From $100 Million to $250 Million: How to use finance and accounting to grow your business (Part 2)
November 5, 2021 •ROARK
Using finance and accounting to grow your business from $100 million to $250 million requires the right people, process, and technology changes. You’ll see major changes to your business as compared to when you grew from $50 million to $100 million.
In our last blog post in this series, we discussed growing the team, organizational structures, attracting great talent, using specialized recruiting, and executive search for finance and accounting professionals as you grow past $100 million in revenue.
If you missed part 1 of this two-part series, check out: From $100 million to $250 million: How to use finance and accounting to grow your business (Part 1). In this post, we’ll talk more about the role of finance and accounting in different ownership structures, the leadership of the finance and accounting function, and how process and technology change during this growth stage.
Ownership structure affects the needs of finance and accounting
When we look at the requirements based on ownership and let’s map some of that back to the essentials in finance and accounting.
Finance and accounting in a public company
So if you’re a public company, you will have to be compliant with GAAP standards and maintain a strong position. You’re also measured by engaging with and complying with the GAAP standards, understanding SEC reporting formats, and deadlines. And while there’s more to it than just accounting, accountants are typically responsible for these tasks.
Now you have to manage the internal controls in the company and attest to them. So it depends on your market cap whether you are required to do so or not. And your attest will be audited by an outside firm. You are assuring that your CEO and CFO have certified the 3 0 2 and 9 0 6 certifications as required by the Sarbanes Oxley Act—which breaks this kind of corporate veil of legal protections.
Finance and accounting in the private equity-backed company
Your private equity companies will have less stringent reporting requirements than a public company, but they will be similar because you have external investors. External investors will require more paperwork, but their focus will be primarily on the company’s profitability.
Finance and accounting in a privately held company
If you’re in a privately held business, now is the time to make changes. And you should put the right people in place to take your company where it needs to go. At this revenue stage, many owners want to start taking more of a backseat at this point. Or they may have taken quite some time to accumulate the company to reach such heights. So you need to make sure you have strong people who can move into these positions for the second or third generation – or even just to enjoy the fruits of your labor.
Changing mindset for finance and accounting leaders at $100 Million+ in revenue
The managers have to think differently. And unfortunately, specific skillsets will need to be upgraded during any revenue breaks as we follow the series of milestone revenue points that we’re using in this series. But as companies grow past $100 million in revenue, they can’t solve their problems by adding employees. The issues become unmanageable, and the number of transactions increases too quickly. So, you need to rely on what Ernst and Young taught me about routine data processes to work through the high volume of transactions that happen every day.
You need to have controls that prevent or detect problems, and you should minimize the number of people required for corrections. And if you do not have people that think this way, they’re thinking about how to go in and fix everything through staffing. There’s too much data out there for an accountant to be able to manage without losing anything.
One of the biggest mistakes made as CFO to avoid
Eric Roark, described one of his biggest mistakes made as a Chief Financial Officer (CFO) recently. A lot of it had to do with budget, but you’ve heard of that saying: “Stepping over dollars for pennies.” Not in his case, but some of the management team. If you are implementing or have projects going on, use consulting to augment your team. Teams are typically at 90 percent, a hundred percent, or higher than 110% in accounting and finance.
A company may not want to invest in the additional operation, accounting, financing, HR, IT. This can cause a major project such as an ERP implementation or acquisition to drag on for extended periods that become too costly. When a company needs to undertake a significant undertaking and does not have staffing capacity, the time-to-completion of the project is delayed. Short-term savings are deceiving, and the long-term costs of those choices are realized once it’s too late.
Use interim finance and accounting professionals on leave or after a key leader leaves
The more employees a company has, the greater risk of people leaving or going on leave. Putting an interim professional in place is an important HR strategy to have at your disposal. The biggest mistake that companies make is when they rush to hire because of an open position. We’ve seen this cost them significant amounts of money.
Our management team needs them to focus more on the process and less on completing tasks. When you’re in control of a small company, it often requires many people to help. But when you get to larger companies, they have to have managers because there are so many people who are doing it, the management span of control gets balanced. When we take a broader look, the value of the technology becomes clearer. Technology helps with efficiency, which in turn saves money.
As we grow and build our company, let’s make technology a priority. We can’t as easily invest in it when just starting out, but now that we’re large enough, it is possible to invest in the right systems. You could save substantial money just in accounting and finance.
Hire a great CFO for your organization
When you hire a CFO really depends on the company’s structure, ownership, and how quickly they are growing. Often we do see them before the $100 Million in revenue mark. As an investor or CEO who is reading this, we recommend getting someone if you don’t have a CFO at $100 million to $250 million in revenue.
Our first question to you is–who’s the right-hand person? What happens to the organization if the CEO wins the lottery or gets hit by a beer truck? That CFO is usually the right-hand person to the CEO.
This can be beneficial, as they report directly to the board and then investors. It also provides an additional layer of protection because you have an independent party saying that information to the most critical people in this situation (investors, owners, board).
But if you have a good CFO, they should be working closely with the CEO to lead the company forward. So, it just becomes a game-changer to get that CFO in place. An executive search firm specializing in finance and accounting can be a great resource in helping you find the right “first” CFO.
What the CFO does to guide and drive the business forward.
I think different types of CFOs would best suit a company at different stages. I like talking about this topic because it depends on what the CFO’s specialty is.
If we talk a bit more generally about them, they will manage the complexity of reporting for an entity of that size. Suppose you’re the owner, private equity, or even an investor. In that case, there are so many complexities they get into reporting, whether it be to your banks, your bonding companies or insurances, or your investors.
Bring on Strategic CFOs
If you’re looking at a $100 million in revenue, the person handling your business should be strategically minded.
Strategic decisions will be thrust upon you, but not all people are equipped with those skills. I would consider CFO a term that has been diluted… so what some people might call a CFO is different from mine. That’s not in any way meant to take away from what they’re doing at the organization.
The CFO is defined as the one person who sets the strategic direction for an organization, often by looking ahead and focusing that organization’s resources on meeting future goals. The strategic CFO also typically leads other vital functions like human resources and sometimes information technology.
So you do want executive sponsorship or leadership to help and shape those directors. The next level of management, whether it be accounting, is prevalent in finance, of course. But typically, they’ll do it HR. There are some other functions that we’ve seen in different companies that they’ve taken on.
But that provides executive leadership and sponsorship, which helps develop those managers and grow their skills. Whenever the business is gaining, and there’s no room for growth in your organization, you’re most likely going to need a lending or investment need.
The CEO is great at being the company’s face, but someone needs to back up most of their claims with numbers. The CFO is a huge asset in that they have been analyzing trends and providing accurate financials to help support the CEO’s vision & goals.
And given our last discussion, you’re probably going to be looking to buy companies or sell yours. It’s now time to start taking on the smaller M & A transactions. But when opportunity knocks with a larger one, you should take it.
The amplitude of a company will get louder. You want one person to be the specialist for this issue, and if you are in either a publicly-traded or PE-backed company, the CFO needs to take up that role. Someone with external investors must have a CFO as well.
The CFO and cost savings
As a CFO in privately-held companies, Eric Roark experienced many challenges.
He recently shared a story saying, “They took too long to hire me and then left money on the table. These challenges led me to find opportunities, which was so helpful in putting much money on their bottom line. Right. And so we’ve done that, but I remember precisely one conversation with an owner and great guy, incredible entrepreneur. There is not a stronger sense of entrepreneurship or visionary in anyone else I’ve ever met. So compliments to him.
And so I got into his organization, and we worked through I was able to provide information, understand what went on in the company, and implement new initiatives. As a result, we got millions of dollars back into the company’s bottom line. And some of it was one-time, and some of the time, it was a residual cost saving that came through and revenue opportunities and strategic planning opportunities.
One day when the business owner of the organization approached me, saying that I had been with him for about three or four years. Probably around three, and he said, “Hey Eric! You’ve saved us so much money in year one! You’re doing all these great things to keep us even more money in year two:
You’re still doing a lot of it. And now this year, the third year, it’s kind of waning off, and he said, “did you know what I have to do to get you back on your game?”.
I thought about that for a minute, and he was right when we looked at the cost savings because I used to present that to the management team in revenue opportunities.
And I told him when I realized that the savings we could do in the past were based on mistakes that could have been prevented. In other words, opportunities not taken advantage of. So now you won’t miss out on those missed opportunities as we take care of them!
So you may think I make less as your CFO. But what happens is we find out before it’s too late, and if you have good financial foresight, those things will inevitably dwindle. And in the meantime, you’ll be getting revenue opportunities.
Strategic items that boost performance are often not accounted for and buried in financial documents. A good CFO is the one who will make sure you understand their value as opposed to just cost savings.
Sometimes the most significant value is in what they’re doing today, so you can avoid costs and seek out opportunities. So I suppose it was a fun discussion. I remember his face because he had this intense expression like, “keep up the good work”. All right. And I did, and it was a good educational time. Honestly, for both of us – respect to him for asking an excellent question.”
Being Prepared for Mergers & Acquisitions
My first of all belief is the best run companies are built to sell. There is a book titled “Built to Sell,” and I suggest reading it.
Run the business as if you intend to sell it.
But if you are running your business as if you intend on selling soon or have been thinking about that in the past, and do not want to sell yet, you may be thinking about other things that increase your multiple.
You are building intellectual property, looking at concentrations, expanding geographically, putting platforms in to accelerate growth. With regards to the EBITDA, you need ways of driving profitability and efficiency. Things like that will take a while, but they’re well worth it in the long run.
Business owners should constantly evaluate their business and make necessary changes for the better. Evaluate disciplines and reporting as if you’ll go through due diligence someday. The due diligence process for owners should make you feel better about your investment because if you have that sorted out and can comply with the processes, then it means you’re doing all the right things. As a result of the evaluation, teams often find things that aren’t right; sometimes they will want to lower the company’s value or have future liabilities.
Pro tip for entrepreneurs: always run your company as if you already plan on selling it one day.
Mergers and Acquisitions get riskier and more costly.
Another pro tip to consider is that the mergers and acquisitions are larger, will be riskier, will cost more money, and require a more significant capital investment. We’ve seen acquisitions that have crippled companies, but we’ve also seen some strategically sound purchases that strengthened them.
Build an M&A Team that’s always ready
You need to get it right. And that means you’ll need to be prepared. You have to prepare for anything, and if your company isn’t as well-prepared as others, you might not reap the available benefits. Make sure you’re ready; don’t be unprepared. To ensure you have the best possible M&A team, assemble a group of attorneys, bankers, consultants, and CPAs.
If that’s what you’re looking to do, make sure your M&A team understands the business. Make them feel at ease and get them in there with all the info they need. Successful transactions will be easier for both parties.
And look, if you have a team networking within your community, they might be bringing targets to you too. In time, they know your business inside and out.
Changing Systems and Processes for Finance and Accounting at $100 Million to $250 Million
There are several factors to take into consideration when you assess your current system. Likely, your company’s ongoing growth has created an incoherent mess and resulted in more confusion for everyone.
There are two methods of using technology. One where there is a single provider who does everything, and the other where you have the best of breed for each specific function.
But then we’re faced with the counterargument of how do our integrations look? If you have older legacy business software that needs to be integrated, prepare yourself for a challenging project. Is your ERP robust enough?
Many companies begin with a QuickBooks or other small software package, but once they start growing larger, they’ll migrate to Sage for an Intacct or something similar.
The more enterprise-level a company becomes, the more distributed and diverse its markets are. More automation will also come into play, requiring you to look at your systems again to ensure they’re up for the task.
Because it is a significant undertaking, I recommend you spend some time exploring all of your options. Some programs are designed to be automated; others require manual attention and automation.
One of the essential items to consider is what they call business intelligence. This will include things that handle budgeting and forecasting, as well as dashboards and analytics.
You should consider automating that process, using some if-then scenarios, as the impactful decisions you make will have huge monetary consequences. Providing more facts and numbers will enable you to make smarter decisions.
Robotic Process Automation in Finance and Accounting
One of the other recent changes to work culture is what they call a “robotic process automation (RPA).” With this idea, routine data processes can be completed by AI and technology.
Elimination of Paper and Digital Document Storage
Currently, our systems and technology are not entirely in line with a paperless world. If you’re larger than the middle market, then you’ve probably already been approached by vendors offering solutions. However, as more small companies grow into larger ones, simple change management strategies (such as digital document storage) will be implemented.
Automation of Close Processes and Bank Reconciliations
Some software systems can process or read the text contained in images. BlackLine is one of those softwares, and it helps automate close processes and bank reconciliations.
Automation of Payments and Collections
There are also other types of software that help with automation, like not having to handle manual checks and collections due to electronic payments being all the rage. And with this, we’re getting away from emails on this automation, debit cards, the post office that causes a delay in things, and business happens in real-time.
Many new developments are happening in the technology and systems space that help with accounting and finance. This technology is arriving from the enterprise but becoming widely available to companies with revenues ranging from $100M-$250M.
We see technology replace the manual work that we used to do and what we’re doing.
The high-tech culture in the States is seeking to upgrade skills and differentiate its professionals from the rest of the world. If you reach a revenue size of about $100 million, it is time for technologies that accelerate business and generate up to 250 million per year.
I am very excited about this time. Opportunities are everywhere.
From startup to $250 million, things change significantly for entrepreneurs in accounting and finance.
There are three milestones you can look for in the future as the organization grows beyond the middle market. Stage one will be $250 to $500 million in revenue, the second stage is $500million to a billion in revenue, and the third stage is when your business reaches one of the top 500 fortune companies.
So yeah, at each stage, there are different challenges. In this series of posts about starting to getting a solid middle-market company, we looked at that. And those were fun times, lots of change, a lot going on and upscaling–those were great times. But this company is your baby, and it’s growing up whether you’re an owner investor or part of the C-Suite.
Thank you, Eric, for all the knowledge and advice that you shared with us as we navigated the journey from when we were thinking of how to name our company in that startup phase, all the way up until this point – when we’ve reached the $250 million mark.
Any parting words before the end of this series?
I help entrepreneurs, investors, and executives—throughout the business world. My joy is in seeing them achieve their dreams while we grow together. What you’ve managed to do is so hard, and there are so many rewards along the way. I’m proud of what you have accomplished.
Well, thank you, Eric. This has been from 100 million to $250 million in growing your business using finance and accounting. If you didn’t get a chance to see the other episodes or read other posts, we also had segments on starting a business up to $1million in revenue, growing it up through the $1-20 million range, then on to the $20-50 million as well as $50-100 million range.
So I encourage you to watch any of those episodes on Youtube or read these posts on how finance and accounting can help grow your business.
If you’d like to take your internal finance and accounting team to the next level, we’d love to discuss and see if we can help.
Like this series? Check out each of them in our series, From startup to $250 Million: How to use finance and accounting to grow your business.