Five reasons why you need a good FD

It ought to be the entrepreneurs' motto: 'When the going gets tough, the tough make sure they've got a great finance director.' Because all the innovation, marketing and production nous in the world isn't going to save a company - or keep its growth rate up - if the financials start to go wrong. We're not saying 2008 is definitely going to be tricky... but it could be.

Of course, you can't always trust entrepreneurs to trust their FD (or keep a tight grip on the numbers themselves). Which is why so many private equity investors look to their portfolio FDs for truth, sanity and common sense. So... do you have the right financial managers in place? Not just good FDs and controllers - ones with a 'private equity mindset'?

It's a pretty crucial question. And we can think of at least five reasons for making sure the FDs at your portfolio companies are up to snuff in 2008 - and why even the ones you think are doing a great job could do with some extra finance function muscle in the coming months.

Cash is no longer cheap

OK, so the credit crunch has been overdone as far as the mid-market is concerned and most of your portfolio companies have made do without excessive "covenant lite" debt on the books in any case.

But when the whole financial system is as jumpy as it is right now - with plenty of uncertainty plugged into the system - having an FD who knows how to tighten their grip on the balance sheet and the cashflow without stifling his fellow managers is critical. You never know how much they're going to have to do with the funds they already have. And it's not just the multi-billion dollar buyouts that are nervous, either (http://snipurl.com/peston1).

It's the economy!

Food prices rocketing? Inflation stoked by booming commodities? House market stuttering? GDP growth uncertain? The media are calling it a "turning point for the economy" (http://snipurl.com/evandavis1) and even Bank of England governor Mervyn King is warning that inflation, growth, sterling, housing and the public markets are in for a bumpy ride next year. (Don't take our word for it – it's all in the quarterly inflation report: http://snipurl.com/boenov07)

When things start to get uncertain, you need to know investee companies have someone with sound risk management credentials. 2008 could go either way, so your portfolio financial managers must have great forecasting and risk mitigation skills. But while you need an FD and their team to be able to manage on the downside, ideally they should be able to spot upside risks, too...

Real risk management

After all, uncertainty creates opportunity - and if the finance function is helmed by an audit-obsessed "accountant" with their eyes on the liquidation value of assets, you're in as much trouble as if they're a gad-fly MBA who never says "no" to the chief exec.

Only the smartest FDs - with the most efficient, effective financial controllers supporting them - will manage real risk rather than take the safest route. That particularly pertinent given the flexibility many PE firms are adopting on exit strategy (we written about this at http://snipurl.com/nervy2008exits). Finance execs with the right mindset are going to stay positive and focus on value if the plan changes to accommodate bumpy capital markets through 2008.

Mid-market deal activity could rise

The net effect of the credit crunch hitting big leveraged deals and uncertainty creating opportunities in almost every sector is that there is likely to be more big-fund private equity cash looking for a home - in the mid market. "I think that the volume of deals could be potentially larger in 2008 than in 2007," says Donald Spitzer, US national managing partner for private equity at KPMG. "However, the total dollars invested may be lower, because the type of mega-deals we have seen recently are unlikely to continue."

Investee companies that can demonstrate excellence in financial management could be seen as lower risk transactions than those where the numbers aren't as tight - so having sharp guys in the finance function starts to look like an exit-value enhancing decision.

Process, process, process

Outsourcing and ERP used to be the preserve of big companies. Not now. The competitive environment demands that every business looks for cost-savings and efficiencies to drive the bottom line. Think your MDs will relish the challenge of driving out "process cost"? Not their job, surely.

But while the FD - whose process-driven ethos and joy in systems' design - is often well placed to find that hidden value, too many of them don't think outside the numbers. With the right finance director - freed to look strategically with the support of a strong financial controller - portfolio companies can drive out cost delivering fast increases to EBITDA.