CASE STUDY 14/12
Can a Strategic Finance Office add
10% to your bottom-line
by rethinking your business verticals?
The Challenge
The company had 5 lines of business (LoBs) which it had classified as independent functions that only depended on centrally for management time, governance, and support functions. The business & sales teams were separately allotted to each LoB as it required domain expertise to make a sale. The marketing team was a shared function whose time was allocated across all the LoBs based on the revenue generated by each LoB.
Despite achieving over 20% CAGR over the last 5 years, the accrual of cash was reducing. The company continued to maintain profitability above its industry peers and hence were unaware that there could be an issue. During the same 5 year period, the company had also not made any sizable infrastructure spends.
Something was amiss. Enter Prequate.
We were brought on board to recognize opportunities for improving profitability with a perspective of cost optimization and boost the overall reporting frameworks for performance. Within 6 months of working with the business, we realized that while the business continued to grow, the profitability seemed to stay hovering around the same figure, though the time utilization numbers improved. This meant that the problem was less tactical and more strategic.
Knowing the why
The power of looking at a business outside-in is something that businesses tend to forget to do after a period. As the management gets busier in day-to-day operations, they forget to re-evaluate periodically what they are doing right and what they are doing wrong. Further, what worked in the past may not be what is working at this point in time for them. The value of the SFO, which functions as an external problem-solving crack team comes in here.
"
Because something worked well in the past does not mean it will work well today. Every few years, a company needs to look inward at everything they're doing and evaluate 'why'. Here, an external team can be the difference between knowing and actually doing something about it.
"
Pradyumna Nag, Partner
The Engagement
We were brought on board to recognize opportunities for improving profitability with a perspective of cost optimization and boost the overall reporting frameworks for performance.
Within 6 months of working with the business, we realized that while the business continued to grow, the profitability seemed to stay hovering around the same figure, though the time utilization numbers improved.
This meant that the problem was less tactical and more strategic.
The Approach
The first step to solving a problem is understanding how the business was making money mathematically.
Step 1
Introduce a more structured method at capturing costs relating to business operations of each LoB (right from the marketing team to post-sale support) + standardize reporting languages across all the LoBs
Step 2
Execute a detailed LoB study of all the LoBs with an eye for moving from allocations (distributed by share) to the allotment (identified for a specific purpose)
Step 3
Identify under-performing/ unprofitable/ onerous LoBs and deep-dive to understand the reasons for their impact on overall profitability
CASE STUDY 16/08
Can a Strategic Finance Office add
5% to your bottom-line
by rethinking how you collect
on your receivables?
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About the client
Marquee*, Pte Limited ( 'Marquee' ), was a growing 5-year-old company having 20% YoY growth while adding new accounts. The company was able to maintain an industry-leading PAT margin of 20%+. They have a functioning Finance Team of 15 members with the VP of Business playing the role of a CFO as well. Marquee had its development center in India while headquartered in California.
Industry: Technology Services
Location: United States
Size: 200+ employees
Disclaimer: Considering the nature of work, client names & organizational specifics have been changed to protect client confidentiality.
The Challenge
Marquee while growing YoY had been suffering from a common problem - growing working capital outages despite being profitably run. As a company in the growth stages, the cash flow challenges tend to become a hindrance to service more accounts and take key resourcing decisions. While the Income statements looked very sound, dealing with cash flow shortages was a bi-monthly affair.
Over a period of time, the company had grown familiar with the age-old mantra - follow-up = payment.
Hence, the solution was more follow-up = faster payment.
But this is easier said than done.
In our experience of working with over 200 businesses at that time, this works only in 30% of the businesses and is a short-term fix that is very taxing on the finance teams. The company relied on continuously utilizing the banking facilities to manage cash flow needs continually.
In order to get out of the people dependent cycle, the business needed to be looked at differently - at what made it unique.
Enter Prequate.
Prequate's approach of merging management practices to finance and solving problems in a manner that is sensitive and understanding of the business and what makes them unique made the difference.
Knowing the why
Over the next 3 months, we observed that the company was averaging a DSO of between 50- 60 days.
While this was a standard across many industries, in a services company, it can be a major cash draw from the system. Project managers, when asked for the reason for long delays in their accounts, responded that they have asked the Finance team to make the follow-ups more aggressive. The finance team, on the other hand, countered saying that they were not getting a response on follow-ups and had no recourse but to wait. A typical problem of working with international customers, they both said.
For a company of Marquee's size, any improvement in DSO could lead to an easy success if things were improved.
"
A business is made of its people. Understanding that also means that knowing carrot and stick approaches do not necessarily work. Enrolling stakeholders is a key element to any transformation and goes beyond anything number crunching can deliver.
"
Pradyumna Nag, Partner
The Engagement
Marquee hired Prequate under the SFO model to help them understand how this problem can be fixed.
For a company of Marquee's size, any improvement in DSO could lead to an easy success if things were improved.
To deduce the root-cause, we performed the following steps:
Step 1 / Track and trail DSO
across all clients and understand the payment terms agreed in the SoWs.
Step 2 / Compute the cost of the DSO
and the impact that improving DSO can have on the business and whether there was a problem worth solving and how much effort to expend.
Step 3 / Understand the cycles and rationale individually
across all projects from the time revenue is earned to when it is collected and coincide with them by drawing up a time-casting sheet.
The Approach
At this stage, we realized that Marquee, had scope for improvement in:
Time from:
-
recognition to invoicing +10 days
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invoicing to confirmation for payment +7 days
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confirmation to first follow-up +5 days
-
follow-up to collection +5 days
The Prequate Difference
Easier said than done, change cannot be implemented without the support of the entire eco-system - project managers, heads of business, and the finance team.
Change can happen only when you become cognizant of the people element of the business. Once the understanding stage and time-casting workings were prepared, we planned for a joint meeting with all these stakeholders. Before the meeting, the prep work to make changes was initiated.
Step 4 / Enrol the stakeholders
While the best industry practices were already planned, the main task would be to enroll all stakeholders to align on a few important points:
-
DSO is an important factor for the company
-
Each of you can influence the DSO in your own way because of the relationship you maintain with your accounts
-
What can you do to help as a functional person?
Step 5 / Get buy-in
Giving people the autonomy to find a solution that works for them is a key element of an exercise like this. All 3 stakeholders came up with solutions that they felt would work. They ran them through the Prequate team who facilitated an unbiased conversation and gave them examples of most effective industry practices.
Step 6 / Craft incentive structures and tie-in to KPIs
by adding DSO of their accounts as a key part of their OKRs and provide them with a support system to be able to bounce off challenges if they come up.
Step 7 / Celebrate small improvements
to keep the momentum on the goal, the best-performing account heads were celebrated for their achievements in the month.
IMPACT
Business Roadmap Advisory
Strategic Finance Office
Investment Banking
Sell-side
Investment Banking
Buy-side
Mergers & Acquisition
Advisory
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