Acquisition opportunities were on the agenda. The group’s operating cash flow was creating uncertainty for the CEO and owners. Understanding the relationship between reported performance and cash generation became important to assessing the financial capacity for further expansion. The group had access to financing. What required closer examination was how the business generated and consumed cash, how that would develop over the coming months, and what it meant for investment decisions. This became a central part of an interim CFO assignment in a Nordic technology group with private equity ownership.
The starting point
The group operated across several markets, with recurring revenue and other sales contributing to its financial performance. Its finance team was small, and limitations in system support and data quality meant that even relatively straightforward analyses could require substantial manual work. Monthly reporting, audit work, forecasting and requests from management and owners competed for the same limited capacity. The business needed both experienced financial leadership during a CFO transition and additional resources to carry out the analytical work. An established cash pool and revolving credit facility provided substantial funding headroom. Assessing the capacity for further acquisitions also required a clearer understanding of the existing business’s cash requirements, including seasonal movements, tax payments, interest and investments.
What needed to be put in place
The purpose was to build a clearer explanation of cash development and examine the assumptions behind the forecast. Management needed to understand which factors affected the timing of cash flows, which reflected ongoing funding requirements, and where uncertainty remained. During the assignment, the finance team was expanded. The interim CFO onboarded an FP&A professional who carried out the bulk of the detailed analysis and forecasting work. Producing useful analysis required time to work through the underlying data, examine assumptions and connect information from different parts of the business. The interim CFO provided direction, addressed accounting and financial management questions, and connected the analysis to the issues facing the CEO and owners. The FP&A resource provided the capacity to perform much of the detailed work needed to support those discussions.
The work took place alongside the broader CFO responsibilities, including monthly reporting, audit follow-up and budget work. In a small finance function, deciding where to direct limited capacity was itself an important management task. Some requests required extensive manual analysis, making it necessary to balance immediate information needs with the recurring work required to run the business.
Connecting reported revenue to cash flow
A particularly important part of the work was a detailed examination of Swedish accounting rules and how they applied to revenue reported by the Swedish business. The difference between reported revenue and cash generation was significant enough to require a deeper understanding of the accounting behind the figures. Interpreting the cash-flow profile meant examining the relationship between revenue recognition, customer invoicing and cash receipts. The accounting review therefore became an essential part of the financial analysis. This also mattered for the group’s internal funding assumptions. Earlier forecasts had assumed ongoing settlement of intercompany balances by the Swedish business. Those assumptions needed to be assessed against its actual cash-generation profile. Understanding the underlying business and its accounting was therefore important to assessing both local funding needs and liquidity at group level. The cash-flow work also covered seasonal effects, taxes, interest and other significant payments. Capital expenditure and investments supporting recurring revenue were relevant to the group’s overall liquidity requirements. The existing credit facility formed part of that assessment. As it was linked to the group’s cash pool, understanding liquidity required looking at cash balances, facility utilisation and remaining headroom together.
For the CEO and owners, this work was directly relevant to their consideration of M&A. Operating cash flow had made them uncertain about the financial room for further acquisitions. A clearer understanding of the existing business’s cash requirements was needed to assess how an acquisition might affect the group’s funding position.
What the client achieved
The team developed a clearer understanding of the main cash-flow drivers and the assumptions that required closer scrutiny. The work brought together accounting analysis, forecasting and the practical operation of the group’s funding arrangements. It also gave management and owners a better basis for discussing the relationship between operating performance, liquidity and acquisition ambitions. The analysis helped frame the questions that mattered: how much liquidity the existing business required, when it would require it, and how confidently those requirements could be forecast. Expanding the team and onboarding FP&A support strengthened the team’s ability to investigate cash-flow developments while maintaining its recurring reporting responsibilities. The interim CFO maintained responsibility for the overall finance agenda while additional capacity supported deeper analysis and forecasting. This provided continuity through the transition to a permanent CFO.
Lessons from the assignment
- Acquisition planning benefits from a clear understanding of cash generation. Reported revenue, available credit and cash generation each provide different information, and their relationship needs to be understood. Understanding how the existing business converts activity into cash provides a basis for assessing the financial capacity for further expansion.
- Internal funding assumptions need to reflect the underlying business. Expected settlement of intercompany balances needs to be assessed against the cash-generation profile of the business making the payments. Understanding revenue recognition, customer invoicing and cash receipts is important to assessing both local funding needs and liquidity at group level.
- The finance function needs sufficient capacity to perform the work. Producing useful analysis requires time to work through the underlying data and examine assumptions. An interim CFO can help by setting priorities, bringing in the right support and connecting detailed analysis to management decisions.
What this means for PE-backed companies
For PE-backed companies considering further acquisitions, understanding the existing business’s cash requirements is an important part of assessing the capacity for growth. Management and owners need to understand how the business generates and consumes cash, how that will develop over the coming months, and what it means for investment decisions. The assignment illustrates how interim financial leadership can combine direct involvement in complex questions with building the team’s capacity to address them. In this case, onboarding an FP&A professional and drawing on that person’s analytical contribution were central to the work.
At ADVALO, we support companies through CFO transitions and periods of change, combining financial leadership with hands-on work in reporting, forecasting and liquidity management.
Please get in touch if these are challenges you recognise in your own business.
