3-step strategy for PE-backed CFOs to enhance EBITDA

As Seen in: CFO.com

Sixty-eight percent of fund sponsors say that CFOs are not doing enough to prioritize EBITDA enhancement, according to a recent Accordion survey.. That’s both a jarring and concerning number. How can CFOs better meet sponsor expectations? By understanding the context of a complex marketplace and quarterbacking a more unorthodox offensive gameplan in 2024 (one that goes well beyond the traditional jurisdiction of the finance function).

We don’t need to belabor the market’s complexity: Interest rates are the highest they’ve been in a quarter of a century, making cash the most expensive it’s been in recent history. The planning and liquidity concerns that spring from rate volatility are also new to a generation of CFOs who have not yet experienced a high to low cycle. Inflation is cooling from its peak to pre-pandemic levels, but where it will ultimately land is still uncertain and its impact on the economy (beyond limiting purchasing power) may not yet be fully realized. Finally, geo-political unrest continues to threaten the global supply chain and an evolving tariff landscape will affect the cost of trade.

The important point to note is that these macro levers force CFOs to make micro decisions: cash interest vs. pip interest; paydown debt vs. payout dividend; focus on free cash flow vs. focus on EBITDA; upgrade talent vs. cutting costs, etc., etc. PE-backed CFOs must make all these decisions amidst uncertainty while also balancing lofty sponsor expectations (and after years of sluggish deal activity, sponsors have become impatient for wins).

Where does a PE-backed CFO even begin? They should start by understanding what sponsors expect from them. According to our recent survey, sponsors want their CFOs to enhance EBITDA by:

• Driving Transformation: Sponsors want their CFOs to not only to wear the traditional finance hat, but they also want them to be their companies’ lighthouses, shining the way to value creation opportunities (whether that’s via optimizing cash flow, enhancing liquidity and profitability, and/or finding ways to digitally transform their companies to become scalable platforms).
• Aligning on VCPs: Sponsors need CFOs to get the priorities straight. CFOs must lead the rest of the C-suite to ensure they are aligned with the board and sponsors on business objectives (something they have struggled with to date), so that they can work to affect the right KPIs and value creation levers.

The CFO Strategy Guide

This three-step guide helps CFOs meet these sponsor expectations and give their PE team what they really want: EBIDTA enhancement and value creation.

Step 1: Implement Data-Led Value Creation

Everybody will tell you it’s all about clean data for the win – and we agree.

The CFO needs to make sure his/her team has effective processes to collect accurate data. As such, the finance team must build a state-of-the-art collection process, establish a master data governance strategy, and clean up existing data in order to have a “single source of truth.”  (The extent to which this is being effectively executed today is debatable. According to our survey a full 92% of CFOs believe that their data is clean and reliable; unfortunately only 65% of sponsors agree.)

The finance team needs to get the data collection right, but the CFO also needs to spend their time mining the data for the analytical insights that are actionable in the near-term. Turning messy data into actual insights is a multi-layer process which includes a:

• Foundational Stage: Harmonizing/cleansing data (particularly needed in situation where there are multiple ERPs). From a master data perspective making sure to segment by customers, suppliers, items, products, and pricing – and assign data stewards to maintain/update it with changing business needs.
• Pointed Analytics Stage: Identifying the revenue, cost, and cash levers CFOs can pull. This should be considered with a laser focus on industry-specific levers and the company value creation plan.
• Predictive Analytics Stage: Leveraging traditional statistical analytics and (increasingly important) AI tools to both inform the goals, the right levers to pull, and to properly execute against them.

Step 2: Tech-Enable Scenario Planning

CFOs need to not only be aware of the current market conditions which will inform strategic initiatives, they also need to plan for all possible types of market scenarios. But sponsors want more than typical financial scenario planning. They want CFOs to think through metric categories that go well beyond financial inputs —blending in operating metrics as well as macro-economic factors including leading and lagging indicators to address all potential business disruptions. This type of more holistic scenario modeling will enable CFOs to move from “reporting” to “quarterbacking” corporate responses to a wide spectrum of market variances.

Critical to this effort will be the CFO’s investment in the right tech stack, without which the scenario planning effort won’t just be difficult, it will be impossible. That tech stack should include tools that enable advanced planning solutions, machine learning, and artificial intelligence alongside public database feeds to modulate demand predictions in real time as well as to inform operational impact such as supply and inventory planning and staffing decisions.

Step 3: A Bigger Role in Enterprise-Wide Transformation Projects

The results that come from translating data into actionable insights and driving more holistic scenario planning should impact the entire company, well beyond the office of the CFO. To this end, CFOs must think of themselves not only as the leader of finance, but as the quarterback for enterprise-wide transformation. (Indeed, according to our survey, 98% of sponsors expect the CFO to be responsible for corporate scaling and transformation efforts).

But what does quarterbacking transformation really mean? It means partnering closely with operational executives. If, for example, the CFO finds that that X product is not profitable or that inventory is exceeding demand, s/he must work with operational executives to pull the right levers on price, discounting, warehousing, etc.

It can be quite challenging for the organization as a whole to prioritize the changes (or the discrete transformational projects) that promise the most impact. CFOs can be key to priority-setting by helping management teams identify the most addressable opportunities and the right executives with whom to partner on appropriate value-creation levers to drive better bottom-line performance.