Podcast | Life after lockdown: How great FDs can help businesses emerge stronger

finnCap Group, partnered with Acuity Associates, brings you our latest podcast. As a country we are now entering the phase of lockdown where we can see an exit route. In this podcast episode we discuss how excellent FDs/CFOs can help businesses thrive through this crucial point in the COVID-19 crisis and emerge out the other side intact.

Acuity Associates finds and recruits Finance Directors and CFOs whose skills include readying business for sale or other significant liquidity events. Acuity Associates’ mission is to strengthen finance teams through the application of its proprietary The Acuity MethodTM. The Acuity MethodTM validates accountants' technical skills. i.e. their ability to be effective in their roles.

The Acuity MethodTM assesses FDs/CFOs' capabilities according to the '5D FD', the five dimensions of the Finance Director. Acuity Associates' whitepaper, downloadable here, explores what outstanding looks like in an FD: 5D FD – Benchmarking the 5 Dimensional Finance Director

Speaking today are:

• Ben Mekie, Director at Acuity Associates
• John Farrugia, Partner at Cavendish Corporate Finance
• Karl Cockwill, Portfolio Director at NVM Private Equity

Hosted by:

• Jonathan Bright, Digital Content Marketing Manager at finnCap Group

Listen to or download the podcast below

Podcast transcript

Jonathan – Hello my name is Jonathan Bright, I’m the Digital Content Marketing Manager at finnCap Group.

The word unprecedented has been used a lot of late but it is nevertheless accurate. Businesses are still finding their feet in the COVID-19 crisis, balancing looking after their staff, many of whom will be remotely working, with ensuring that business continues and the company remains in a strong position to emerge out the other side.

With this is in mind, today we are talking about the role of the CFO, Chief Financial Officer, or FD, Financial Director, in all of this.

Speaking today will be:

• John Farrugia, Partner at Cavendish Corporate Finance
• Karl Cockwill, Portfolio Director at NVM Private Equity
• And Ben Mekie, Director at Acuity Associates

Welcome to you all

Acuity Associates are first and foremost associated with finding and recruiting fantastic FDs and CFOs for companies, using its proprietary The Acuity MethodTM. First of all I’d like to probe an idea. Before this crisis emerged, Acuity was already championing the role of the FD or CFO in creating strategic direction, especially in the face of adversity or uncertainty.

Now that COVID-19 has truly reared its ugly head, Ben, what is your opinion of the role of the FD or CFO in this situation?

Ben – Well for the CFO or the FD, and I tend to use the words synonymously, the skill sets required haven’t changed. The one thing that is different about the situation at the moment is the degree of uncertainty, which as you said in your introduction is unprecedented.

The primary consideration at the moment is of course cash. However, I think the matter goes more deep than that so, as green shoots appear, as our politician friends would say, with regards to increased or more satisfactory statistics about the progress of the virus, it looks looks like at some stage the lockdown will, as soon as practical, be released. So the cash element of that is obviously crucial in order for a business to get through this process with or without loans. But for the process of re-adopting practice and operations during that comeback period, there’s more to it than meets the eye.

For instance, because of social distancing, when people go back to work their productivity may be affected. So if it’s taking an employee four days to undertake a task that ordinarily takes two, clearly productivity is affected, which in turn affects margin and that in turn affects cash flow. That depth of understanding of the business needs to be inspected and the right person to do that is the FD or CFO.

Jonathan – Karl, from your perspective, what is the biggest risk consideration for an FD or CFO right now?

Karl – yeah it’s a good question. Since the beginning of March / middle of March and it was clear the lockdown was coming, our overarching focus has been without a doubt on cash, cash liquidity, headroom; cash is king, cash always was king, and that’s what we spent our time doing with our portfolio FDs, modelling, looking at various scenarios. That’s absolutely the first stage where we were six weeks ago.

But actually once you’ve got through that and you’ve modelled some scenarios out, it’s been an issue of maximising headroom, whether that’s accessing the government schemes of furlough, negotiating time for pay arrangements, VAT or PAYE, as many rent deferral schemes as possible and that’s where the focus is shifted to.

You were right before – our forward-looking focus is how we come out of this because it varies very much on particular sectors. For instance, for the two or three out of our portfolio of 24 that have got more challenges within their customer base you tend to have to be guided by what your customers are doing. I’m on the board of quite a large manufacturer that supplies into retail and only when retail is open will we be able to come to a clear plan about how that pans out. To reiterate, it’s absolutely about cash at the moment.

Ben – I think that the FD, whether they be in a portfolio or private equity company or otherwise. needs to understand the options facing a business right now – from the worst case, that the business simply isn’t able to survive and it needs to save what it can, to the second option in that the business can survive with sufficient funds and decisive action. But it’s no good thinking what to do and then not doing it. The business needs to change or adapt to survive.

There could be opportunities that can be taken advantage of with the right resources and all funding at the moment has gone to some businesses that have happy circumstances – if happy can be used in the loosest sense of the word – they’re thriving in this crisis because of their existing products and services. I think a keen understanding in the mind of the FD or CFO, to reference decisions in terms of where a business is across all of those options, ideally pushing them down into the positive to achieve that in conjunction with the board. That is crucial right now.

Jonathan – And John, from Cavendish‘s point of view, why should people look towards the FD or CFO for direction at this time?

John – Well, we’re all about businesses that are contemplating selling in the near or medium term. It’s one of those things where we’ll look at this period and try to figure out as a corporate financier – how you are managing through this period and how you adjust for it.

What do you want the FD to really be thinking about, carrying on from what the other guys said, is how you figure out how to bounce back from our current situation to a point where you can trade back at a normal basis. Because if you are unable to bounce back and trade back to normal any time soon, it will be hard for any entrepreneur to consider selling for a good period of time.

Ben – That process is absolutely crucial. Where the right skilled FDs and CFOs can be effective is when they work across multiple sectors, so they can bring fresh thinking from different sectors into their current sector and apply those out of the box measures that they may not exist for somebody whose only works in that sector from an operational perspective, for instance. 

Karl – Yeah, I’ve used the words 2020 will be a year to forget with a lot of my portfolio companies. You would expect that all of our portfolio is for sale all of the time, but for some businesses revenues have declined to zero within a matter of days. That requires immediate thought and quick actions. I’ve been very impressed by what our portfolio has done. They need to act very quickly and you would never have predicted that we would’ve made so many moves. I’ve got to be honest, the government schemes, despite them having the C-build scheme that was getting some criticism, which was particularly aimed at the banks, the furlough scheme has been an inspired idea and we’ve already had three or four payments out across my portfolio within the last two or three days, so that’s been really important. But some have come out quicker. One of mine has doubled its staff from 270 to 540 over the last four weeks, which is quite remarkable. The challenges around sorting out IT has been entirely different and it is very sector specific, I think.

Jonathan – John would you agree that hiring the right FD or CFO is a good first step for a company preparing the long game trying to get out of this crisis intact?

John – 100%, even in normal times, again you would want a strong and capable FD, but in times like this…

Karl – It’s more critical.

John – It’s definitely critical. We work with many entrepreneurs who effectively need a financial controller; you wouldn’t even call them the finance director. It’s at times like this where you probably do need to up the skill set of your financial controller, probably replace them, or enhance the team by bringing in an FD to see yourself out of the situation, because it does take a lot of business planning to find a way out through what we are undergoing right now.

Karl – The best teams are the ones where the FD and the Chief Executive have a very close relationship and there is almost a seamless transition between the two. They play off each other and there isn’t really, at the edge, a clear distinction between who is dealing with the more strategic parts of the plan and who’s actually modelling it. Most of the chief execs that I deal with I have put a serious amount of input into any forecast going in and that’s what we’d expect. I think you’re right as with marginal businesses in these times, marginally confident FDs are not going to find it an easy place to be and if you’re in a situation with a relatively inexperienced FC now maybe is the time to scale up but – and there are parts of the portfolio where we are looking for people – it is not an easy time to do it.

Jonathan – In the current situation are there valuable traits of the FD or CFO that the company should either look to retain in their incumbent or recruit for in a new hire?

Ben – Well I think that the skills aren’t going to emerge magically because of the advent of this crisis. They’re either there or they’re not.

Certainly, where individuals have been doing a good job that shouldn’t change; that should be retained and focused on – where their strengths lie that’s where they should be working. But there is an argument to suggest that this would be a time to supplement those skills with perhaps a part-time or interim on a project basis. Bring in the right skilled FD to introduce that. Also the legacy systems that this individual will inevitably create as part of their project. I think the time for seeking help is nigh.

Karl – Yeah I think one needs to address that and we certainly, in the past and continue to use, experienced FDs as non-exec directors, particularly if we’ve got somebody who is slightly new to the role to provide that external support.

We’ve even used finance directors with restructuring experience in the past as well; you might call it an informal CRO type role. It’s where the FD has just not had that level of experience, but if you’ve got somebody who is 60 and has been through three recessions – admittedly none quite as bad or quite as sharp as this – there’s just different ways of doing it. We operate in the lower mid-market so we don’t supplement with CROs typically, but we will pull people in on an interim basis or even commission, consultant-style, if we think these things are required.

Karl, taking the perspective of private equity now, what are private equity seeing in the businesses within their portfolios in terms of how financial teams are actually operating? 

Karl – The most notable thing we’ve seen, and this applies to teams generally, but the team that the FD leads in particular, is they’re all working harder than ever. They all worked hard before this, and this applies across the NVM portfolio, but every team has stepped up to the plate here. The FDs have been really busy, not least managing cash. The shock of closure and customers was a real challenge to start with and the focus was initially on forecasting cash management, what sensitivities are going to apply, and I don’t need to tell you guys, but it’s quite tricky sometimes. It’s very easy to sensitise something into oblivion so you can talk yourself into a very negative scenario and I’ve been very careful with mine to say, look, the best we can do is forecast for what we know at the moment. And actually what you view today is very different from what we are all thinking four or six weeks ago. We are hopefully seeing two or three weeks out from now a gradual lifting of the lockdown and it’ll start to feel different then. So you know we are all working really hard; there’s been more forecasting. I suspect my portfolio has produced more forecasts in the last month than they have in the last three years, which is a bit painful for them, but it’s also painful for me when I have to review them.

But it’s a bit like being in the diligence process. You’re getting bombarded in the presale due diligence process when you’ve got your day job to do and you got a load of other stuff going on; it’s a really challenging demand on your time. They are a nuisance and you haven’t got enough hours in the day. But the guys have really stepped up, I’ve got to be honest it’s been really impressive to see.

Jonathan – Is there a particular nugget of information they are looking for in their portfolio businesses that could signal the company is remaining on a relatively steady course?

Ben – What we’ve observed is that with changes in the market being so quick and then changes in government behaviour also being unprecedentedly rapid, we’ve seen that the best-in-class FD is prepared, as painful as it is, to say something like “OK, that cash flow that I did two weeks ago – bin it – it’s not applicable for the current circumstances.”

We have to re-forecast and remodel because the assumption set has changed. That takes a lot of mental fortitude with the ability and the gravitas to recognise it. The temptation, in weaker environments is to have created a forecast that works under normal circumstances, and try and bend it or adapt it somehow to these unprecedented times. That often is just not fit for purpose. So you’re really looking for that skill set to say “Look, are we really making business decisions here based on the right information? Because ultimately that’s what the FD and CFO are doing, helping the business make the best possible business decisions under the circumstances that that business faces. And in normal times those business circumstances don’t change that frequently. Right now they’re changing all the time.

Karl – Yes, it’s a good point. What I would say is we are seeing that the best FDs are acting more entrepreneurial. Where is in the past it would be decision-making based on analysis. And for the best businesses, historically, that’s been the right way to go. But we are saying that you need to be fleeter of foot and I forget how the saying goes, but never let the perfect get in the way of the good. We don’t have perfect information on which to forecast and actually having 80% to 85% of what you know, now, is going to be as good as you’re going to get. We need to act on it.

You haven’t got time to think. The best teams we’ve seen are the ones to analyse it quickly almost in an entrepreneurial way, supported by the data we’ve got. But actually acting on it – I’ve spoken to friends who are very successful businesses in the portfolio now that are going to be finding it very difficult to adapt into a more entrepreneurial, quick thinking “Act now pick up the pieces later on” manner. That’s absolutely what we’ve had to do, and our teams have responded well.

Jonathan – John, amongst the companies you are talking to at Cavendish, are you seeing any need for further interim financial expertise to guide some of those teams moving forward?

John – 100%. In fact there are two companies in particular where we have recommended this for their finance team and are actively talking to them about what type of person they need, as the current calibre is not enough to see them through this nor see them through the process as and when we start it.

Ben – We’ve got an example where we put someone in a business recently, a fully qualified chartered accountant there which came out of the big four, who revealed themselves as a superb scorer FD, and an excellent custodian FD in so far as it went. But there was not one single report about the business anywhere to be found. So that’s where on the surface you think we’ve got a very competent accountant here, but really if they’re just operating at that level then they’re not really fit for purpose.

The challenge is with a successful business that’s growing; if it’s not noticed then of course the opportunity missed is how fast would it have grown with the catalyst FD, with a business partner FD, and with the strategist FD, co-helming with the CEO.

Karl – Yes that’s a good point and one thing that I didn’t mention before is that our focus over the next four to six weeks will without a doubt be on creating new 100-day plan for our investments, about how we are going to come out of this, how we are going to manage the working capital and get a greater management, and at what point we will be anywhere near operating at full capacity. That all requires those more strategic skills that you don’t ordinarily will necessarily see.

Jonathan – How did the operations with finance teams of companies in the private space that have liquidity problems such as for instance travel or hospitality compare with those that have real turnaround specialists to hand?

Karl – It’s a good question. We don’t use external turnaround specialists, we don’t really see any CROs – corporate restructuring offices – at all. Furthermore, challenged investments were in a difficult space because the sector changed and something has become really difficult, or pricing of external commodities has moved we will use external non-execs with experience. Occasionally for a cash management job we’ll use interim operators – the kind of people who sit behind the big four. But there are some sectors that are really, really tricky to manage, essentially where your business has declined to zero, perhaps retail or hospitality. Travel is another one, we’ve got experience of that; they are really difficult, we’ve had to act quickly, but essentially those businesses have been mothballed. We haven’t got any investments in the hospitality space and that to me looks like one of the most difficult of all to come out of. Where we’ll sit by Christmas, who knows?

Ben – Yeah turnaround has the advantage of being highly, highly focused. The sense of having a strategy that will work is equally as powerful, and that doesn’t necessarily – as Karl says – have to be produced by a CRO. It could be produced by the incumbent team and perhaps enhanced by non-execs, who are specialist finance, CFO-centric. So it’s hard to answer generally, but I think each situation – the closer you’ve got to the right strategy, the less they need to bring in a turnaround situation.

Karl – Yeah I mean it depends on the individual from a private equity perspective. I’ve spent 20 years in private equity my background before that was in restructuring within one of the banks. Some of us have got the skill set and I’ve been through it before, but it is different this time it does feel very different.

Ben – The Acuity MethodTM which you mentioned earlier, Jonathan, the way that The Acuity MethodTM works is that it assesses the capabilities of a finance director or a senior financial controller or CFO to how they going to perform against the five dimensions. We spent a long time developing this proprietary approach and it’s highly effective. One once the assessments come through it’s very obvious to us which candidates have the skills across the dimensions which will make fit for purpose for our needs. We say that recruitment companies have candidates. As a professional services business, Acuity has Associates and FDs or CFOs graduate from being a candidate to being an associate by demonstrating and having the skills validated through the processes so that we are comfortable to put them into our clients in the knowledge that they are going to add value. Across the five dimensions. 

Jonathan – And with that in mind, simple question, how difficult is hiring a new FT or CFO in an environment such as this?

Ben – Well, there’s a lot more people out there, but our years of assessing and validating skills in this world suggests that there is a normal distribution of talent so if you’ve got more people available to do work that means you’ve got more people at one end of the bell curve and more people in in the middle of the bell curve and more people at the right end of the bell curve. So you might find it easier to attract CVs from individuals who wish to help because perhaps they don’t have anything else to do. But the challenge still remains over which of them are actually fit for purpose. And so we believe that The Acuity MethodTM is the solution to that conundrum.

Karl – I can give an anecdotal example here. I wouldn’t have thought it was easy to be honest, because you can’t meet people, but a lot of this stuff can be done by Zoom and informally. But I am aware that we’ve done exactly that on one of our portfolio companies within the last few weeks so it definitely can be done, but it is not straightforward and as ever with hiring an FD to an extent if you need someone short notice, there is a limited gene pool.

Jonathan – So lastly this is a question for everyone here – is there a message of optimism, which you can give to companies facing an uncertain few months ahead?

Ben – I’ll kick off by saying difficult are the times where we learn and get better, so let’s make sure we make use of this particular time to do the things that have perhaps been important but not urgent, which can get sidelined – so the more strategic elements. So we have clients that are spent and taking away all of their operational capabilities and turn their attention to building a brand, building of community, building of strategic partnerships. This is the time where you can steal a march on your competitors by getting better and communicating better. Even if you’re not able to operate, these are difficult times, so let’s learn, let’s get better and let’s invest the time that we’ve been artificially given to improve our businesses.

John – If I can add to that, I think what a lot of companies have seen – and Carl mentioned that earlier on in the conversation – is how teams and employees have pulled together to try and get through these difficult times and I think it’s something for senior leaders to keep note of going forward. That whether someone is working from home or within the office they are always thinking about the firm and how to grow that firm. Furthermore, I think a lot of people – and I think Carl mentioned this too – a lot of people have been forced to act more entrepreneurially and they should try to maintain that thought once we go back to normal again because it can only be for the benefit of the business going forward.

Karl – Yeah, I’m going to cheat and make two points. On a micro level, and this is my recollection from the last financial crisis, we are already seeing it here that for mid-market companies this is an opportunity often to recruit higher calibre staff then you would not ordinarily get sight of, partly because people are shedding in the uncertainty and you do expect to get access to a different gene pool to the people you would normally access, so that’s something that people should try and capitalise on.

But on a more macro level, I think it’s important not to lose sight of the fact that this is a disease that everyone suffering from. But the cure is self-inflicted and it’s driven by government, for all the right reasons. I’m not calling for the lockdown to be lifted, but I do think that it is within government‘s gift to lift it and to continue to support the business going through.

It’s my understanding that the government and in particular the Bank of England are committed to not lose productive capacity within the economy and the government will continue to support businesses for a while longer than the timelines we are seeing and so I think that is a good reason to be optimistic for this. 

Jonathan – A good note to end on.

• John Farrugia, Partner at Cavendish Corporate Finance
• Karl Cockwill, Portfolio Director at NVM Private Equity
• And Ben Mekie, Director at Acuity Associates

Thank you for joining us today.