CFO Transitions: What Should We Consider?

Josh Henle
Sep 4, 2018 · 5 min read

James Rohn noted that “You cannot change your destination overnight, but you can change your direction overnight.” While the impetus for change can originate anywhere, successful organizational adaptation is leadership driven. Executive transitions are inevitable and challenge leaders to re-evaluate the past, shift the company’s trajectory, while continuing to enhance results.

The Chief Financial Officer is at the crossroads of change as she supports success across the organization. She is tasked with translating “what was” to “what will be”, converting the qualitative to quantitative, and acting as a catalyst for the organizational evolution. Thus, a change in the Chief Financial Officer can have a material impact requiring the executive team to immediately focus on three key areas:

  1. Liquidity — Understanding and actively monitoring cash movement is essential. The ability to quickly quantify cash needs, forecast liquidity, and determine the impact of operational decisions is essential to operate from a position of strength. Key stakeholders tasked with executing the Company’s vision should understand the impact of their decisions on liquidity. The CFO must both educate and be an advocate for stakeholders while managing owners’ expectations about cash required for long-term growth investments.

Passive management of liquidity leads to lower employee morale, damaged vendor relationships, impatient owners, and penalties which can pave the way to bankruptcy. Active liquidity management requires the CFO to perform detailed analyses to understand the cash conversion cycle and related drivers. She will focus on the impact of significant customers, vendors, employee leverage, the impact of past and impending business decisions, and the sensitivity of debt covenants to those changes. A fulsome understanding of liquidity will culminate in establishing or strengthening banking and investor relationships to ensure availability of cash before it’s needed.

Case Study — A Company averaging 35% EBITDA margins believed that maintaining high margins was ample proxy for managing liquidity. A detailed analysis revealed three near-term liquidity risks: (1) a dividend to shareholders, (2) escalating debt payments, and (3) annual business insurance renewals. These cash outflows jeopardized the company’s ability to fund payroll. Using the foresight gained from the analysis, the shareholder dividend was converted to a contribution, the insurance renewal was financed over the premium term at near zero interest, and the Company was able to avoid disrupting business operations or debt service.

2. Accounting and financial operations — Following liquidity, the CFO should provide oversight of financial and tax accounting to ensure financial reports reflect the performance of the business and support the decision-making process. The CFO will also evaluate the efficacy of the back office and assess alignment with the finance department’s role in supporting the company’s strategy. This process starts with timely financial statements, which should be available to the executive team no more than five (5) days after month end. The statements should be supported by monthly account reconciliations and should provide insight on how operational and sales performance drove financial outcomes.

The next step is utilizing regular reporting to stakeholder needs to optimize decision-support. Generally Accepted Accounting Principles (GAAP) have proven capricious over the past twenty years and while the CFO should maintain a focus on GAAP reporting to satiate banks and investors, she also must provide consistent and reliable financial data to support daily decisions and strategic objectives. Misalignment between financial and operational data can lead to missteps, lost opportunities and financial restatements.

The CFO should involve her finance and accounting team to collaboratively create goals and ensure objectives address measurable and controllable behaviors tied to specific desired outcomes. Misalignment of the internal vision for the finance department can lead to ineffective policies and counter-productive behaviors. A proper process will result in accountability and a common vision.

Case Study — Financial statements were issued 11 business days following month-end with financial and operational reporting consuming an additional week (over three total weeks). An end-to-end evaluation of finance and accounting process reduced the accounting close to three (3) days, allowing operational input before final issuance on day 5. Clarifying stakeholder needs and organizing requirements by functional area (e.g. procure to pay) drove consistency and efficiency while reducing headcount 25%.

3. Financial Performance, Reporting, and Decision Support — Proper reporting and decision support fosters a high-performing business. A strong CFO ensures clear financial expectations are available to key executives and decision makers throughout the organization. The CFO owns and produces budgets and forecasts, which serve to communicate financial expectations. Properly prepared budgets should challenge the organization, while remaining achievable when executed by the executive team.

Forecasts and budgets should extend beyond entity-wide planning to specific projects and initiatives, which ultimately inform entity-level expectations. The CFO’s active involvement in business decisions should result in discrete financial models to quantitatively understand the project or initiative impact. Her involvement helps the company pursue profitable projects and better analyze the related risks, returns, and sensitivities, which are often dismissed or judged immaterial on a qualitative basis.

Case Study — A multi-unit services company hypothesized that increased staffing accelerated revenue growth resulting in an almost instantaneous ROI. Prior to implementing the plan, the CFO tested the hypothesis by analyzing granular sales and operational data to support the thesis. The initial plan and related assumptions increased earnings after year 1, but the analysis demonstrated that following the plan would deliver material earnings declines in year one, requiring additional capital to sustain operations. Linking the financial and operational analyses allowed the Company to shift the strategy and create an investment plan that was both self-funding and produced a strong ROI without additional capital.

Introducing a new CFO into an organization can significantly impact a company’s operations and prospects. Taqitz Advisors supports executive teams through CFO and finance department transitions through providing interim CFO support, candidate assessment, and supporting identification and acceleration of key finance requirements.

About Taqitz (\’tȯ-kēts\)

Taqitz Advisors emulates the mindset of traditional climbers scaling Lily Rock who continually make essential decisions based on their assessment of opportunities and risks. The name reflects our approach to serving clients: situational adaptation to optimize and accelerate each outcome. Our clients understand that decisions, made en route to completing a transaction, dictate results.

We are transaction-focused advisors specialized in providing data-centric decision support. Our legacy includes advising clients on over 200 transactions valued in excess of $100 billion and have held executive, senior level leadership, for public, private equity, and family-owned companies exceeding $1B revenue annually. Regardless of your Company or Deal size, our experience and insights will provide a beneficial perspective.

Our team consists of finance and accounting experts with a penchant for data science. We focus on linking high-level perspectives to the detailed reality — enhancing insights while optimizing and accelerating your transaction.

Josh Henle

Written by

Executive finance professional with big-four accounting, advisory, and corporate finance experience.

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