Published: Jan 08, 2020
Focus:
Insights
The CFO plays a critical role in any private-equity backed company. Frank Duffin provides his advice on managing an efficient finance function and meeting the expectations of an investor.
Maven:
What was your career path to becoming a CFO?
Frank Duffin:
I qualified as a CA with Arthur Andersen in 1982 and progressed through various financial roles in Johnson and Johnson and General Mills before moving into the Electronics market where I spent the bulk of my career. I worked for a UK plc where I became Financial Controller for one of their subsidiaries then joined a division of Philips Electronics which was acquired by a US Corporation, Solectron, in 2003. I stayed on as Financial Director (“FD”) as that subsidiary trebled in size inside a year. I spent six years in Silicon Valley in several roles before returning to the UK where I entered the world of Private Equity (“PE”), becoming European FD of PE backed Worldmark, then Deputy CFO and ultimately CFO in 2009. After seeing Worldmark through to a secondary PE sale in 2006 , and ultimately a trade sale in 2015, I joined McGavigan as CFO in 2016.
M:
What are the biggest challenges in the industry that affects CFOs today?
FD:
Brexit. It has created tremendous levels of uncertainty in our industry and in the wider economy. The impact on foreign exchange is a constant worry so we monitor that closely to minimise uncertainty.
M:
What is the key to successful budgeting, particularly with a company such as John McGavigan with international operations?
FD:
Firstly, whether it is a single entity or an international group the basis of the annual budget process is that whilst the numbers will form the start and finish, the key aspect is “how do we get there?”. The team will initially determine its targets for the year, in terms of sales, profit and cash generation – that way you know what the answer is, but the most important step is mapping out the middle part – the “getting there”. This needs to be based on knowledge of the market, the likely sales profile, the resource required to deliver the budget and the subsequent cost.
As for the international dimension there are two key considerations. It is imperative not to change currency conversion rates from the prior year, even if they are moving around, and to determine a “constant currency”. Whilst it’s important to calculate the impact of actual currency rate volatility on the business, a fixed constant currency is required for comparative purposes. The other factor to consider is making sure that intercompany trading is aligned and that it does not become a source of fighting over who takes profit and who doesn’t.
M:
With John McGavigan having an international operation in China, what advice would you give to other UK companies with Chinese operations?
FD:
China is a great country in which to do business, so embrace it. I have been dealing with China since 1997 and have visited countless times since. The key focus is cash. Having been a CFO of two businesses with international operations in various countries, the big worry that can keep you awake at night is any sense that cash will be trapped overseas, especially where you have local fiscal obligations to meet so I have over the years done a lot of work to prevent cash being trapped in other countries. China has a great deal of legislation about moving money into and out of the country, but you build up the experience and knowledge of what to do to in order to transfer cash legally back to the UK. The other factor to consider is to recruit a strong local finance lead in country and to build a close relationship, visiting them regularly. It is also important that they come to the UK to see the other side of the business. I have been doing that for many years and it works!
M:
It has been said that the CFO is the key conduit between the company and its private equity investor, would you agree or disagree, and why?
FD:
I would say A key conduit rather than THE key conduit. My experience is that a good PE house fosters relationship with senior teams across various disciplines, not least the CEO. The CFO will more likely talk the same language as the PE house and can articulate its needs back into the business, but that should be one of several conduits in my view.”
M:
In your experience, what are some of the unique challenges that private equity backed companies face?
FD:
Financial covenants can be a challenge in the sense that if the transaction is not structured properly they can inhibit the business from attaining its goals. The twelve-month rolling cash flow available for debt service covenant can result in the deferral of investment decisions so constant dialogue with banking partners is critical, even when things are going well. One aspect of a PE investment structure is the potential for inflating debt level on a company’s balance sheet due to loan notes being included in the structure. My teams have, on many occasions, completed standard financial questionnaires for suppliers and customers who often have no allowance or understanding for this type of structure.
It is important for the CFO to have available a simple paper for use on such occasions to enlighten the customer or supplier on the nature of shareholder debt, rolled interest and goodwill amortisation to prevent any disruption to trading. I have been on several customer and supplier calls to walk through such a paper. The other big challenge can be ownership horizons and the potential impact that can have on investment decisions. I see that as an opportunity for the CFO. If the investment decision can be framed, in terms of its impact on shareholder value, then that can actually lead to a healthy debate around the board table about the right thing to do.
M:
In your opinion, what does a successful finance department look like?
FD:
A successful department, finance or any other function, is one where you continually make your team members more and more marketable. I have seen people who worked for me over the years reach high positions in finance and like to think that I was a part of their success.”
M:
What piece of advice has helped you the most professionally?
FD:
Three pieces of advice, actually. The first from my father who taught me that “civility costs nothing” – that is something that I try to take through life. Next is something an old boss once said to me – “always be honest with yourself”. Whether that is a decision to accept or reject a job, speaking up if you disagree in the boardroom or any other situation; it is usually sage advice. My last one is the name of a book by the late Gavin Kennedy, who was my Economics lecturer at university. The book is called “Everything is Negotiable” and is to me the best business book written.
M:
What would you say are the most valuable lessons you have learned over the years?
FD:
To treat people as people. You always get more from them if you do that in my view. Equally important, and closely linked, is that you can’t do everything yourself and that you will get so much more done by trusting your team to do more. That in turn makes them more marketable as I said previously. A former boss of mine once told me “the job of a boss is to make their team members look good and the job of the team is to make their boss look good”. I guess, to end on a PE note, good communication to all financial stakeholders is critical – investor, management/board and banks are all important to a business and none of them need, want or like surprises!
*John McGavigan manufactuers complex decorative and technical plastic components and assemblies used in the automotive, consumer electronics and white goods industries.
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