An Urgent Revamp to Reporting

  • By AFP Staff
  • Published: 6/27/2023
Financial report, laptop, graphs

After a private equity firm acquired a professional services company, a VP of FP&A came on to overhaul the monthly reporting for the new management and owners. The VP was tasked with bolstering the technical ability to get the reporting out and the challenge of designing reports that meet the different needs of various stakeholders.

The AFP FP&A Case Study series is designed to help you build up key FP&A capabilities and skills by sharing examples of how leading practitioners have tackled challenges in their work and the lessons learned.

Presented at an AFP Advisory Council meeting, this case study contains elements that are anonymized to maintain privacy and encourage open discussion.

Insight: For this private equity roll-up, delivering meaningful management reporting required technical connectivity and the ability to craft data-supported performance theses for internal and external audiences.

Company Size: Medium
Industry: Professional Services
Geography: U.S., Regional
FP&A Maturity Model: Business Partnership, Data Planning

Partnership: Demonstrates business understanding and delivers insight; builds partnerships with individuals and teams. Upholds the perspective of the CFO while supporting and serving the business.

Data planning: Data is actively managed so trusted data is accessible to all at minimal effort. Growth of data and tools is anticipated and planned, so standards are developed in partnership with IT.

Background: General Information About the Company

In October 2021, a professional services company was acquired by a private equity firm as a platform investment to which they would rapidly acquire smaller firms, integrate them and increase revenue to $1 billion in the next five years. The investment thesis also called for operational improvements and a change in the service offering mix to weigh the higher profit margin advisory business more heavily.

The presenter of this case study was brought on as the VP of FP&A, six months after the acquisition by the private equity firm, to develop the FP&A team, build up the budgeting and forecasting process, and be the primary contact to the private equity firm for monthly reporting and all other inquiries.

With only an interim CFO, an interim controller and a minimal team, confidence in the data quality was low, access to the information was poor, and the situation was frustrating for everyone. While the company did have a robust IT infrastructure, the company used an old version of an ERP.

Challenge: The Work or Difficulty FP&A Had to Address

Prior to the acquisition, the company was managed on a cash basis. This is not an uncommon practice in a partnership, where all profits are taxed at the partner level, and therefore, cash is pushed out to the partners prior to year-end to pay taxes.

The new private equity owners, whose focus was more on long-term value, required a change to accrual accounting to monitor the company’s EBITDA. This would later be used as the basis for a future transaction in which they hoped to sell the company based on a multiple of the EBITDA.

Prior to the acquisition, no monthly financial reporting was done at the company. Six months after the acquisition, the private equity firm worked with the existing interim finance team to create a monthly reporting package that they could use to help monitor their investment. Unfortunately, due to the lack of full-time, dedicated resources, the reporting was limited, complicated and took an enormous amount of time to complete.

Adding to the confusion, the controllership function had to transition the accounting to accrual for both current and future periods as well as the year prior for comparison reporting to the private equity firm. Within the past year, the company had done eight acquisitions. For each of those acquisitions, the private equity firm wanted reporting on the basis that they owned the company from January 1 forward, even if they did not actually buy until October.

The VP was tasked with two different but related challenges that he had to solve simultaneously: (1) the technical ability to get the reporting out and (2) the management/design challenge of meeting the needs of various stakeholders.

Approach: How FP&A Addressed the Challenge

The VP started with the metrics that were being produced currently and how they were created. He worked with management and PE firms to define the metrics and iterate them.

The technical challenge to getting the reporting right.

Integrating different companies being added to the company’s platform was a big challenge, as each company had its own system and reporting metrics. When a new firm was brought online, there was a decision to make a direct cutoff: from the date of transaction forward, the firm was on the company’s ERP system. This involved a training process to get people what they needed, so there was a lot of preparation work involved.

This reporting structure was the fulcrum of the reporting package and required inputs from many different data sources as well as judgmental inputs around revenue recognition and cost allocations.

The tagging conventions in use were inconsistent across the various companies that had been acquired. At that point in time, there was no desire to develop a consistent lexicon. When a business owner needed something, a report was put together through a customer query. The result of this process was a bunch of disjointed queries that did not work well together.

After identifying the data sources, the VP dug into the data warehouse to identify the metrics being tracked and locate the key metrics and data. Due to the structure, there were many tables that did not have matching keys in which to link them, causing frustration for users of the system and complicating the data extraction problem.

Using custom SQL queries, Power Query and Power Pivot, the VP imported data sets into Excel from the data warehouse and created a data model that could be updated on a periodic basis. Using PowerPivot, the VP extracted the data to an Excel workbook and developed a reporting package that followed the same structure that all were accustomed to. He also added new charts, graphs and analysis to better support leadership and provide transparency to the private equity firm. This was a proof-of-concept report to test and stabilize the design and build prior to adding automation for the longer term.

The management side of reporting

When it comes to reporting, the VP had to reconcile the various constituents’ needs. Internally, there is typically a CFO book, which covers the benchmarks that the CEO and senior leadership team committed to deliver, and the business operations required to run the company.

A subset of the CFO book is typically created for either the Board or the private equity investor. The private equity firm had an investment thesis when it bought the company. The firm knew why it bought the company and how it would value the company before selling it and wanted to measure its performance against the thesis.

For example, the private equity firm wanted to increase the percentage of the work portfolio that went to advisory business because it resulted in higher margins and faster growth. Initially, when the VP got to the company, he couldn’t answer questions such as, “Why outsource more to third parties? Why decrease the number of partners?” He needed to identify the metrics they needed to answer these questions and build the reports that told the story.

Ultimately, metrics tell stories of how the company is operating. How and to whom you tell the stories is important. You have to understand your audience and tailor those stories, supported by analysis, to your audience.

Outcome: What Came of FP&A's Efforts and What Was Learned

The new data structure streamlined the reporting process, so reporting could be done within a reasonable timeline after the accounting close, allowing the team enough time to add commentary and socialize the results with leadership before presenting the report to the private equity firm.

Transparency drastically increased, and as a result, the relationship with the private equity owners improved. Because they had transparency on why the numbers were changing, they were able to make their monitoring investment decisions.

Looking at the long-term outcome, the planning system and reporting was purchased, and the work done on the monthly reporting package greatly informed what and how data could flow into the system to support the creation of planning templates that can be completed at the division level on a consistent, periodic level.

Build up key FP&A capabilities and skills with AFP’s FP&A Maturity Model, a roadmap to help you and your team become leading practitioners.

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