The Role of the CFO in Driving Growth

Recently I was at NACE in Detroit. NACE brings together leaders in collision repair, automotive service, and the multitude of stakeholders in insurance, parts, paint, and technology industries. It was a fantastic event full of great networking and educational seminars.

I had the opportunity to sit down with a lot of business owners in the industry who were incredibly optimistic about their future. They clearly recognize the challenges facing their business but are actively engaging in strategies to mitigate their risk while growing and thriving.

Consistent throughout many of my discussions, however, was the concern of managing the financial risks that often accompany growth. The lessons of M2 and other failed bids at rapid growth are still fresh in the minds of many in the industry. While these business owners are excited about the growth opportunities available to them they recognize that growth will bring additional financial pressures and challenges. In light of these concerns, our conversations naturally shifted to the role of the Chief Financial Officer (CFO) and how a company manages the financial risks growth entails.

Looking Back: Financial Analysis

Have you ever wondered why sales were down last month? Or perhaps, why profits were up two months ago but down this month? Maybe you have scratched your head and wondered how to analyze a bonus plan without giving away all the profits of the company.

Those are all traditional responsibilities of a CFO. A CFO analyzes past financial data to ensure that a company is operating and hitting key profitability metrics. If a company is not meeting its financial goals then the CFO digs deeper to find the root cause.

Typically, the CFO also analyzes and negotiates vendor contracts, such as for parts or paint, to ensure that these contracts are competitive, both on price and terms. For example, a parts supplier may be willing to offer deeper discounts in exchange for specific payment terms. But an increased discount in exchange for specific payment terms may not always be in a company’s best interest. It is the job of the CFO to make that determination.

In short, the CFO acts as the key financial analyst of the company, analyzing past performance and identifying opportunities for improvement.

Understanding the Present: Managing Working Capital

Traditionally, collision repair companies have not focused on working capital management. Due to the nature of vendor relations in the industry, the role of third-party payers, and limited use of debt financing, many businesses are in the privileged positon of collecting payment many days in advance of any requirement to issue payment for the cost of goods sold or other expenses.

In a high growth environment, working capital management becomes critically important. Many bankruptcies happen as a result of a lack of liquidity rather than a lack of sales. Liquidity is the concept that describes how a company can quickly convert assets into cash. The greater the liquidity, the easier it is for a company to access cash. Companies that are unable to convert assets into cash in a timely manner face a liquidity crisis, are unable to pay employees and other obligations, and can be forced into bankruptcy as a result.

One of the most common ways startups, acquisitions and brownfield projects fail is through lack of adequate working capital (poor management and strategy the other). Growth puts additional stress on working capital as building new locations or acquiring existing locations requires a company to invest substantial cash resources to build, acquire and commence operations. Companies can rely on existing cash to fund growth, or utilize debt to finance growth. In both cases, however, the role of the CFO is to assist management in identifying the appropriate financing strategy, as well as to ensure the company has sufficient cash on hand to service the debt and/or cover current and future account payable obligations at both existing and new locations. Timing incoming and outgoing cash flows, as well as managing the cash conversion cycle and the operating cycle, are critically important responsibilities of the CFO in high growth environments.

Planning for the Future: Corporate Finance – Capital Structure, Hurdle Rates, NPV, and Budgeting

Using the tools of corporate finance, the CFO is responsible for evaluating the sources and uses of capital funding in the business, the mix of capital (debt or equity), and the actions and investments that managers can take to increase the value of the firm for the shareholders. A key part of maximizing the value of a business is looking at the world of investment opportunities to determine the best way to invest the limited resources of a company.

Building budgets and projections is an important part of the duties of a CFO. Budgets and projections are used both in financial management as well as operational management. Through the use of past performance the CFO, along with the senior management team, builds out detailed operating assumptions, often monthly for at least 12 months. These operating assumptions are then used to manage performance at individual business locations, as well as to evaluate future investment opportunities. By building out future operating assumptions, a CFO is able to evaluate the current value of a business.

A similar process is used when evaluating investment opportunities. At its core, finance is about understanding the present value of future cash flows. In order to evaluate multiple different investment opportunities the CFO creates operating assumptions to determine future cash flows, and then evaluates the present value of the future cash flows on a risk adjusted basis. Once the present value is determined, management can set baseline hurdle rates and only consider investments that meet certain return requirements.

The forward-looking projections a CFO is responsible for is some of the more complex work a CFO provides. Using forward-looking projections, a CFO can model the future performance of a business based on industry knowledge, educated assumptions, and past performance. These projections seek to answer the question, “Is this investment worth it?”

Other Duties

These are just a few ways CFOs add value to a business. The role of the CFO is complex, and ever increasing. In addition to managing the financial side of the business, the CFO is responsible for managing banking, financing, vendor and other key financial relationships. The CFO often also is expected to provide insight into any part of the business that requires large capital expenditures, such as IT upgrades or facility expansions. In some organizations, both HR and IT report directly to the CFO. Increasingly, the CFO is expected to take an active role in setting strategy with the senior management team. In a high-growth environment, the team responsible for sourcing, evaluating, negotiating and integrating acquisitions typically reports to the CFO.

The role of the CFO traditionally has been overlooked in the collision industry. A full time CFO is not feasible for everyone. Experienced CFOs can command salaries of $250,000 annually or more. There are few CFOs with direct collision industry experience. However, companies that have grown successfully and rapidly understand that a person dedicated to managing the financial side of the business is indispensable. The CFO ensures that the company is meeting historical and current profitability expectations, ensures that the company minimizes working capital while ensuring the company has access to cash when needed, and also builds future value by managing the capital structure of the business and directing the company towards appropriate risk-adjusted investments.

We will continue to talk about opportunities to grow in the industry. As the large consolidators continue to acquire the upper tier of regional MSOs there is an opportunity for smaller MSOs to rapidly grow to fill the void. While the continuing consolidation of the industry will continue to pose an operational and competitive threat, for the astute, growth-oriented business owner with the right team there is significant opportunity.

I am eager to hear from you. Have you dedicated an individual in your business to manage the financial side of the house? What challenges have you had in managing the financial side of your business? Please shoot me an email via my contact page. I find the transformation in the industry truly fascinating and all communication is kept strictly confidential.

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