How the Finance Function Creates Value for Private Equity Portfolio Companies

When we look at the typical finance and accounting function within a company, we’ll find a range of accounting activities – payroll administration, customer invoicing, financial reporting, processing of payables, and so on. According to various surveys, about 70% (or more) of all financial management functions deal with the processing of accounting transactions. That means that less than 20% of financial management is spent on strategic planning, risk management, performance measurement, competitive intelligence, investment analysis, and other aspects of real financial management.

As opposed to hedge funds, which are alternative investments that use a variety of tactics and pooled money to earn investment returns, private equity funds invest in their companies directly. They do that by buying a controlling interest in publicly traded organizations or by purchasing them. Furthermore, private equity investors provide equity capital to a company that isn’t quoted on a stock market, turning it into a platform company. That money can be used to expand working capital, develop new technologies and products, strengthen a company’s balance sheet, or make acquisitions. PE can also resolve management and ownership issues.

When private equity portfolio companies get their investment, one of the first steps to redesign their finance function to create value is to move away from traditional accounting management and kickstart the transformation into real financial management. This transformation’s overall objective is to switch to more value-adding activities or things that will help improve company performance.

Portfolio companies need to adopt a set of practices that can help transform their finance function into a significant value driver. These practices include many things, such as:

  • Reducing cycle times by processing data only once.
  • Organizing around results.
  • Leveraging technology and people to improve transaction processing (e.g., electronic data interchange, purchase credit cards for payables, electronic payroll processing, etc.).
  • Centralizing and structuring financial data, so it doesn’t just occupy storage space but provides necessary information.

Keep reading to find out more about how the finance function creates value for private equity portfolio companies.

Breaking Away from the Traditional F&A Model

Departing from the traditional finance and accounting model is essential to making the finance function a source of value for your portfolio company. That requires a different way of thinking about how you measure your company performance. The emphasis should be on increasing value. To successfully transition over to value-creation, it’s crucial to understand why the finance function runs contrary to it.

Your company’s financial function can play a role in placing focus on things that are of greater importance to true economic performance. For instance, it is critical to think outside the financial statements because value-creation never actually appears on the Balance Sheet. Things like innovative marketing, information technology (like AI, automation, and financial analytics), human resource capital, and others are paramount to creating value.

Balancing the financial and non-financial forms of measurement is another crucial step. Portfolio companies need to identify their strengths and weaknesses and measure the non-financial aspects contributing to value-creation. Solving disparate systems by moving towards a unified system can help leverage the company’s intellectual capital. Using better analytical and processing tools can improve the CFO’s and CEO’s decision-making process. This is how value gets created, and finance and accounting needs to lead the way.

Key Lessons for Finance Functions

  • Adding value. In finance, less than a quarter of the time is spent delivering relevant business insight.
  • Investing in skills. Top quartile companies pay their insight to finance professionals about 25% more.
  • Focusing effort. In top-quartile companies, analysts spend 40% of their time gathering data (not analyzing).
  • Making savings. Leading finance functions cost 35% less than the median finance functions.
  • Eliminating inefficiencies in finance as well as other functions. Across many key finance processes, automation, and process improvement can reduce costs by more than 45%.

Realign Your Operating Model to Focus on Value

Since business operating models are changing so fast, finance functions must keep track if they want to support the business and find ways to add value. But when they think about their business operating model, CFOs usually focus on the shared services and location choices for teams, as well as to what extent they can outsource them to third parties. There are many other important questions to consider. What services does finance provide the business? What technology needs to be in place? What skills are required?

One of the ways towards a lower-cost finance function is applying automation, which doesn’t have to be a time-consuming, complex, and expensive project (as many believe so). Much of the time wasted on performing finance and accounting tasks or activities like error correction and rework can be replaced by automation and robotics. Thanks to FaaS providers, web-based data analytics tools, and accessibility of RPA (robotic process automation), portfolio companies can put these solutions quickly and at low cost. That can help transform the way finance function works and the value it adds to the company.

Another way to lower the cost of the finance function is by focusing on more effective human resource management, changing the way teams work and collaborate, and eliminating “waste activities.” Finance leaders are asking themselves whether their teams can do certain tasks more efficiently and whether they need to perform some of them at all. Then, they determine what tasks don’t differentiate the business and add value and eliminate them.

As finance functions grow more efficient, they free up their most operationally savvy and experienced professionals from routine transactional tasks. It saves them from the dullness of gathering, validating, reconciling data, and compiling many financial reports that often aren’t used for bringing business decisions. What PE firms look for in their investments is, most often, a top-notch management team.

Utilizing Technology

Today, technology is vital to almost any finance function (and overall business) transformation. With the emergence of a new generation of tech platforms, resources, and tools (such as RPA, Artificial Intelligence, Big Data, cloud, etc.), transformations have a bigger potential to deliver more generous benefits than before. Robotics, AI, and the Internet of Things are technologies that global organizations see as both the most important for cutting costs and the most disruptive. Private equity portfolio companies can’t fall back on their technology gaps as an excuse to delay implementing other transformation elements. However, some companies have realized that they can’t move forward with their transformation until their tech resources have caught up.

When selected and applied correctly, tech solutions can free up significantly more time for the finance function to deliver value. For example, with effective governance and standardized data definitions, FaaS platforms can serve as a single source of information and make it possible to streamline various processes. Companies with a single enterprise-wide system have much lower accounting costs, while data visualization tools and add-ons enable self-service reporting and make it possible to frame opportunities and challenges in new, productive ways.

The best FaaS providers already have access to the latest technological solutions to help private companies achieve high growth rates. Overall, those tools help with improving and reorganizing outdated systems that are slowing down productivity and growth. They typically come with a higher price tag, which is a solid reason why a PE-backed company will benefit from reaching out to a Finance as a Service provider.

Measuring the Right Metrics and Accurate Reporting

When PE firms invest in a company, the first thing that most of them do is develop and improve the portfolio’s information systems. They do that to make sure two important things are set up to their standards:

  • Costs. What are the costs, and where are they? Nothing will change if everything is according to the PE’s standards, but if the costs can be reduced, they will do everything to achieve it.
  • What sells and what doesn’t. Whichever product or service the PE portfolio company has that’s creating income will remain as are or be improved. However, the PE firm wants to cut down on costs, and one of the ways of doing it is by eliminating offerings that aren’t producing high-enough income.

Before the private equity company invests in a company, it wants to look at these five metrics..

  1. Cash flow

No investor wants to invest in a company that is not making high-enough revenue, so they will want to see the cash flow statement. Cash flow statements show how much cash the organization is generating, while the income statements include non-cash expenses and revenues. The cash flow is a metric that matters a lot to PE firms because they know high incomes sometimes don’t mean that the money is circulating. Investors value portfolio companies based on Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), which is an important indicator of an enterprise’s earnings potential and financial performance.

  1. Liquidity

Investors want to see this metric because it shows them how quickly a company can be sold or bought without affecting its price. They typically want to see it after the company is invested in or sold, and they want to see daily, weekly, monthly, or quarterly cash flow models. Since the enterprise needs to ensure that the liquidity metrics change or remain at a desirable level, it increases the need for excellent F&A solutions.

  1. Product analysis

Costs need to be controlled because it’s easy to leave out certain areas where profits are generated, which makes cost accounting tricky. When certain areas are left out, PE firms want to conduct a detailed analysis of each product to determine the actual margins that the portfolio company is making.

  1. Expense control

Private equity firms always want to have a clear view of the portfolio company’s expenses, so expense control is another important metric that they need. They need it to detect expenses the company has and find ways to reduce them (and increase profits). If the costs are higher than previously planned, they will take actions to decrease them. PE firms will ask about the company’s policies, why some of them are spiking, and how they are controlled.

The last metrics include industry-related metrics, and they are specific to each company (depending on the industry it operates within). Since each industry has its own metrics, every company needs to define them. The PE firm will definitely ask for these metrics because they provide insight into how the portfolio company performs within its industry.

How FaaS Helps PE Portfolio Companies Create Value

To help their portfolio companies thrive, PE firms understand that they must leverage the best financial services and advanced tools. The main reasons why PE firms decide to hire companies such as Consero as their partner include:

  • Accurate financial data and reporting

When a private equity firm invests in an enterprise, it sometimes happens that the enterprise doesn’t have a strategic CFO, which is why its reporting isn’t up to the level PE firms need. To drive the growth of the acquired company, PE firms use data, analytics, and metrics. FaaS providers are there to supply all the analytics and metrics the PE firms need, giving them the necessary KPIs and metrics in an understandable and easy-to-read format.

  • Scalability

FaaS providers have a business model that allows them to scale to meet any company’s needs quickly. They provide the right level of resources for the right activity. When an organization goes through an acquisition, FaaS providers can help with the process by setting up systems and getting the company streamlined. Companies don’t have such scalability and flexibility with in-house finance teams because in-house teams don’t have the time to get that acquisition integrated. 

  • Speed-to-optimization

Immediately after investing in a company, PE firms will want to grow it as quickly as possible. But it often happens that the finance and accounting department hinders that growth because:

  • The F&A team members don’t possess the right skillset.
  • It is unable to increase company revenue.
  • It doesn’t have the right processes or systems to help them achieve the desired growth.

When there is a problem in this department, many organizations try to hire a new team that researches available systems. They choose one that seems to be the best fit, configure, and implement it. After it’s all done, they train their staff to use the system. However, this optimization process requires between 18 and 24 months, and it takes a lot of energy to achieve the point of full integration. On the other hand, the FaaS model will help you optimize your finance function in as little as 30 days. FaaS providers already have the finance processes and systems fully implemented, and they can deploy them more cost-effectively and rapidly than an in-house team could.

  • Cost savings

Hiring a FaaS provider is a much more cost-effective solution than building and training an in-house team (for PE firms, time is of great essence). Also, the savings achieved with a FaaS partner can last even as portfolio companies continue to grow. These providers bring a larger pool of experienced staff to the table. They are very efficient and automate activities that an in-house team would perform manually. Besides, they already know which processes will work best for you because they work with similar organizations.

  • CFO insurance

The FaaS model is often considered as CFO insurance by many PE firms. Your FaaS partner helps reduce the time needed with financial analysis and administration and takes over the daily mundane tasks, allowing the CFO to focus on strategic leadership and business growth. PE firms don’t want their portfolio’s CFOs to spend time on tactical and routine activities but on figuring out how to turn financial information into competitive intelligence.

Benefits of Teaming Up with Consero

Consero’s services are designed to help companies assess their current financial health and determine which choices will help them thrive. We understand that businesses often need an experienced partner to help them deal with various obstacles on the road ahead of them. We offer a robust financial solution that will help your portfolio company build a strong foundation after the investment or acquisition was made. Our services include:

  • CFO consulting. If you have a private equity CFO without the right skill sets, then we provide strategic guidance to help improve their skillset. Or, wel can help to fill that gap with an expert strategic fractional CFO to help you boost profitability and productivity, provide financial data analysis, forecast performance, etc. Our Strategic CFOs will take initiatives that deliver on your portfolio company’s investment thesis, which helps to democratize the creation of value beyond the finance function. 
  • Financial planning and analysis. Our finance analysts and experts will help you bring informed decisions based on detailed insights to help you come out of cash flow problems. We use advanced software based on AI and automation to provide detailed analysis and reports that will help you create the best plan for moving forward.
  • Controller. Controllers play an integral role in interpreting financial numbers and making data-informed decisions on budgets and expenses. They work to ensure that a company utilizes the right internal controls that keep it profitable and healthy.
  • Bookkeeping. PE-backed portfolio companies with issues with their financial management, records, and strategy can benefit from Consero’s bookkeeping services. We are not just an outsourced, third-party bookkeeping provider that helps you maintain your books, but a strategic partner that enables you to save money, save time, and deliver a higher ROI.

Since the private equity industry has increased significantly during the last decade, PE firms have to do more to stay competitive. They need to understand regulations and make the right decisions, but this cannot happen if their finance staff is unskilled and unequipped with the right tools. A fund manager must have comprehensive insight into the company’s financial standing at every moment to be able to make the best decisions.

Consero provides an outsourced finance and accounting solution that will help gain more significant financial insights through advanced analytics, reduce operational risk, eliminate inefficiencies, make savings, and allow CFOs to focus their effort on things of greater importance. We are ready to help you improve your practices in value creation, firm valuation, governance, and capital structure.


Consero FaaS: Disrupting the Outdated Traditional F&A Model

  • Cash to GAAP conversion
  • Clean-up work
  • Interim oversight & support
  • Accounting software Implementation

Build it Yourself Solution

  • CFO / Interim CFO
  • Consultants / VARs

Consero FaaS Solution

  • CFO / Interim CFO
  • or Consero Interim CFO
  • Consero Setup/Transformation
Ongoing F&A
  • Monthly financials
  • Daily accounting support
  • Management reporting
  • Integrate add-on acquisitions

Build it Yourself Solution

  • CFO
  • Controllers & Accounting Team
  • Enterprise Accounting Applications

Consero FaaS Solution

  • CFO
  • or Consero Fractional CFO
  • Consero FaaS Enterprise F&A Software and Services

New PE Platform Investment F&A Challenges

Founder Owned Company Accounting:
  • Existing accounting done on a cash/hybrid basis
  • Run on SMB accounting software and other disparate applications
  • Inability to produce auditable financials
  • Lack of know-how to develop projections & KPIs
  • No consistency/structure to customer contracts
  • Underqualified staff
  • Non-scalable manual processes
Carve-Out Accounting:
  • Required to move off parent company accounting applications in a timely fashion
  • Have to build an entire F&A team
  • No documented operational policies and procedures
To Optimized Finance & Accounting:
  • Monthly financials available in 5-10 business days
  • Audit and diligence ready support details
  • Integrated enterprise grade accounting software
  • Budget and forecast reporting
  • Business KPIs
  • Efficient & scalable processes for rolling in add-ons