Is Your Operating Plan on Track? Use a Dashboard

Middle-market GP Argand Partners uses customized data to track whether its portfolio companies are headed in the right direction

Having spent decades investing in private companies, Howard Morgan knows the winning feeling when a plan is a well-executed. He also knows the sinking feeling when it isn’t.

So, when evaluating investments for his relatively new private equity firm, Morgan crafts painstaking 100-day and medium-term strategic plans. This discipline includes tracking a mountain of data about the underlying operations, and looking for evidence that goals are being met. It also understand when helps operational intervention is in order.

Morgan, the former president of Castle Harlan who, along with former colleagues Tariq Osman and Heather Faust, founded Argand Partners in 2015, says the best private equity investors start tracking key performance indicators early. “We would want to start to work with management…even before we’re given the keys,” he says.

Like many firms, Argand creates customized dashboards for each portfolio company. Portfolio management reports core data on a monthly basis, and more comprehensive data quarterly.

“Too often financial reports are forensic, so we try to develop reports about what is happening on that day and what actions can be taken in the weeks following to improve, even if the company’s beating budget,” says Morgan. “We monitor cash and liquidity, for sure, but also backlog, unused capacity, plant loading, sales activity, sales calls. It’s quite customized.”

Morgan says he focuses on some granular, day-to-day activities that public company reports would never include. “One of the unusual practices, but which we feel is a best practice, is tracking direct cash flow, which is literally receipts and disbursements. Accrual accounting can hide a lot of things, but it ought to always reconcile back-to-cash accounting.”

Promoting Growth, Tracking Expenses

Outside of distressed investing, private equity investors rarely say they focus first on cutting costs at a portfolio company. Instead, the focus on growth strategies that can transform the fortunes of the company. Argand falls into the growth camp. “More often than not, we are adding resources to sales and marketing,” says Morgan.

That said, carefully tracking budgeted and actual expenses can help an investor better understand strategic priorities and how well value-add plans are being executed.

Says Morgan: “I can recall an instance where management was recommending a new advertising program. We were very, very enthusiastic. But their numbers seemed conservative. When we asked them why…they bluntly said that if it was any more, it might negatively impact their bonuses. We said, ‘Okay, well, we can fix that. We’d like you do double the program.’”

Once a plan of action has been set, Argand will use its dashboard to track whether the desired goals are reached. It’s not a simple as one metric, or one cost cut. Tracking travel spend, for instance, can be useful, but does not necessarily act as a leading indicator of sales.

“Certainly, you know, there have been instances where cost containment is pennywise and pound foolish. You need to see the client and put that in a travel budget. And if travel costs start falling and you also see fewer quotes, less activity, and a declining backlog, then you know there’s really a problem.”