Enhance your private equity company’s approach to cash management.
Cash management strategies are often essential when it comes to boosting valuations and putting free capital to work, and private equity companies can improve valuations by using working capital levers. Meanwhile, improved order to collections cycles through process improvement and technology leverage and tactical utilisation of working capital funding, including facilities such as supply chain financing and invoice factoring, are opportunities for CFO’s to release cash for investment in growth. Although most companies prioritise profitable growth, cash is often the constraining factor in a PE owned business with leveraged balance sheets. Thus it is important that private equity owners streamline their companies’ internal operations and cash management.
The highly sought-after divisional and group CFO Gary McGaghey has a wealth of experience in improving cash strategies for private equity companies. He explains that many private equity companies that are needing to fund growth, often don’t fully utilise their cheapest and quickest access to cash through working capital optimisation to accelerate free cash flow generation.
As a result, Gary McGaghey suggests that private equity companies adopt cash release options like improved deal desk operations, contract renewals, and financing options, including supply chain financing and invoice factoring. When buyers place greater value on free cash flow and operational rigour, they can often fund strategic initiatives in even the most challenging economic environments.
Here, Gary McGaghey suggests four ways that private equity companies can improve their cash strategies.
1. Improve the Use of Order-to-Cash Metrics Around Receivables
Many companies are light on inventory and payables. For these companies, improved use of order-to-cash (OTC) metrics around receivables (like weighted average days to collect, weighted average days if late, and days billing outstanding) can make it easier to achieve higher free cash flow. Focusing on improving operational discipline and implementing leading practices can help private equity companies improve these metrics by some margin.
As an example, Gary McGaghey notes a private equity healthcare software provider that found gaps in its OTC processes. The software provider completed an analysis of historical transactional data, assessed customer categorisation, and restructured its operational processes (including its collections and dispute management). The company’s attention to accelerating billing cadence was key to effective operational discipline. This led to a release of cash flow that they used to fund incremental acquisitions. Furthermore, it enabled the company to create more accurate cash forecasts. As a result, the company’s practices released five percent of revenue in cash flow improvements.
2. Improve OTC Metrics by Incorporating Cash Impact Into Deal Desk Operations
Companies that plan to improve OTC metrics can also incorporate cash impact into their deal desk operations. When it comes to subscription-based revenue models, the deal desk must price – and understand – the commercial arrangements that are most beneficial for the company, including those with end-user fluctuations.
Private equity companies can identify OTC improvements by completing a state and gap analysis, pinpointing clear deal acceptance criteria and processes, and producing a metrics dashboard. Cross-functional involvement can also help when it comes to aligning agreed-to deals with business objectives and downstream capabilities like billing.
3. Leverage invoice factoring strategies
Invoice factoring has historically been perceived as an expensive and operationally complicated source of releasing cash from a company’s working capital cycle. Thus CFO’s have often shied away from this opportunity. However, Gary McGaghey notes that the explosion of several invoice factoring providers at competitive rates, with less stringent covenant restrictions, and well equipped with robust technology solutions to take away the operational complexities, have provided an opportunity to release cash from working capital which private equity CFO’s would be foolish to ignore.
As an example, Gary McGaghey notes a private equity business in the media industry released a substantial amount of cash from its blue chip accounts receivable book through invoice factoring. The substantial cash pool which was created was used to fund transformational initiatives. The invoice factoring program operated within the constraints of the existing debt covenants and was well supported by a technology enabled factoring process which did not constrain the business operationally.
4. Deploy Procure-to-Pay Strategies
Finally, private equity companies that hope to improve working capital performance often find it beneficial to deploy procure-to-pay strategies. Gary McGaghey suggests strategies such as enforcing industry-acceptable vendor payment terms across its suppliers, implementing technology enabled accounts payable process improvements, and utilising supply chain financing programmes, can substantially stretch ones accounts payables book but, most importantly, staying within the parameters of agreements with suppliers and thus not risking disruption to supply or relationship damage.
When a private equity company focuses its accounts payable processes on supplier risk assessment criteria, negotiation strategies for changes to payment terms and frequency, and segmentation, the company can soon enjoy the improved cash flow.
Gary McGaghey reminds private equity companies that improving cash management and internal operations is often vital, despite the tendency for many of these companies to prioritise growth. Enhanced cash management is key to funding growth, so it’s important to analyse the working capital levers and consider whether keeping cash at the core of your strategy could drive success for your company.
Gary McGaghey has delivered impressive organic and M&A-driven growth in several private equity, privately owned, and listed companies. These companies span multiple sectors, including beverage, fast-moving consumer goods (FMCG), media, and pharmacy industries. He hires and cultivates world-class finance teams who work under his management to achieve major growth transformations for companies around the world.
In 2019, the €1.3bn end-to-end marketing production services group Williams Lea Tag elected Gary McGaghey as its CFO. Here, he oversees the implementation of commercial plans (particularly cash generation) and investment decisions that maximise the value of the company’s holdings. He is also the non-executive director of Fitmedia UK.