The Power of Data


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CFOs from World-Class Companies met over dinner recently at Restaurant Serenade, in Chatham, NJ, to discuss “Financial Analysis, Data Analytics, and Driving Strategy in World-Class Companies.” They came together as part of The World-Class Companies CFO Dinner Series, powered by CFO Studio.

David Wyshner, President and CFO of Avis Budget Group, led the discussion. Data is of critical importance to today’s CFO, he said. It is the key to competitive advantage. Historically, finance has been data-driven, but the emergence of big data and the growth of data analytics have further heightened its value.

“We are at a real inflection point regarding the importance of financial analysis and data analytics to help drive business decisions,” said Mr. Wyshner. “At Avis Budget Group, we are using data to drive decision-making and pricing, and to understand profitability from one transaction to another. It is helping us figure out when and where we make money, something that may sound easy, although it is not. It allows us to know what to optimize and when to acquire, rotate, and dispose of our fleet.”

Thomas Bongiorno, Senior Vice President and Chief Accounting Officer, Envision Healthcare, Greenwood Village, CO, framed the discussion. “The historic focus of the finance function was primarily tactical — close the books and ensure the integrity of the financial statements and disclosures with no surprises. This is now table stakes for a finance function. The payoff is in driving value through analytical insights, which represents a significant shift for many finance functions, but is a journey worth taking.”

“Historically, [financial planning] used to be about managing physical assets and the accumulation of wealth around the accumulation of property,” said Bud McGann, Chief Revenue Officer, Tidemark, a Redwood City, CA–based enterprise performance management software company and a CFO Studio Business Development Partner. “However, there has been a significant switch from asset accumulation to knowledge about people and information on netwoScreenshot (25)rks. We must leverage that information and bring it to the field.”

The CFOs in attendance all agreed that the growth of data-analytic capabilities is helping drive business decisions, with the further effect that CFOs armed with analytics are vital to operational business decision-making.

The biggest takeaway: In-depth analytics are allowing companies to hedge against volatility and to respond faster, and with greater insight, to changes in the marketplace.

Steps to Risk Mitigation


As Seen in CFO Studio Magazine Q1/Q2 2016 Issue


Chief financial officers for tax-exempt organizations came together recently at Red Knot Restaurant in Kenilworth, NJ, to discuss operational and reputational risk in their organizations. The event was part of CFO Studio’s Executive Dinner Series. The discussion leader was Bob Barry, CFO of Community FoodBank of New Jersey, one of the largest food banks in the country, distributing 44.6 million pounds of food in the year ended June 30, 2015. Mr. Barry led off by saying that public perception can affect the level of donations that tax-exempt organizations depend upon for funding. Today’s charitable donors do their research, so information that is publicly available can help or hurt tax-exempt organizations. “From a reputational standpoint,” he asked the CFOs from other tax-exempt organizations attending the dinner, “how do you meet your donors’ expectations and/or your grantors’ expectations?”

IRS Form 990 and Reputational Risk

Mr. Barry noted that IRS Form 990 is a valuable reputational-risk mitigation tool. It allows tax-exempt organizations to provide would-be donors not only with information about their finances, but also with insights into their mission and programs. “That form is something that we control. That is our document. Nobody sees it until we review it, understand it, and know what the implications are,” he said. The IRS allows any number of pages of supplemental information. Mr. Barry said that the FoodBank’s 2014 Form 990 supplement ran to 127 pages.

GuideStar and Charity Navigator, whose missions are to help donors evaluate charities before giving, receive the 990s from the IRS and use information from them to rank charities. A key point, said Barry, “is the first page, line 19, net excess/net deficit. I can tell you from my experience that the deficit is harder to deal with than the excess, because donors really don’t want to see money going to waste.”

Net excess is a potential difficulty for William Curnan, Chief Operating Officer for Ewing, NJ–based Advancing Opportunities, which provides services to individuals with disabilities. He said that when he files the Form 990, he adds an MD&A (management discussion and analysis) letter to explain that the organization’s mission involves building residences so that people with disabilities can live where they choose. He needs to explain this because the housing that Advancing Opportunities builds under the government’s Olmstead grants program looks on paper to be an asset. However, “I’m never going to sell it. I’m never going to leverage it. It’s deed restricted. I can’t do anything with it, but on paper, it’s a [large] asset,” said Mr. Curnan.

Form 990 is not required of religious organizations. John Balzano, Chief Financial Officer for Sisters of Charity of Saint Elizabeth, NJ—which is engaged in educating the young, caring for the sick and the elderly, and helping the poor—does not file a 990. He stated that a CFO, simply by his or her own reputation and knowledge, takes a lead role in answering questions about finances, whether or not it is a tax-exempt entity. “ACFO brings a sense of confidence and accountability that those financials are right. Whether you’re showing huge profits, or huge losses, you just need to present financial data properly and explain the results in the MD&A letter.”

Peculiarities to Report on 990s

Timothy O’Donnell is Chief Financial Officer for the International Neurotoxin Association, composed of physicians from all over the world who meet every two years to share information and the results of their work in promoting different uses for neurotoxins (treating migraine headaches and cerebral palsy, as well as erasing wrinkles with Botox). O’Donnell’s dilemma is that biennial meeting schedule, which means revenues spike every other year. “Our 990 looks very unusual,” he said, because there are swings in both assets and activity from year to year “due to the nature of the organization’s meeting.”

Early in her tenure at Family & Children’s Service of Monmouth County, Anna DeJesus, Chief Financial Officer, said she found it necessary to pull back on expenses because the organization was losing money. “We wound up with a slight profit [and for] the next three years, that profit grew, but we also did a new strategic plan. A high priority on the strategic plan was to build a [six-month] reserve.” She added, “Our programs are significantly funded by government grants, which can be cut at any given time. The reserve was extremely important.”

Ms. DeJesus said that she posts the 990 on GuideStar every year. “We’ve shown three years of steady growth, and our development department has seen a substantial increase in the number of contributors. Donors feel very confident in what we’re doing.”

“Because they believe in the mission, obviously,” said Mr. Balzano.

“That’s correct, they believe in our mission,” said Ms. DeJesus. That mission includes providing Reading Buddies to foster literacy skills for children in underserved public schools, Adult Protective Services to intervene on behalf of abused, neglected, or exploited adults, and 11 additional human service programs that reach more than 7,000 at-risk individuals and families annually, without including the organization’s thrift shop clients. “But there is no mission without money… no margin, no mission. Even Mother Teresa understood that.”

GuideStar and Charity Navigator look at the ratio of money that goes to General and Administrative (G&A) expense versus money spent on programs. According to Mr. Barry, no more than 12 percent should go to G&A. Also, Charity Navigator “looks at your development costs as a function of how it relates to money raised,” he said.

Both Mr. Curnan of Advancing Opportunities and Ms. DeJesus rely heavily on funding from government grants, and because of the nature of some of those grants, the organizations’ total G&A percentage is higher than 12 percent. Mr. Barry said that reporting of G&A on the 990 is totally separate from reporting that goes to the grantor. “I didn’t really appreciate how much [the rating organizations] looked at the 990 until we had a meeting with Charity Navigator. [The 990] is really what keys their whole analysis, and that is what donors look at now too.”

Screenshot (20)Schools’ and Colleges’ Funding

Eileen Black, Controller with Stevens Institute of Technology, a private research university in Hoboken, NJ, files a 990 but does not include MD&A information. Instead, the university relies upon its development department, other leaders, alumni, and students “to generate excitement about the mission and what we’re accomplishing.” The university has received national and worldwide recognition in publications. Also, the research in which Stevens’ professors and students are engaged —and its contribution to technological innovation— is also an important part of the university’s mission and has contributed to the reputation that Stevens has established. “This recognition has been a significant factor in rising contributions,” Ms. Black said. “Other nonprofits should consider using media, social media, or other avenues to enhance the excitement about their mission, not just the Form 990.”

Mr. Balzano, who has worked in both the public and nonprofit sectors, responded with a comparison of for-profit financial planning to tax-exempt planning. “When you create a [corporate] plan, people spend so much time on the expense side of it. ‘What’s my travel budget?’ ‘What’s my utilities?’ ‘What’s my insurance?’ [But in the tax-exempt sector,] you’ve got to spend your time on the revenue side of the plan. The Sisters of Charity sponsor two Academies and a College, and in talking with them, I always stress the importance of the revenue side. I say, ‘What are you doing to raise revenue and what are your metrics?’ They have their donors and their fund-raising events, but [those sources are] generally not enough to achieve their mission. Unless you build into people’s minds how to get funding, how that works, they tend to focus more on, ‘How can we cut costs here?’ You can never save yourself rich. That’s just not possible.”

“That’s the Howard Johnson’s model,” said Andrew Zezas, publisher of CFO Studio magazine and host of the event. “The story I’ve read is that decades ago, the CEO of Howard Johnson’s — the company that invented and originally succeeded at the roadside hotel-and-restaurant chain concept —eventually focused little on top line. It was all ‘cut expenses, cut expenses,’ at the expense of everything, including quality and service. The shame of it all is, when was the last time you ate or stayed at a Howard Johnson’s?”

The Compensation Pitfall

The salary of the tax-exempt organization’s CEO must be reported on the Form 990, and becomes public knowledge quickly. The form was revised in 2008 to require such organizations to report on the process of determining compensation. “Whether the [compensation committee is] making an adjustment for a bonus or whatever, you have to document what the change is and why and what data was used,” said Mr. Barry.

“We had some lean years during which the CEO did without pay, and I applaud her for doing that,” said Martin Mussman, Treasurer, New Jersey Coalition for Inclusive Education, which helps create neighborhood schools where children with disabilities and learning differences are welcomed as classmates and empowered to succeed. “So we negotiated a 10-year payout to make up for that.” But as a result, the Form 990 does not tell the whole story about that CEO’s compensation.

Some attendees mentioned that their executives expressed alarm that their salaries are publicly available. The salary of the CEO is, most agreed, a matter of great donor interest. People go to that part of the 990 and ask, “‘Is it justified?’” said Mr. Balzano. He added, “You should never be embarrassed about what you make if you’re really making a contribution and fulfilling your mission. But I find it interesting how so many tax-exempt leaders feel very sensitive about that information.”

“I think there’s that perception that we should be doing this out of the goodness of our hearts,” said Suzanne Schwanda, Senior Vice President of Finance and Administration, Special Olympics New Jersey, which provides year-round sports training and athletic competition for children and adults with intellectual disabilities.

Other Types of Risk

Besides reputational risk, the group discussed operational risks, including the risk of recession and the risk of having to sell real estate at an inopportune time. On the latter point, Mr. Zezas said, “The time to sell real estate, especially in sale-leaseback transactions, which are more structured finance than real estate transactions, is not when the organization is experiencing financial challenges. It’s the same approach as deciding when to borrow from a bank. The best financing terms, whether at a bank or in a real estate transaction, can most often be achieved when your organization is performing well. That’s the time you get the best terms, because your risk profile is more advantageous to banks, lenders, investors, and others.”

Another aspect of operational risk is being too dependent on funding coming from one source, such as the government or a foundation. “We worked really hard back in 2008 to diversify our sources of funding,” said Ms. Schwanda. “We actually expanded the number of special events we do, and gave participants incentives to reach out to friends and families to help sponsor them to reach different levels. That greatly increased the revenue we received from these fund-raising events.”

After nearly two hours of conversation, it was clear that the group members were experts at what they did, which was to facilitate people doing good and delivering services to others. “One of the challenges that all of you folks have in common is that you’re very often working for organizations that are short on resources, short on business acumen at some levels, and long on good intentions,” said Mr. Zezas. “Where strong leadership is unavailable, an organization may miss important opportunities.”

Mr. Barry described a conversation that he’d had with the CFO of a major international corporation who told Barry, “‘Your job is much harder than mine.’ That felt good,” said Mr. Barry. At tax-exempt organizations “we’re in the trenches. We deal with substantial risk without big staffs and dependable revenues.”

“There’s no stockholder taking money, there’s no owner taking money, but every dollar you spend, every dollar you save goes back to the programs and the people you serve,” said Mr. Curnan. “That’s unique. … You control whether you’ll be successful or fail, and that’s a tremendous responsibility.”

Mr. Barry agreed, adding, “That’s a true operational risk.”

Preparing for Private Equity


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As Seen in CFO Studio Magazine Q1/Q2 2016 Issue


Going after private equity funding was the focus of a CFO Studio Executive Dinner held at Blue Morel in Morristown, NJ. Luke McKinnon, recently having served as Chief Financial Officer of a global engineering services company, was the discussion leader.

“Going out and raising privScreenshot (17)ate equity is a huge effort,” said Mr. McKinnon.

Successful private equity firms have financial controls in place that focus on the basics of performance— revenue, operating margins, and cash flow. McKinnon was tasked with finding a long-term minority-interest investor for the global engineering services company he was part of, one who would be willing to have a seven- to ten-year relationship. “We found three firms interested in this length of term. Although they are called private equity, many of those investment companies are more family-run type places,” explained McKinnon.

The company McKinnon was with was global in nature, with operations in countries including Afghanistan, Iraq, Sudan, the Congo, Vietnam, Thailand, and Indonesia. “At one point, I had 2,000 bank accounts around the world,” said McKinnon.

This wasn’t the only challenge the private equity firm had to contend with. “They are focused on Day Sales Outstanding (DSOs) and cash flows,” said McKinnon.

This comment led to a discussion about DSOs. Bill Baldwin, Chief Financial Officer, Kepner-Tregoe, Inc., a Princeton, NJ–based capability development and consulting solutions company said, “Our most troublesome country is India, whether it’s with a major IT company or another Fortune 500 client that we deal, in India it’s a very, very long payment cycle.”

Delayed payments have become the norm. Historically, government agencies are known to be sluggish. “We provide engineering and consulting services to the government sector, mainly municipalities and counties, and they’re always dealing with funding and processing issues, so we’re probably at 115 to 130 days,” said Michael Dentici, Senior Vice President, Chief Financial Officer, T&M Associates, an engineering, planning, and environmental consulting firm based in Middletown, NJ.

Procurement and finance are becoming more interwoven than ever. “We’ve been involved in deals where the client’s procurement executives say, ‘We require 60- to 90-day terms, to which we counter that our prices will go up 15 percent, to which the client often agrees. This makes absolutely no financial sense, because the 15 percent fee increase is much more than the cost of money. There is a disconnect in the performance systems and communications between procurement and finance when this happens,” said Mr. Baldwin.

Peter Pfreundschuh, Vice President Finance and Chief Financial Officer, Immunomedics, Inc., a Morris Plains, NJ– based biopharmaceutical company, said not only are payments in each country unique, but they are ever changing. “When I first audited payments with some French companies, we were seeing 360-day payment cycles. A law was then enacted in which companies were required to pay on time.”

John McAndris Jr., Chief Financial Officer and Vice President of Finance, JJM Consulting, LLC was previously in charge of Latin America for Pfizer/Wyeth. “Venezuela is a country that is very tough, as many companies there never release money. You have to go to the government to get a special dispensation to get the money out of the country,” he explained. Screenshot (16)

This discussion put things in perspective for Andrew Wood, Chief Financial Officer, J. Fletcher Creamer & Son, Inc., a Hackensack, NJ–based contractor. “About half of our work is with government agencies and the other half is with private companies. Most of our work is with utility companies, which are semi-regulated. I used to complain…until I heard you guys. Our DSOs are in that 65- to 68-day range, which is not that bad, compared to all of you,” said Wood.

Selling accounts receivable is a standard form of managing cash flow and is something with which Gunther Mertens has experience. Mr. Mertens is President, North America Region of Elmwood Park, NJ– based Agfa Corporation, the North American arm of global imaging leader Agfa-Gevaert N.V. “Our DSO is actually 45 days, which is good. But what we see is that some bigger companies are asking us to offer extended-payment terms beyond the standard 30 days, in exchange for a supplier-side financing program,” said Mertens.

As an example, Mertens explains that if a customer owes Agfa $1,000 and payment term is 60 days, the customer’s bank will pay Agfa $995 after only 10 days. The customer in turn will pay his bank $1,000 after 60 days. “So the customer achieves his goal of improved cash flow by keeping his cash 30 days longer,” said Mertens. “The customer tries to make this palatable to Agfa by not deteriorating vendor’s cash flow by 30 days and instead improving vendor’s cash flow by 20 days. But there is a cost to the vendor similar to if the vendor were to sell its receivables.”

Prioritizing revenue cycle issues was of paramount interest to most CFOs at the CFO Studio Executive Dinner. “If you don’t bill them, they don’t pay. The start-up time is in the invoice. If you change the terms of your agreements, so that your billing point is earlier, you can actually move forward the payment,” said Barry Lederman, Chief Financial Officer, Whippany, NJ–based Halo Pharmaceutical, a contract development and manufacturing organization that provides scientific and development expertise.

A steady billing cycle is key to success. “When I was in professional services, one of the things we changed right away was, instead of billing at the end of the month, we started billing every two weeks,” said Michael Roth, Chief Financial Officer, Chief Operating Officer, Beefeaters Holding Company, a North Bergen, NJ–based manufacturer of dog treats. “We dramatically increased cash flow by billing major customers every two weeks.”

The Right Partner Screenshot (18)

“One of the most important lessons for everybody is to get the right people to invest,” said Ed Schultz, Principal, of New Jersey–based Highlands Business Group, a consulting firm. “It’s important to make sure the due diligence is right, that the fit is correct, and that you’re not going to get beaten up. A lot of deals go south because the private equity firm didn’t listen and didn’t gain a solid understanding of the business. Sometimes, they only want to do the deal and aren’t thinking about who they’re investing in.”

The correct fit is important. “There are two things to consider: style and strategy. Does everybody agree about what the company is going to look like in the future? Is there knowledge of the industry and can you really get along with these folks? What is their style going to be on a tactical basis, too?” ponders New York City–based Curt Cornwell, Partner, Transaction Services, PricewaterhouseCoopers, a leading professional services network, and a CFO Studio Business Development Partner.

Andrew Savadelis, Chief Financial Officer, Angion Biomedica Corporation, a Uniondale, NY–based biopharmaceutical company, pointed out the uniqueness of the arrangement made at the company McKinnon had worked for. “It’s not private equity in normal terms. It sounds like it is more Venture Capital than Private Equity. VCs tend to take a longer-term perspective, but they also look for higher returns on their capital gains.”

Many agreed with Savadelis. “I concur, as the VC model typically includes raising a fund that is very industry-centric,” said Gregg Kam, Chief Financial Officer, Sonneborn, a Parsippany, NJ–based manufacturer and supplier of high-purity specialty hydrocarbons.

When preparing for private equity, sell-side reports have become a trend, according to PricewaterhouseCoopers. A selling company has an accounting firm come in, prepare a quality earnings analysis, a debt analysis, as well as details on trends being experienced, and that book goes out.

Allen Lane, Senior Vice President and Chief Financial Officer, Solix, a Parsippany, NJ–based provider of program administration, eligibility determination, and call center services, said, “I’ve been reading through a lot of these recently. There is a definite marketing slant on the part of the seller in these documents. They are a nice road map to begin your discussions with, but you still have to do a full due diligence review.”

Mr. McAndris of JJM Consulting said sell-side reports help from another perspective. “You can steer the course of where you want the buyer to look. You’re controlling the conversation,” he added.

In some instances, these procedures are not necessary. “We were headed down the road of going public and [our investors] came along and made us an offer that was about 50 percent above our projected IPO price. That’s what we call a no-brainer,” said Bert Marchio, Chief Accounting and Operations Officer, Edge Therapeutics, a Berkeley Heights, NJ–based clinical-stage biopharmaceutical company.

There are cases where acquirers don’t see the forest for the trees. “Every due diligence sale that I’ve been through, some companies got involved and looked at minutiae that didn’t really mean anything. For example, ‘I see you spent $22,000 on a particular purchase. What was it? Oh, it was a Christmas party,’ ” said Mr. Kam. “They often miss the big picture about the business in due diligence, focusing on immaterial items.”

Copyright 2017