“Now [after an acquisition] the stakes are going to increase quite a bit.”
“If you’re buying a $100 million or $200 million business, they might be just looking at a P&L and saying, ‘We make our payroll, we’re making profits and life is good,’” said Grant Thornton CFO Advisory Principal Mike Hennessey. “Well, now the stakes are going to increase quite a bit.”
Maximizing the value of a PE investment requires optimizing the value that the finance function brings to the organization. Finance should be able to provide insights into P&L and cash flow that can enable efficiencies and the redeployment of available funds into treasury assets or the business.
“I’d like to see folks really understand their cash conversion cycle from payables to tied-up days in inventory to DSO [days sales outstanding],” Hennessey said. “Understanding the combination of those three metrics can help you generate a lot of cash by better managing your accounts payable and inventory and being more diligent on your receivables.”
Meanwhile, finance improvements that lead to a significant reduction in the number of days after close required to produce financial statements can lead to more favorable debt covenants. These changes require strategy, insight, planning and discipline, but ultimately can deliver substantial value.
An effective diagnosis of the company early on can help finance build more effective, scalable processes while identifying gaps that need to be filled with knowledge capital, systems improvements and/or other resources.