Financial Engineering in a Hyper-Growth Environment
By Brian Patterson, CFO, USS
Working for a company that is growing furiously is both fun and challenging. The fun comes from seeing the results of your hard work before the ink on your plans has dried. The challenge is–well, you’d better get things right on the first try or those results will be quite different than what you, your shareholders, and investors expect.
In my career I’ve had the privilege of working for several fast-growing companies, but nothing compares to the rate of growth of my current employer, USS. Last year we doubled the sales and doubled the number of employees. And this is a 20-year-old company in a mature industry.
For 2016, we’ve set even loftier goals, which made me reflect on the question of what a CFO has to do to manage growth effectively. Three areas, I believe, deserve the most attention. I’ll go through them one by one:
Financing with Speed and Agility
The first question we faced was whether to finance with debt or equity. Debt is less expensive, but has tighter constraints that can slow the pace of growth. An equity option promises fewer restrictions, but it means the dilution of the owner’s equity, and can be expensive early in the growth curve. Which one is better?
Given the current cost of money, I believe the best funding for growth comes from the debt model. This requires an owner with a thick skin who can accept carrying debt, an interest rate that’s palatable, and, of course, a bank that understands the strategy and believes in it.
Growing on a conventional asset-based model means being front-end loaded on spending. The bank is, in essence, investing in you for future gain. Your banking partner must buy into your aggressive growth curve, buy into the leverage that impacts covenant ratios, and be agreeable to that process. In the case of USS, as we develop our plans, we share those with our banking partners. They have become not just providers of working capital; they are in many ways our partners in business.
Debt is not always the best option for growth, of course. When moving to a mergers and acquisition strategy, for example, more risk is encountered. Then it makes sense to share some of the risk with an equity partner. The owner’s equity does get diluted, but in a lesser measure than when the company is small. The optimal approach, in my experience, is to go as far as possible with the debt model, then switch to an equity model when the company gets larger.
“A good CFO always has the finger on the financial pulse of the organization”
Building Systems to Support Growth
A good CFO always has the finger on the financial pulse of the organization. When growing fast, the pulse is racing. The goal is to be proactive and not reactive relative to the financial state of the organization.
Having a strong ERP/MRP system is a must. In the case of our organization, we are expanding in the U.S. and internationally. For this reason, our ERP system is in the cloud and can be accessed from anywhere. We use the same chart of accounts across the organization, with minor variations. We also use consolidation overlay software, which provides us with an easy way to view the finances of our international operations in a consistent manner. This software is especially useful for dealing with multiple currencies and the resulting exchange variation issues.
When it comes to enterprise resource planning, visibility and analytics are key. Operations, production, R&D and other parts of the business should be tracked using consistent metrics that are easily communicated and analyzed. I am a big fan of Visual Factory and Lean Thinking approach: go/no go; green/ yellow/red. Having the data presented visually rather than with the traditional historical accounting reporting, allows for a better view of the future performance. It also helps non-financial people understand finance, which is especially useful in the boardroom and in executive meetings.
If I could pick one specific tactic that helps with the management of rapid growth, it would be pace reporting. The core of how we measure ourselves is in the budget vs. actual variance analysis. Each month budget for the previous month is replaced with the actual numbers. For example, when February comes, we’ll have January as actual and the remaining 11 months as budget; then when March arrives, we’ll have January and February as actual and 10 months of budget. If we are hitting the plan, the pace should be consistent with the 12-month plan. But if something turns from green to red, then we can drill down to where the problem is and course-correct immediately. I am a big fan of trailing-12 analysis of specific deliverables we want to hit in the business, such as bookings, revenue, expenses, cash flow, elements of working capital, and some specific accounts for expenses.
Hiring and Retaining Talent
It should go without saying that if one wants exceptional growth, exceptional talent is needed. What I learned early in my career is that one has to be willing to pay for talent. High performers cost money, but are worth the investment.
I have noticed that, unfortunately, too many CFOs are too afraid to hire talent. Perhaps they feel that a smart newcomer could be a threat. But I believe that a good CFO should never be afraid to hire the next CFO. Smart people, when treated and mentored properly, will make your job easier. They will also make you a better leader.
How do you pick the right people? Personally, I look for thinkers–hungry, resolute thinkers. I look for people who have demonstrated success early on; who are open to mentoring; who are not set in their ways. Ultimately, I want change agents on my team: those who will bring ideas and solutions to the problems, not those who bring just a mechanical process.
In the interviews I look for good listeners. I provide a brief description of where we are today, and then I listen and look for their thought processes. I am very much interested in knowing how they get from a problem to a solution; that tells me if they are solution providers or rote operators.
I was blessed early in my career to have very successful individuals mentor me. I repay the favor by doing the same for the people I hire. But I always start by hiring the best I can afford because, ultimately, great organizations are built by great people. The talent you bring on board is perhaps the biggest determining factor in whether you will grow your business as fast as your plans suggest.