- In a survey by AlixPartners, PE firms rank “lack of financial and technical capabilities” as the number one cause of PE-backed CFO turnover.
- In pursuit of a top-quartile IRR, sponsors can ill afford the inefficiency generated by a poor forecast.
- Many CFOs provide a distorted view of the future by setting unrealistic revenue expectations or failing to maintain an accurate balance sheet.
PE firms possess an insatiable appetite for data. Their forecast requirements may present a significant challenge for the first-time PE-backed CFO. Precise forecasting requires year-round commitment, and any forecast done in an attempt to hit a pre-determined number will likely prove flawed. A CFO must be brutally honest about their company’s recent performance to produce an accurate outlook for the future.
PE-backed CFOs utilize several best practices to maximize the quality and impact of their forecasts.
Hands-On Modeling
Each quarterly forecast presents a CFO with the opportunity to demonstrate their expertise and operating savvy. Sponsors take great comfort in a portfolio company CFO who truly understands the drivers of the business.
A CFO who doesn’t appreciate the value of the quarterly forecasting process is likely to play little role in its execution. This hands-off style creates several potential issues:
- It is the board’s duty to scrutinize and pressure-test the quarterly forecast. A CFO who takes little to no active role in the forecast’s development will be ill-equipped to defend it.
- A CFO should possess a deeper knowledge of key business drivers than their subordinates. If the CFO is not an active participant in the forecasting process, the resulting model may be based on flawed insight.
- PE firms prefer to run lean, and a CFO who cannot or will not aid in vital activities like forecasting often necessitates a higher headcount in their function.
Embracing the forecast process also helps a CFO uncover valuable insights they otherwise might not discover. Quarterly forecasts are not simply a check-the-box item in the PE world, and a finance chief’s lack of involvement will manifest if they completely offload their execution.