Financial Officers

In the past, finance directors were regarded merely as the “number crunchers” – the commercial conscience of a company. Nowadays their image has undergone a radical transformation. Today's Chief Financial Officers (CFOs) are the drivers of organization-wide change, exercising a decisive influence on corporate strategy and the ways in which it is implemented. This is especially apparent in businesses which belong to private equity companies. Here, CFOs fulfill a highly demanding role. Working under significant time pressure, their task is to implement rigorous cost and cashflow management and at the same time open up new growth prospects for the future.

The European private equity market has seen dynamic growth over the past decade. Equity investment companies like Cinven, Kohlberg Kravis Roberts (KKR), Blackstone and BC Partners have also been increasingly active in Germany. They buy companies, restructure them and then sell them on after three to five years – mostly at a substantial profit. The investors behind the private equity firms expect an annual return of up to 30% on their capital.

Management – the key success factor

Because the companies acquired are heavily indebted they have to service and repay the debts from their operational cashflow. As a result, the success of this kind of deal is dependent on generating additional cashflow and cutting costs in the short term. At the same time the company’s strategy must be overhauled and new growth prospects for the future opened up – after all, something more than a pared-down cost structure will be needed if the company is to be sold profitably at a later stage.

This dual challenge, and the speed at which the restructuring must be implemented, place high demands on the management of the companies acquired. This makes the choice of management personnel a crucial success factor for private equity firms. And the CFO is the kingpin of the whole enterprise. The CFO and the CEO are the two key figures in the company – for investors, the CFO in particular stands surety for the successful execution of the master plan. This invariably includes restructuring measures – either to bring a company out of a crisis and back into profit or to increase its existing profitability.

Focus on costs and cashflow

The CFO is the driver of this change process. The traditional definition of this role – which sees the finance director as an asset administrator, someone who takes responsibility for financial processes without intervening in operational management or helping to plan and implement growth strategies – today no longer applies. CFOs must of course take charge of core responsibilities such as controlling and finance. And yet their success will be measured above all by the extent to which their strategies succeed in cutting costs, improving cash flow and increasing the value of the company. At the same time, though, they are expected to contribute to the development of new market prospects.

Traditional companies, too, are increasingly favoring the new-style CFOs. However, in companies that form part of private equity portfolios, the presence of a CFO with these qualities is a vital prerequisite for achieving the corporate goals. And in all respects this key figure must act pragmatically, flexibly and fast.

Solid planning, strong nerves

Because the exit timing is built into the plan, these CFOs have no scope for delay or hesitation in taking the necessary measures. They need to deliver rapid results in order to justify the faith placed in them by the banks and investors. After all, the company must be set on the right track during the first year if the restructuring process is to bear fruit from the third year onwards.

Throughout this process the CFO must keep the value drivers in their sights and achieve an effective balance between short-term and long-term measures: building the company’s sustainable potential for growth is the key to achieving a good sale price. At the same time the CFO has to contend with a permanent cash drain: high debt servicing leaves little scope for unused reserves or profit accumulation. It's a tightrope act that calls for solid planning and strong nerves.

One of the CFO’s pre-eminent roles is to change the prevailing mindset in the company, raising awareness of financial efficiency in all areas. How can the purchasing department optimize its payment terms? What scope is there in suppliers’ payment terms to improve cashflow? How can average inventories be significantly reduced?

A hands-on approach

These are questions the CFO needs to answer without delay – for example by inspecting stocks of semi-finished products in person and discussing with the employees involved how inventory turnover can be improved. As this suggests, CFOs in companies in private equity ownership have to be much more hands-on than in traditional companies. Given the radical change processes they are initiating, they cannot rely solely on delegation. They must roll up their sleeves and get involved, cutting through hierarchical structures to get to grips with the detail – while at the same time keeping their vision focused on the bigger picture.

CFOs in private equity companies are the drivers of change. Introverted number crunchers won’t be up to the job: on the contrary, these CFOs need outstanding communications and leadership skills. They must be able to convey the company’s strategies and goals to everyone, right down to the supervisor on the shop floor.

Only value creation matters

All of which makes it self-evident that CFOs in private equity-owned companies need to be pragmatic, assertive characters. They will have to defend dismissals and relocations in the face of potentially bitter resistance from the workforce. Yet however difficult their role may be, the CFOs in private equity-owned companies have at least one advantage on their side: their role is a clearly defined one. In the end, increasing the company’s value is all that counts. In many large family-owned companies the situation is very different. Here CFOs all too often have to contend with the divergent individual interests of the various shareholders.