Gary McGaghey’s Three Cash Improvement Strategies for Private Equity Tech Portfolio Companies

Sometimes, private equity technology portfolio companies that are planning to fund growth avoid free cash flow (FCF) and working capital management because of low borrowing costs and the volume of private equity dry powder. However these parameters have changed dramatically in the past 3 months as interest rates started to climb, putting many leveraged private equity owned businesses in a liquidity challenge. Furthermore, this approach sacrifices sustainable, accessible cash and operations improvement and service levels that are integral to improving value. 

Instead, private equity tech portfolio companies can implement cash improvement strategies to boost valuations and put free capital to work. Improvements in supply chain financing, subscription management, receivables, deal desk operations, and payment processing can all boost cash. That's why the group and divisional CFO Gary McGaghey explains that newly acquired tech portfolio companies' working capital improvements can lay the groundwork for improved returns on investment and balance sheet performance.

Meanwhile, private equity firms that are looking to divest technology companies can implement working capital improvement strategies to demonstrate operational discipline to acquirers. These strategies may include cash release options, like supplier financing and Receivables factoring and other alternative financing options. Gary McGaghey explains that buyers are likely to place greater value on FCF and operational rigour, which allows them to fund strategic initiatives in a challenging economic environment.

Here, he shares three cash improvement strategies that private equity tech portfolio companies can adopt.

1. Improve the Use of OTC Metrics Around Receivables 

Technology companies that are light on payables and inventory can achieve higher FCF if they improve their use of order-to-cash (OTC) metrics around receivables. These receivables may include weighted average days if late, weighted average days to collect, and days billing outstanding. By increasing operational discipline and focusing on leading practices, these companies can significantly improve their metrics.

For example, a private equity healthcare software provider found gaps in its OTC processes, resulting in excess cash flow that the company could use to fund incremental acquisitions. The program comprised an assessment of customer categorisation, an analysis of historical transactional data, and restructured operational processes, such as collections and dispute management. 

Gary McGaghey explains that important components of operational discipline that facilitate accurate cash forecasts include attention to subscriptions and the acceleration of renewals to minimise time gaps between agreements and maintain billing cadence. The leading practices that the company adopted released 5% of revenue in cash flow improvements.

2. Incorporate Cash Impact in Deal Desk/Client Operations

Incorporating cash impact in deal desk/client operations is another important step for tech companies that hope to improve their OTC metrics. In a long term master services contract or subscription-based revenue model, the deal desk/client ops teams should price and understand the most advantageous commercial arrangements for the business. These commercial arrangements should include those with end-user fluctuations. That said, quoting systems usually need software upgrades to include contracts with variable pricing that shifts according to the number of end users. 

Private equity companies can complete a state and gap analysis to produce a metrics dashboard and determine clear deal acceptance criteria and processes. Gary McGaghey explains that cross-functional involvement can help confirm the alignment of agreed-to deals with business objectives and thereby accelerate the billing process. This alignment of objectives between finance and the client ops teams, along with the right tooling and processes, can substantially speed up the billing process which will speed up the order to cash cycle of the business, releasing substantial cash reserves.

3. Improve Relevant Procure-to-Pay Strategies

Gary McGaghey's third cash improvement strategy is to deploy relevant procure-to-pay strategies, which can be game-changing for private equity tech companies that are looking to improve their working capital performance. Strategies could include industry-acceptable vendor payment terms, accounts payable (AP) process improvements, and tech-based supply chain financing programmes that reduce costs, improve efficiency, and connect all the parties involved in a transaction.

For example, a tech portfolio company that focuses an AP improvement programme on segmentation, supplier risk assessment criteria, and negotiation strategies for changes to payment frequency and payment terms can see the company quickly increase its cash flow.

Fuelling Company Success With Cash Improvement Strategies

Even when private equity companies prioritise growth over cash in the short term, improving cash management strategies and internal operations are essential to funding growth and improving outcomes. Therefore, Gary McGaghey highlights the importance of analysing working capital levers and encourages private equity tech portfolio company leaders to consider whether keeping cash at the centre of their strategies could fuel further success for the company.

Learn more about Gary McGaghey's private equity expertise.

About Gary McGaghey

As the group CFO of the €1.3 billion end-to-end marketing production and business services group Williams Lea Tag, which Advent International owns, Gary McGaghey manages the company's execution of commercial plans, particularly cash generation, and investment decisions that increase the value of the company's holdings. Outside of this role, he is also the non-executive director of Fitmedia UK, which develops children's fitness analysis and testing solutions.

Before taking on these roles, Gary McGaghey helped a plethora of private equity, listed, and privately owned companies achieve a high level of M&A-driven and organic growth. He enabled this growth for companies in a variety of industries, from fast-moving consumer goods (FMCG) to beverage, media, and pharmacy sectors. Under his thorough management, highly successful finance teams have enabled companies of all shapes and sizes to grow exponentially.