How CFOs think: Why growth does not always mean profit

Priyan Fernando:
When I see a profitable business on paper and no money in the bank, I feel terrified.

Ky Chow:
If you work in finance, you've probably experienced this firsthand. Revenue's up, everyone's celebrating the growth, but under the surface, margins are slipping. Your cash is getting tight, the balance sheet is quietly starting to drift, and that tension lands on you.

Because while the business is excited about scale, you're the one asking whether there's any actual value being created. And that's the question our guest today has spent a career answering. With me today is Priyan Fernando, a CPA. He's the founder of a fractional CFO practice, Metrix Advisory, and the 2025 Australian Accounting Award CFO of the Year. Priyan, welcome to How CFOs Think.

Priyan Fernando:
Pleasure to be here, Ky.

Ky Chow:
Terrified. For a man who works with numbers for a living, that's a big word to use. Can you tell me about that?

Priyan Fernando:
One of the things I always hear is, "Priyan, my accountant at the end of the financial year gets me a set of financials and a tax return. On that paper, I see money, I see profit. But when I look at my bank account, I don't see it. So I ask the question, 'where has all this profit gone?'" And the reason behind that is the fact that business owners, especially the ones in the SME sector, don't really understand what happens on the balance sheet, what happens on the cash flow, because they're too fixated on the top line, mainly the revenue, sometimes even on the profit.

Another thing I see all the time is how accurate are their financials? How accurate are their accounting systems? So it could be a factor of two things. It could be the financials not being accurate, or it could be there's some underlying issues within the business that the business owner hasn't identified, especially in that SME sector.

Ky Chow:
So now SMEs, why have you chosen to focus on this sector? Because it's often neglected.

Priyan Fernando:
Very true. I mean, it's the area or the industry that I can have the biggest impact on. The fact that I come from a background... I was born and brought up in Sri Lanka in a business family. We had an apparel manufacturing business in that SME sector in Sri Lanka. My dad was in the US on a business tour, hospitalised, in a coma for three days. Had to take over the business. I was very young. Over a thousand employees.

We had an apparel manufacturing business across four locations in Sri Lanka where we were. I spent four years in the country understanding the shifts of the business. So I was actually in the hot seat of running a business.

That exposure back in Sri Lanka really resonated what was missing in the market. Essentially, SMEs not having that advisory support, that forward-thinking vision. I saw a gap in the market and I saw a massive need there as well. And I thought, "You know what? Let me target that."

Ky Chow:
Now, that experience of being in the hot seat, age 25, running a business, through the GFC, clearly shaped how you think. So I want to get into this thinking about the tension between growth and profit. And in your experience, you think that growth is winning this argument far too often. So how often do you actually see it? Businesses that are growing, but not becoming more profitable.

Priyan Fernando:
Again, far too common than you'd expect. The problem is, Ky, business owners, they get fixated on the top line. They're all about growth. They've got all these bright, shiny ideas that they want to explore. So they're all about, "Okay, I start off the business with half a million dollars. Okay, how do I get to a million dollars? How do I get to two million? How do I get to five, 10, et cetera?" Which is all good. We all want to grow. But you got to be very mindful that you're not doing it at the compromise of long-term profitability.

And I always ask the question, would you rather be a business owner that runs a business which has annual revenue of 10 million but a profit of a million dollars, or would you rather be a hundred million dollar business but a profit of only a hundred thousand dollars?

Ky Chow:
And how receptive are they when you say that?

Priyan Fernando:
Very receptive. They obviously want more profit, but the problem is they don't give the required attention to it. But what I mean by the required attention is understanding their financials, understanding their margins, understanding how overheads work, understanding how cash flow works as you grow as well. I mean, that's a common thing that you see with businesses growing and scaling is that the top line increases, but their gross margins don't. There's consistent margin erosion or overheads get out of control, and therefore EBITDA or operating profit gets impacted negatively. So those are the conversations that I like to have with clients.

Ky Chow:
Right. And what are some of the other common sources of leaks, I guess, in terms of profit as businesses does scale?

Priyan Fernando:
Many areas. One, looking at gross margin at customer level where they don't get the pricing right. They compromise on the price just to get volume. Margin erosion happens. Another reason, again, just to get a new customer on board, they provide extended payment terms, therefore your day to day’s increase. And to fund that, you now have to get an overdraft facility, therefore it's costing you an interest.

You don't think of all these things, but they all add up. When you look at the P&L, you'll see the net profit decreasing because now you've got extra interest costs because you've given a new customer extra payment terms just to grow your top line.

And the same thing can happen with your inventory. You buy more inventory than what's required. And if you don't have the right processes and systems in place to monitor wastage and utilisation of inventory, then it's going to have an adverse impact on the profitability of the business and ultimately on your cash flow. You might find a temporary fix by getting an overdraft, but if you're not solving the underlying issue, then that overdraft is only going to be a temporary solution.

Ky Chow:
Okay. And how do you have those conversations with a client who is getting excited and you need to tell them that growth is not the same as success? And in fact, it could even be papering over some deeper problems.

Priyan Fernando:
Yeah. I mean, I like to be very direct with my clients. I think I can be because I'm fractional. I'm not fully involved in their business, if you know what I mean. I'm not one of their staff members per se. So I tend to be very direct, but also very factual, very data driven. I like my dashboards. I like my KPIs. I like looking at metrics which most business owners don't think of. For example, like gross margin at customer level or gross margin at product level.

Ky Chow:
The diagnosis seems pretty clear. Business scale, visibility drops, and the profit just quietly starts to disappear. The question is what you actually do about it. So let's talk about this toolkit that you use at Metrix Advisory because you have a very specific way of coming into a business to get it back on track. When you step in as the fractional CFO, what's the first thing you look at?

Priyan Fernando:
I want to understand their vision. I want to understand the business model. What's their USP, their unique selling point? What's their value proposition of the business? Because at the end of the day, every business operates out there to solve a customer pain point. If you don't have that, then you're not going to have sustainability in your business. Right?

So first of all, I like to understand a business owner's mindset, their vision, what their business model is all about. Then obviously after I understood that, I'll look at understanding their financials. What sort of accounting system they use? How they do their bookkeeping? Because at the end of the day, you've got to get that foundation right. If your foundation is not right, then I can't provide advice on incorrect data. Right?

So I need to make sure that their accounting system is up-to-date. So like the P&L, the balance sheet, the cash flow statements, they're all looking clean and they've got a good process around capturing a lot of the information. And then I'm also a massive fan of understanding the business operationally. So I don't just go through the accounting information. I love understanding the business on an operational level. So in terms of, okay, what are the CRMs they use? And what does their customer life cycle look like? And how do they handle their leads? Where do they get their leads? What do they do for marketing? What is the return on their ad spend? So I'd ask all these questions, Ky.

Ky Chow:
And that's because you've been there.

Priyan Fernando:
Because I've been there. Exactly. Because I've been there. I've done that. I felt the need of a business owner. I always try and put myself in the business owner's shoes because you got to understand them to be able to provide them with insights or advice. And like I said, I love getting involved operationally, especially in businesses where people are involved. Like in manufacturing, like in agriculture, there's people involved. Construction, property developments, there's lots of people involved. And at that level, you want to understand what return are you getting on a dollar that you spend on your labour, on your materials, on your overheads.

So those are the things that I'd look for as soon as I get access to a new client. And then I'll put together a bit of a journey, a bit of an action plan as to what we can expect. Right? And then it's about putting together dashboards and KPIs so that business owners have something to provide them with that visibility, and also more importantly, hold them accountable.

That's one of the things I like to do. One of my first conversations with a client is, "End of the day, you're hiring me as a CFO. You can have your accountants, you can have your lawyers, but you got to understand that they're not going to run the business for you. At the end of the day, you're responsible for it as a business owner."

So building that accountability with the business owner is, again, very important and it's part of what I do as a fractional CFO as well.

Ky Chow:
Cash flow and profit, they're not the same thing. A lot of business owners do not understand this. Can you tell us about a time when you had to explain this?

Priyan Fernando:
Yeah. I mean, it's very common in the manufacturing space, Ky. And I learned that especially with my dad's business back in Sri Lanka as well. You get an order from a customer and the business owner gets very excited. So you raise an invoice. The perception is that that's revenue. So it gets allocated straight to revenue, boosts your revenue on the P&L, improves your bottom line. And if that's the way you keep your accounting year-on-year, you see growth at the top line. Your profit's there too, but there's no cash in bank. And that's where I step in.

The way you're looking at revenue needs to change. Revenue needs to be tracked based on not just your sales, it needs to be tracked on what gets completed every month, every quarter, every financial year. So you need to turn your targets, not just based on sales, but how your business makes money and therefore avoids the cashflow pitfalls is by making sure that you achieve a certain target across what you manufacture on a monthly, quarterly, annual basis.

And that's a conversation that I had to have with a particular client in the manufacturing space where they were simply reporting their revenues on what was sold rather than what was completed and delivered. So that shifting mindset helped them become more profitable over time.

Ky Chow:
So they did listen then.

Priyan Fernando:
They did absolutely listen because it was pretty obvious just looking at the financials that the profit that you see on the P&L was essentially a manufactured profit because you're seeing a profit based on sales rather than what's being manufactured and delivered, completed and delivered to a client.

Ky Chow:
Okay. So what are the KPIs that SMEs consistently, that you've seen, undervalue or overlook?

Priyan Fernando:
For me, the big one is gross margin. I ask a lot of business owners about gross margins and they're like, "I wouldn't have a clue, Priyan. I know my revenue and I know my profit on the P&L, but I don't know what you're talking about with gross margin." And to make it even worse, when I ask questions at gross margin at customer level or gross margin at product level, again, going back to a manufacturing business example, as a manufacturing business, they obviously have a variety of products. You want to know which ones are profitable at the end of the day.

Because the revenue line might say, "Okay, you made 10 million of revenue this year." But what if you actually end up selling 90% of the items were the least profitable items for you? It's not really going to be helpful from a profitability or from a cashflow perspective, right? So that's a big metric that I see a lot of businesses not utilise. Another one is actually cost of labour across all businesses. Now I've got businesses who are in allied health, NDIS or occupational therapy, et cetera. Because cost of labour is the biggest expenditure for them, for that sort of business, right?

So one of the key things I look out there is, for a dollar you spend on labour, how much are you getting back? And tracking it consistently and holding your employees accountable for that.

Ky Chow:
Okay. So you've been there operationally, so I suppose, in a way, you understand what it's like, quite frankly, for them to just be preoccupied on things other than finances. So, is that why dashboards are something you do for every client because it's something that you think, "I'm being realistic about what they can digest"?

Priyan Fernando:
Yeah.

Ky Chow:
What goes into them?

Priyan Fernando:
Yeah. I mean, with dashboards, one of the reasons why I like dashboards is I like to keep them simple, and sometimes lots of colours. You got to understand the business owners are not accountants. They don't like working with spreadsheets. They don't like numbers. Right? So if you give them a P&L, which is, let's say, two or three pages, they're not going to read it. Let's be honest. They're not going to understand most of it either. That's why I have dashboards. I keep them very simple. And I use a balanced scorecard framework, which essentially looks at a business from four different aspects, like your customer, your people, your processes and systems, as well as financial.

And I look at the key metrics that we can address. From a financial perspective, looking at revenue, cash flow. From an operational perspective, looking at people, cost of people, like I was saying before. From a customer perspective, gross margin at customer level, or customer retention targets, or NPS for getting customer feedback. And at operational level, how good they in terms of meeting their deadlines.

So I'd make a simple dashboard, so that way they actually don't have to worry about going into the accounting system to get the financial. They don't have to worry about going into the CRM to get the customer data. They don't have to worry about going into the inventory management system to understand inventory and cost of goods sold and all that stuff.

We build a dashboard which plugs into all those different systems and actually puts together a one pager. Very simple. Every week, you see the metrics, you see what the trend's looking like. The whole idea is, you see a trend heading the wrong way, you can take action then and there, rather than having to wait for the end of the financial year.

Ky Chow:
You mentioned before that it's a bit different and it might give you certain advantages. I mean, what are the pros and cons, I guess, of being a fractional CFO rather than someone who's full-time? Is it just, "Oh, I get to stay out of the politics," or what else?

Priyan Fernando:
It's definitely one of them. Look, I'm not obviously part of their team. I'm not a full-time employee of a business. I'm an external person at the end of the day. So I can be very direct, therefore, with clients. And I like to set the tone that way as well, because then it makes it easier for me and the business owner to work with. And also, like you said, I don't get involved in the politics. I don't exactly know what goes on with the staff conflicts and all that stuff. But to me, one of the biggest advantages is the fact that I get to work with multiple industries.

Now, if I was a CFO of one company, that's probably just the one industry that I get exposure to. That's it. Whereas with what I do, now I've got clients in construction, property development, manufacturing, agriculture, allied health, professional services. So the best part is I can actually learn from one industry and apply it to another as well, because a lot of these metrics apply. It's just obviously how you tweak it across the different industries that matter. To me, there's lots of advantages being a fractional CFO, honestly, because of the fact that I get to work with different people, different mindsets. I get to understand different people as well and how they think, what their visions are and all that.

Ky Chow:
Do they appreciate that, as opposed to maybe seeing you as someone who maybe is not a specialist in their particular industry? For example, do you sometimes get the feeling they see you as an outsider, or do you think they appreciate that range of perspectives?

Priyan Fernando:
I think they appreciate that range of perspective because of the fact that what I can bring to the table with that experience that I've got under my belt. And the fact that also, I say it very open to them that I'm going to keep them accountable. And that's what I guess business owners, even if you're a CEO of a business, that's what you'd expect from a CFO. A CFO's role is to hold the CEO and the other stakeholders, especially the leadership team, accountable. One of the disadvantages that I see as being a fractional CFO, I guess, is sometimes clients can try to own you, and they'd be like, "Priyan, I need this done. I need that." So sometimes, the requirements can be a bit hectic and a bit overwhelming at times.

But again, I overcome that by being very transparent, very honest, very upfront with the clients, very direct. To me, that's the only way to solve that. Overall, as with everything else in life, there's pros and cons, but I see far more pros than cons, especially the impact I can have on businesses and also the impact that I can have on livelihoods that depend on that business as well.

Ky Chow:
One hard truth, Priyan. If there is one thing that finance leaders need to hear but they do not want to hear it, what is it?

Priyan Fernando:
For me, there's too much emphasis on the P&L and not much on the balance sheet. I always start with the balance sheet. Because for me, if the balance sheet is correct, the P&L is most likely correct. I feel a lot of financial professionals nowadays ignore balance sheets. And one of the things I do across all our clients is run balance sheet reconciliations to make sure that the balance sheet is accurate, because the balance sheet gives you the indications of the cash flow, where your cash is at, what your liabilities are.

These things obviously impact the working capital and the sustainability of the business, right? I see that happen a lot. There's too much emphasis on the P&L. Paying more attention to the balance sheet, doing your balance sheet reconciliations.

Ky Chow:
Thanks, Priyan. So growth is not the problem, undisciplined growth is. A business can scale, it just has to know what is actually building. And that's the difference between a CFO who simply reports the numbers versus one who challenges and asks the right question.

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