Aira Pineda knew something had to change when she found herself perpetually in firefighting mode. Scrubbed, the outsourced professional services firm where Pineda serves as CFO, was doubling every year, and the team was adapting processes on the fly to match the growth.
With some long-term thinking and investments—new ERP, new payroll system, more hires—Pineda was able to get things back on track, and prepare the organization for the future.
Now, in conversation with CFO Leadership, she shares early warning signs and strategies to avoid this pitfall, ways to ensure your finance team provides insight as well as accuracy and tips for profitability analysis.
Many CFOs find that growth can outpace financial infrastructure. What are the early signs that finance is no longer enabling strategy, and how should you address that before it becomes a constraint?
When an organization scales quickly, the finance function often finds itself in firefighting mode, adapting its processes to match the growth. This happened to me at Scrubbed where we were doubling size every year. We had to make changes such as switching to a more suitable ERP, hiring more people, finding a new system for payroll and finding new banking partners.
There are a couple of signs you should look out for. One of them being that the finance function operates on a fully reactive basis by managing cash flow on an ongoing (weekly) rather than a forecasting (quarterly) basis.
Another one is if month-end goes past 10 days, you are likely spending more of your time in manual reconciliation activities versus analyzing the end of month results. The last one is if your organization is using a web of complex spreadsheets outside of your core ERP system to calculate basic metrics like revenue recognition or utilization.
Here’s a few things you can do to combat this early on. To proactively shift from maintaining assets to building a system of assets through efficient automation, you must first make large investments into your company’s systems and processes, like ERP and financial technology, before there are failures or breakdowns in your asset systems. By automating routine transactional AP/AR accounting systems, payroll processing and the basic reconciliations for your books, you create additional bandwidth for your team to focus on process improvement and ultimately re-establish the finance function’s ability to serve as a partner in achieving high performance.
There’s growing emphasis on separating reporting from forward-looking analysis. How should CFOs think about structuring their teams to ensure finance is driving insight, not just accuracy?
Insight is where finance adds real enterprise value. In my finance team at Scrubbed, I have a team in charge of accuracy of historical data and a team in charge of forward-looking analysis and insight. As a bonus, these two teams counter check each other.
There are a few ways to structure for insight. The first is to formally separate the controllership—i.e., accounting, from financial planning and analysis. The controllership owns historical accuracy, compliance and the close process. FP&A owns the future, forecasting and strategic advisory.
From there, embed FP&A professionals directly into the business units. They should sit alongside practice leaders, understanding the operational drivers, like headcount constraints, pipeline conversion and billable utilization, not just the GL codes.
Finally, when building the FP&A side, index heavily on communication skills. An analyst can create an intricate model but also needs to create a clear, actionable story to help leaders in different areas make decisions. A CFO must translate the model into a narrative for the leadership team to implement the model effectively.
Scenario planning is often discussed as a best practice, but difficult to implement well. What does effective scenario planning look like in practice, and how can CFOs make it actionable for leadership teams?
A static annual budget is often obsolete by the end of Q1. Scenario planning is critical, but it fails when it becomes an overly academic exercise that lives exclusively in the finance department.
Here’s what effective practice looks like. Start by building scenarios around your top three to five operational drivers. For a firm like Scrubbed, examples are utilization rates, average billing rates and talent attrition. If you change a driver, the model should immediately reflect the impact on cash flow and EBITDA.
A scenario is useless without an action plan, so link specific financial thresholds with specific operational actions. For example, “If pipeline turnover reduces 15 percent in Q2, we suspend non-billable acquisitions of headcount and reduce discretionary media spend by X percent automatically.”
To avoid analysis paralysis, limit forecast scenarios to three: base case—most likely to occur, downside case—stress testing, and upside case—excessive growth potential. Conduct a review during the monthly leadership meeting and assess which lane the business is heading.
As businesses scale, high-level metrics can obscure true performance. How should CFOs approach profitability analysis to better inform strategic decisions without overcomplicating the business?
Margin erosion is often obscured by growing revenue as there are typically new services added in the professional services space or customers wanting customized solutions that may erode your margins even if the revenue continues to increase.
Two approaches help cut through that. The first is to move down the P&L to measure contribution margin by cohort: evaluating each service line, each customer and each geographic region. The second is applying the 80/20 rule.
Be aware of how you allocate overhead expenses to customers that are not directly associated with them, how many expenditures you are attempting to allocate to customers and the risk of creating complicated, debatable metrics by over-allocating every minor overhead expense to a customer, like office supplies or specific software tools.
A better method is to allocate the major expenses directly associated with the employee, which produces a very accurate picture of the profit margin (80 percent) for the particular service line, which is generally sufficient to make key business decisions regarding pricing strategy adjustments, evaluating costs for unprofitable customers and focusing on high profit margin lines of business.
