Request to suspend rent payments for a short period
  • No free rents, short term affirmation depends on capital structure off the landlord

Scenario Modeling

In the current environment, more than ever CFOs depend on accurate financial data to create scenario models that they can trust.

A lot of public companies are saying they can’t even provide forward looking forecasts right now. Are you planning on a V shape, U shape, L shape?

  • Evaluate short-term liquidity. Companies will want to instill short-term cash flow monitoring discipline that allows them to predict cash flow pressures and intervene in a timely manner
  • Identifying expenses which are not critical to servicing your clients with no interruption
  • Be Patient in securing investments
  • Maintaining healthy relationship with contracted parties and banks
  • Analyzing cash position for 3 months down line to know the facts
  • It is important to stand united and help one another in whatever way we can, stay safe and stay healthy
  • Strong emphasis on reducing the overall costs and reshaping the finance function
  • Revisiting capital investment plans to postpone investments until the situation improves
  • More than survival it is good time to show strength and liquidity
  • Time to think on after crises opportunities
  • Once the COVID-19 outbreak is controlled, companies will want to review and renew business continuity plans. They will want to assess how existing BCPs are working. If there are deficiencies, companies will want to identify root causes, whether it’s timeliness of action, lack of infrastructure, labor shortages, or external environment issues. Companies will then want to consider putting new internal guidelines in place based on lessons learned, as well as solid contingency plans to build resilience and better respond to future crises.
  • Cutting costs not talent – While the hospitality and travel industries have experienced the biggest impact, other industries have been feeling the weight as well. Cost-cutting is the need of the hour, and it does not have to be a precursor of retention.
  • Furlough the employees is best option vs. lay-off
  • Furloughed employees will have the opportunity to return to a comparable position at comparable pay once

Going on Offensive

Winston Churchill said: “Never let a crisis go to waste”.  Actively reallocating corporate resources is even more important in a downturn than it is in good times.

  • Private equity is under less short-term pressure
  • Having PE as a partner increases the company’s capability
  • Extra capacity that PE shops has helps client get cross those finish lines
  • Private Equity firms provide flexible funding solutions and have all-time high levels of available funds (“Dry powder”)
  • PE firms are now looking to allocate capital to businesses with a solid plan and robust operations
How Private Equity Firms Help Their Clients By Outsourcing Finance & Accounting

How Private Equity Firms Help Their Clients By Outsourcing Finance & Accounting?

We can all agree that efficient communication is the most critical bridge between private equity firms and their clients. Since regulatory requirements are constantly changing, it can be hard for in-house teams to keep up. During recent years, these changes in regulation have indirectly requested a digital transformation in every portfolio company. There is a high emphasis on transparency and accurate financial reporting. Putting together these special reports can become time-consuming for the company’s accounting staff and, in turn, require more resources and knowledge. With business process outsourcing, private equity firms don’t only help their portfolio companies, but they help themselves as well. Let’s try to explain that in a bit more detailed fashion.

 

Allocation of resources

All successful private equity managers have ROI in mind at all times. By calculating the cost of having an in-house finance & accounting team for each portfolio company and comparing them to outsourced solutions, it is easy to understand the need for outsourcing administrative tasks. In-house staff requires space, technology investments, constant education, and a certain level of expertise. This is not only costly; it also limits the company’s staffing choices. Finding experts in finance and accounting within your area can turn into a very lengthy process that may or may not bring you positive results. Depending on the physical location of your offices, your choices may be limited.

By using outsourced accounting, a private equity fund can focus on its investment management while a third party handles finances across their portfolio. Their outsourced partners have the ability to employ the very best talents worldwide thanks to remote work. By removing the burden of accounting from the in-house staff, portfolio companies have more time for investment management and their clients.

Your clients value transparency

Your clients aren’t only concerned about investment strategies. Transparency enables trust, and just like the regulations that are in place, clients are also interested in cash flows. By utilizing a third-party administrator, private equity firms have easy access to accurate and timely financial statements and reports from their portfolio. If you want to meet regulatory requirements, these reports need to be available on-demand, and that can be a hard task for an unequipped and unskilled in-house staff. By providing the right information, you make the due diligence process a lot easier for your potential clients. Technological improvements backed with artificial intelligence are now offered by finance-as-a-service. This brings more efficiency and shortens times for providing client support and meeting investor demands.

Outsourced accounting provides consistent scalability

Providing consistent support to your portfolio is essential if you are looking to leverage more avenues of growth. With outsourced finances, portfolio companies can allocate more resources toward customer support, enabling them to scale that department as needed. By cutting the costs of in-house accounting, you open new possibilities for alternative investments and further market growth. A stable financial scaling process requires your level of communication with clients to scale as well. This process is simplified due to financing as a service since there is no need for additional accounting staff.

Maximizing profit with minimal capital expenditures

The operational costs of portfolio companies can have a significant impact on private equity firms. Since PE companies usually place debt on a portfolio company, it can limit their ability to operate. With outsourcing, things can work out completely differently. Investments in technology and staff are kept at a minimum, which leads to lesser expenses and higher ROI but has no impact on the overall customer experience quality. By lowering the operational costs of running an in-house accounting staff, portfolio companies can focus on profitability and customer experience.

Efficiency and accuracy

The key to constant growth and satisfied clients is efficient decision-making based on accurate information. Outsourced finance enables fund managers to make the right decisions based on the financial health of their portfolio. Having a professional accounting staff allows easy access to valuable information and a set of advantages as well:

  • Fast and accurate financial reports
  • Access to advanced software and technology
  • Constant and timely updates on regulatory requirements
  • A streamlined and automated process of accounting

A highly skilled outsourced partner provides a clear overview of your capital and expenses. By having access to such information on-demand, a fund manager can focus on decision-making and scaling. Fund administration is considered to be a growing distraction for portfolio companies because structures are more complex, and reporting is more demanding than ever. Regulations are spreading worldwide, and there is no doubt that the fund administrator job is getting harder by the day. This has put the US private equity industry in a position where they need to review the oversized back-office teams in their portfolio and consider the costs and efficiency levels of in-house accounting. A maximized ROI requires maximum efficiency with minimal expenditure.

Conclusion

The capital markets in the US have come to a point where PE firms need to adapt constantly. This is especially hard when it comes to accounting due to constant regulatory changes. Back-office teams are getting bigger and bigger while the reporting process is becoming more complex by the day. This situation causes a distraction that prevents portfolio companies from focusing on their clients. The demand for transparency is at an all-time high, but in-house accounting staff can struggle to meet those demands without additional spending on education and equipment.

The success of your PE firm depends on accurate reporting from and financial insight. Outsourced accounting allows portfolio companies to allocate more funds toward strategic investments by cutting the cost of operating an in-house accounting department. In turn, this enables more time and resources to be allocated toward your clients and scaling. A constant ROI growth can only be achieved with meaningful partnerships, satisfied clients, and a clear investment strategy. Without clear insight into your financial health, it can be hard to make the right decisions. This is easily achieved with outsourced accounting thanks to technological improvements and access to global experts via remote work.

The 5 Laws of Cash Management in a Crisis

Everyone understands that cash management is a top priority when trouble hits, but the scale and intensity of the fallout from COVID-19 leaves little room for a sluggish or lax response. Here are five key principles to managing cash at the moment.

Focus can be the first casualty in times like these. There seems to be so many things to do for our families, companies and communities, that it’s easy to get overwhelmed. The news doesn’t help by providing plenty of doomsday scenarios and contradictory advice. Yet focus is precisely what’s necessary right now, to stay calm, and respond effectively to a situation that changes as rapidly as this one.

Cash is a chief concern for businesses already, but that concern can manifest itself in so many unproductive ways, from avoiding tough conversations to chasing down customers for every last dime, to simply stalling, in hopes of a miraculous turnaround. Instead, cash management needs to be tackled in a systematic and rigorous fashion, according to Mike Dansby, the VP of Client Services for Consero, an outsourced provider of finance-as-a-service solutions.

“Anyone’s initial forecast for 2020 is now irrelevant,” says Dansby. “It’s time to scrap that and take a good hard look at this new reality.” Cash is oxygen in this economy, and while that can be daunting, it’s no argument for doom or gloom. It merely requires an accurate view of what’s in the company’s tank.

Law #1: Vet the Numbers, Weekly

He suggests using a tool called the 13 Week Cash Forecast, which is a rolling forecast updated on a weekly basis. “This is a very granular approach, without the assumptions that are typically baked into a monthly forecast,” says Dansby. “Instead, the company looks at what a customer is actually paying, what a vendor is actually billing, and what expenses are coming due.”

This allows a company to better assess when it might need to negotiate a payment plan with vendors and creditors, or when it might need to offer such a plan to customers. Every input and output is examined and verified, essentially becoming a weekly reality check. This now becomes the basis for every cash management decision from this point forward.

Law #2: Delegate Authority

Those in-depth weekly forecasts involve a lot of work, so companies should divvy up the work to various staff members, so they can have a sense of ownership over their contribution. “Maybe someone is charge of receivables, another is in charge of recurring vendors, and so forth. This can be someone in finance, or sales, but it should be someone with an executive title,” says Dansby. They do need to feel genuinely empowered, so that they take full responsibility for the accuracy of their work.

That added responsibility might be a chance for staff to grow, as they build closer relationships with that vendor or a customer along the way, by verifying payments or negotiating a new payment schedule. “I wouldn’t be surprised if  a lot of companies end up with a stronger bench as they come out of this,” says Dansby.

Law #3: Conduct Diplomacy

The value of those weekly forecasts is they help predict problems as soon as possible. It allows the company to stay proactive in addressing cash shortfalls, which boils down to conducting a diplomatic effort with creditors, vendors, customers and employees. “This means never postponing a tough conversation,” says Dansby. “If the company looks like it might break a covenant, it should contact the bank immediately. In most cases, they’ll be happy to work out a new schedule, but only if they aren’t surprised.”

If a company waits until they actually miss a payment, that vendor or creditor is likely to assume the worst. In times like this, trust is an asset no company can squander. “That bank may start to wonder what else the company is hiding,” says Dansby. The vendor might cut service soon after that missed payment, or inundate the company with calls and emails, trying to collect, which distracts staff and erodes the chance of negotiating a favorable payment schedule.

“However, if a company realizes there will be a shortfall in the next 60 days or so, and reaches out to that bank or vendor early, the entire tone of the conversation shifts. That other party becomes a partner in solving this.” And the company should offer customers the same kind of partnership. “Even if that customer can’t make the full payment on time, an engaged and compassionate conversation can recoup some of those monies when every dollar counts.”

This level of candor should be extended to employees as well. If one of those weekly reality checks indicates layoffs are required, it’s vital to move quickly. “Finance staffs are privy to a lot of information early, so to maintain morale, transparency matters,” says Dansby. Layoffs should be conducted as quickly and humanely as possible, which again, requires the early detection that comes with those weekly updates.

Law #4: Play Offense

During downturns, it’s only natural to assume a defensive stance, by looking to do more with less staff, cut expenses to the bone, and find ways to keep as many customers as possible. However, there are some ways to play offense, and companies that do will only up their chances of making it through this gauntlet. Still, just like with any diplomatic effort, it needs to be conducted early.

“If a company has any access to credit line, they should activate it now,” says Dansby. “There’s no telling how quickly a situation can change for a company or their bank, and that extra cash can be a lifeline as the economy worsens.” Sometimes playing offense involved tapping resources before they’re necessities.

That extends to any government assistance a company may qualify to receive. “The recently passed CARES Act offers a lot of assistance, including PPP (Payroll Protection Plan) that allows companies with under 500 employees to borrow up to 2 ½ times their payroll, with some limits,” says Dansby. “Given the demand for such support, it’ll be best to get in line early and begin processing all the relevant paperwork.”

Although Dansby still suggests keeping an eye out for more classic opportunities to play offense, such as acquiring market share by scooping up weaker competitors. “If a company finds itself with the cash reserves to do so, it’s a great time to grow.”

Law #5: Make No Assumptions

“In a matter of two days, most American sports leagues shut down in response to the pandemic,” says Dansby. “That’s how quickly things can change now.” It’s why those weekly reality checks are so vital, and why a single forecast isn’t sufficient.

“Most companies should be maintaining three different plans, one for a worst-case scenario, one for a likely one, and one for a best case,” says Dansby. “Then as the weekly data comes in, the company knows what move to make next.”  And naturally, if that worst-case scenario becomes more likely, they’ll need to devise a plan should the situation deteriorate further.

However it’s worth noting that companies should make no assumptions, good or bad. Assuming only the worst can also blind companies to vital opportunities. Instead, the real golden rule of cash management is to keep one’s eyes open to the reality of what’s coming in and what’s going out and acting on that evidence without delay.

Like so many things, it’s simple but not easy to do, even in the best of times. But as we grapple with what comes next, it’s important to realize how often such troubled times can be a time of grace and satisfaction. Or as Laurence Gonzalez puts it in Deep Survival,  his stellar account of how people survive extraordinary circumstances, “Days stolen are sweeter than days given.”

If you’re interested in more best practices for navigating the current crisis, Consero offers a webinar that can be found here:

COVID-19: CFO Leadership – Navigating Uncharted Waters

 

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How Does BPO Financial Accounting Work For Private Equity Firms

How Does BPO Financial Accounting Work For Private Equity Firms

How Does BPO Financial Accounting Work For Private Equity Firms

Business process outsourcing (BPO) has seen a considerable increase in market demand during the last few years. According to research, the BPO industry is expected to reach USD 405.6 billion by 2027. This should come as no surprise since BPO has found a place in almost every industry, and private equity portfolio companies are no exception. 

Finance and accounting are easier to manage with Finance-as-a-Service, and this is one of many reasons why PE firms decide to introduce it to their portfolio. To fully understand how outsourced accounting works with business process outsourcing, we must take a closer look at BPO and try to explain how such services could benefit your PE firm.

What does BPO accounting mean?

Private equity has many obligations and falls under a lot of financial regulations. This creates immense pressure on the finance and accounting staff in your portfolio. They must have a firm grip on all cash flows within the company, but they also need to stay informed about regulations and market conditions. With the advancement of information technology, staying up to date with relevant information shouldn’t be an issue. Still, if your portfolio company doesn’t have enough human resources allocated to the financial department, things can slowly become outdated.

The need for relevancy in the market has never been higher, and with poor financial reporting from the accounting staff, a private equity firm could see lower ROI over time. Miscommunication, wrong information, or the lack of staff could lead to bad decision making by the managing director. 

With outsourcing (BPO), the whole process is simplified and tightly regulated. Every company that offers Finance-as-a-Service is always looking for top-notch global talent in the area of finance. This is possible because they don’t have to be physically located in an office. Remote work has become a standard for these companies. This global business may have different business models, but it will strive to bring the best customer experiences at the lowest costs.

How does BPO accounting handle your portfolio’s finances?

Whether you choose to work with an offshore BPO company or a local one, the quality of the services may vary, but the business process is almost always the same. Rather than hiring and managing an in-house financial staff, your BPO partners will handle your accounting. Usually, such companies offer financial accounting services, bookkeeping, payroll processing, tax planning and returns, payable and receivables accounts management, bank reconciliation, and financial reporting. Having such services at your disposal on-demand can bring considerable benefits to your PE portfolio but also remove the need to manage and hire financial management teams. Consider it as a form of process automation.

What are the benefits of BPO accounting?

The first noticeable benefit is minimizing the need for additional human resources within your portfolio company. Scaling is no issue with outsourced solutions because resource allocation is tailored to fit the current needs of the company. By having your finances professionally managed wealth management becomes a lot easier. Outsourced finance simplifies asset management by providing on-demand and around the clock support. This means more time and room for scaling and growth for both your PE firm and your portfolio company.

Regulators require timely reports and transparency. With an in-house team, you have limited possibilities regarding staff hires. Time and automated financial management aren’t the only pros that come with BPO. Cost reduction is a significant factor as well due to increased productivity and workload management.

Accuracy and efficiency

By looking at the legal side of things, it is hard not to notice how having access to accurate financial statements, and legal information can help with tax compliance and other legal issues you may encounter. If you made the right choice when picking your outsourcing partner, you could always count on professional help from the company. This is very important when you need to deal with regulations since it removes the need for hiring additional support. BPO provides you with skilled and well-informed talent that will stay on top of things at all times.

BPO gives you access to valuable tools and information

Companies that offer Finance-as-a-Service need to provide the very best to their potential customers to stay competitive. The ever-growing market requires constant improvements and innovation, and this can only result in better customer services. Advancements in information technology have enabled them to have access to sophisticated software solutions like cloud-based finance that can completely reorganize and reshape your business structure. On top of that, these companies update their knowledge base regularly, which enables them to combine the technology they are using with the information they have. This can have a massive impact on portfolio companies since it improves productivity and enables managers to focus on their core competencies.

Conclusion

It is more than evident that the current “build it in-house” solution isn’t very usable for finance and accounting. An in-house team can’t compete with outsourcing for various reasons. Fixed income could be mentioned as one of them because outsourced solutions will always stay competitive in that sense. By having access to global talent, BPO has combined quality with low-cost, allowing them to hire remote experts who can bring more value for less cost. ROI is the primary concern of every private equity firm, so cutting costs within their portfolio is an entirely reasonable need. By unloading the responsibility of handling their finance and accounting to a BPO partner, portfolio companies can focus on productivity and profit while leaving the complicated and repetitive tasks of accounting to BPO altogether.

Knowing all of this removes the mystery behind BPO growth. The demand for such services in the finance industry continues to rise because it is hard to compete with reliable, relevant, and timely data delivery. By knowing all of this, an 8% yearly growth of the BPO market should be self-explanatory. The pros simply outway the cons.

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COVID19: Making finance remote (and resilient)

In the wake of COVID-19, businesses must remain agile and disciplined, which requires making finance teams fully operational out of the office. Consero’s President Bill Klein offers a few key tips on how to do just that.

As much as “black swans” have become a business cliché, by their very definition, they can’t be predicted. COVID-19 certainly fits the bill, and it’ll be some time before we understand its true impact. But businesses don’t have the luxury of standing still, as they have to manage multiple contingency plans to cope with whatever comes next.

Those plans rely on an accurate view of the company’s health, which means finance and accounting teams have to be fully functional, even from home. “At a time like this, decisions have to be made quickly and that means updated, accurate information is vital,” says Bill Klein, President of Consero, a provider of outsourced Finance-as-a-Service solutions.

Klein believes that finance teams need more than remote access to the numbers; they have to be able to perform key operations from wherever they are. Weekly check-ins with the finance team will help make sure the numbers have been verified in real time. When these teams are working as they should, senior management will have time to focus on various models and contingency plans for cash management, which is the core priority now. And any readiness plan needs to be tested, ideally by several people over a week or so. Even if a business has to build that remote capability on the fly, there are some key guidelines to keep in mind.

Obtain a digital finance function with remote access

Klein names two core priorities in building a remote finance team:

  • access to systems and underlying information
  • the ability to complete accounting tasks from that remote location

“Now when people think of remote access here, they’re usually thinking of access to a web-based accounting system, but I’d argue they need to go one step farther and make sure there’s access to supplemental information,” says Klein. “If a vendor bill comes in the office, where does it go? Can the team access that remotely?”

Any relevant information, from vendor bills to customer contracts, needs to be accessible, and that involves thinking through the entire activity cycle of the finance function, to make sure there are no blind spots, no answers that are only available in a hard copy, in a file drawer, somewhere on the twelfth floor. But access to information alone isn’t sufficient.

“Let’s say that vendor bill arrives in the mail. Is there a way it gets loaded to a digital platform? Can the finance team read it, code it and send it to the relevant parties? Can that party sign off on it, and can the CFO or other designated person process the payment for it? That’s what a remote system needs to be able to do,” says Klein. “If someone still needs to show up to the office and sign a check, that could be a problem.” It’s a matter of making sure the team has all the required information also has the capabilities to act on it.

“With that remote finance capability in place, the CFO and the rest of senior management can stay focused on developing better forecasts and more creative contingency plans for the company as a whole,” says Klein.

To help with that effort, Klein argues that the business should review its KPIs, and ensure the finance team can download the relevant data to calculate them. “If a company tracks the cost of customer acquisition, can the finance team deliver the numbers to calculate that? Is the data on Salesforce easy to pull out and apply to these metrics? Making that process efficient can speed strategic decisions,” says Klein.

Cash management with weekly check-ins

In crisis situations, conditions are always in flux. Customers that reliably pay on time may struggle to do so or even go under, suppliers can be late with delivery and billing, and a conservative revenue estimate suddenly seems like wishful thinking. This demands weekly meetings with that remote team so last week’s assumptions are vetted by this week’s reality. Did that client pay as planned? Is that vendor following up on an invoice earlier than usual?

“It’s all about cash management right now,” says Klein. “That requires a range of forecasts and contingency plans from best to worse case scenarios, with weekly updates to determine which forecast is coming true.”  He points out that these updates can help the company stay proactive, so any cuts, layoffs or furloughs are done early enough that they can be minimized. “Nobody wants to wait too long and discover the only solution is a drastic one.”

Stress test the plan

Given that the crisis is already underway, most businesses won’t get a chance to test the readiness of their remote finance solutions substantially. But if possible, it would be good to vet the current mix of technology and processes, even if a company has to adapt along the way. “It’s not enough to have a single employee log on to their laptop, and test their access to that accounting system,” warns Klein. “At the very least, the company should have a small team work remotely to help troubleshoot any issues.”

For example, in testing their remote capabilities, Consero found that certain employees who lived in more rural areas lacked the broadband internet capabilities that their systems needed, and addressed that. They also found that employees worked better with their dual monitors, so they allow staff to take those monitors home when they work remotely.

“We want our team to be more than functional; we want them to be efficient,” says Klein. That robust testing allowed Consero to seamlessly shift to a fully remote capability as the current crisis began, so clients haven’t experienced a single hiccup in service so far. Going forward, Klein suggests that businesses vet their remote work plans annually, with small teams working that way for a week.

Even with the best planning and testing, there will still be challenges. Who could imagine a situation where everyone was working from home, and schools were closed, so an entire family would be draining a home’s broadband capacity? No one knows how this particular situation will evolve, but it’s never too early, or too late, to develop a rigorous plan to address the arrival of this very big black swan.

About Consero:

Consero provides a comprehensive Finance as a Service (FaaS) solution to private equity portfolio companies. We deliver experienced finance professionals, optimized accounting processes and scalable cloud-based systems to support your daily financial operations and strategic decision making. More than 80% of our clients are lower-middle market investor-backed private companies.

During COVID-19, Consero has transitioned over 700 employees to a fully remote environment. Currently, we are serving as the mission critical financial operations backbone for over 150 companies.

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