This is CFO Secrets. The weekly newsletter that always keeps its treasury in government backed securities.

5 Minute Read Time

In Today’s Email:

• 🥶 Practical tips for ice cold cash management

• 🎸 What Iggy Pop teaches us about cash

• 😶‍🌫️ Helping you think more clearly

THE DEEP DIVE

10 Commandments of Cash Management

I’ve never seen treasury management get so much attention as it has in the last seven days.

If one good thing came from the collapse of Silicon Valley Bank it's this. Everyone is an expert in corporate cash management.

Lol.

Many people across my career have asked me why I’m so obsessed with cash flow. I always say the same thing:

“How dare you interrupt me when I’m reviewing my cashflow statement.”

Anyway…

Here are The Secret CFO 10 Commandments of Cash Management

1. Never compromise security of your cash.

The primary duty of a CFO is to be a safe custodian for assets.

I can’t think of a faster way for a CFO to get fired than to lose custody of cash balances.

I have heard reports of CFOs who knowingly took counterparty risk on cash held with SVB. Self-justified on the grounds it was a condition of the debt provided by SVB.

That is not an acceptable trade off.

You should not take risks with the security of cash to access funding.

Use government backed yield bearing assets to keep cash balances safe.

Most banks offer sweep products to access these in an efficient and safe way.

2. Set headroom warning levels

I like to use a simple traffic light system; red, yellow, green.

Measured on total headroom (being cash on hand plus undrawn liquid facilities; RCF, etc).

Green is the safety zone.

Yellow is the warning zone.

Red is the critical zone; activate ‘cash crisis’.

Setting these levels at an appropriate threshold for your business is the key thing here.

Determined by forecast levels and historical volatility vs forecast. Set actions and triggers behind crossing these thresholds (more on that below).

3. Know the purpose of your cash

Be clear on what your cash is for. This will affect how you store it.

And in particular how long you lock it up for.

The warning levels you set in 2 help with this.

Are you holding it as emergency liquidity? Pending future capital investment? To manage seasonal working capital requirements? To fund future cash burns?

Each of these purposes has a different profile, and should affect how you store it.

If you have more cash than you need for even a worse case scenario, you are being capital inefficient. Invest it in the business, pay down debt or give it back to shareholders.

Whatever gives the best result to your shareholders.

4. Control the ways cash can leave you

Are you clear on all the ways cash can leave your bank?

As businesses grow this can quickly get out of hand. ACH. Direct debits. Payroll. Expenses. Corporate cards. Direct payments. Petty cash. To name the most obvious.

Make sure there is a tight list of who can sign each of the different payment methods off.

And that duty segregation controls are in place all the way to the bank.

These sound like basics, but in every role I’ve ever done, I’ve found some weakness here.

I've seen a few frauds in my time, and they are nearly always through a payment back door that had fallen off the radar.

5. Have a cash crisis plan ready, even if you don’t need it

No-one ever plans to have a cash crisis, but plenty have them nonetheless.

Many are avoidable.

Some are not.

Get a ready protocol to activate when you hit the red zone. (the one you set in commandment 2).

Flipping a business from peace time into war time is difficult. But essential when you find yourselves in a cash crisis.

Having that war time plan developed during peace time is the art to being prepared.

Goal is to navigate the crisis period without disrupting business operations. This needs surgical precision.

You should distinguish between an opening balance problem (i.e. a headroom shortfall) vs a cash 'flow' problem. The interventions needed are different.

Have this plan prepared, on 1-2 sides of paper, and keep it to hand but out of view. It’s ready when you need it.

Your future desperate self will thank you.

6. Love your 13 week rolling forecast

The backbone of good cashflow planning is a detailed 13 week by week cashflow forecast.

I'm yet to see a business where this isn't true.

This should be reviewed by the CFO in detail each week, comparing actual vs forecast for the prior week. But also forecast vs forecast for the future weeks.

There is no better way to understand the texture of the cashflows of a business than to go through this. Week after week after week.

This is a short term liquidity planning and treasury management tool.

7. Have emergency liquidity sources up your sleeve

As CFO you should always have a couple of liquidity sources up your sleeve in case you need it.

Make sure you are never starting from zero on this.

Keep banks and equity investor leads warm, you never know when you’ll need it.

Make sure you are clear where you will find new external liquidity should you need it. Exactly who you’d speak to, in what order and what you’d ask them for.

This has to be managed alongside keeping the tension in the business to solve cash crises from inside its own free cash flow.

Solving a cashflow crisis without needing extra debt or equity is always preferable.

8. Optimize your cashflow profile

Cashflow management is all about cash profile.

Understanding your weekly, monthly and quarterly payments and receipts profile.

Lower volatility = More stable cash planning = lower funding requirement.

I’ll explain.

I once ran a finance function that had a $15m weekly cash volatility requirement.

It was a cash generative business, but each week it made a cumulative net $15m of payments in the first half of the week

Then that would come back through higher receipts profile at the end of the week.

That was a $15m funding need in the business, every week. Just to fund in-week volatility!

I was told that was "just the way it was."

I don't know about you, but when I hear that, I always take it as a challenge.

6 months later that $15m funding need had gone.

We moved $10m of customer receipts forward from Thursday to Tuesday. And $8m of payments back from Monday to Tuesday.

All by agreement with the businesses in question. Didn't cost a penny.

It’s an extreme example, but …

Magic happens in cash profiling if you are smart.

9. Keep a 12 month rolling monthly forecast

This is different to the 13 week rolling.

Different purpose. Different time frame. Different method.

This is a ‘funds flow’ style cashflow (more like a statutory cashflow statement), vs the 13 week rolling which is a ‘receipts and payments’ style cashflow.

Your 12 month should connect directly to the business FP&A cycle.

This is how you plan the timing of crucial investments, and business initiatives.

It's how you ensure the everyday decisions in the business connect to the cashflows.

Include it in your management accounts pack each month

This is the tool through which you talk to the board and senior management about cash

You should also run a base case and a reasonable worst case.

10. What is your worst case?

When planning cash for a reasonable worst case scenario. Think probability.

All very well funding for a reasonable worst case. But what does that mean? What probability event does it cover?

For example, a 10% case means you are funded to 10% probability events over the next 12-18 months, but not 1% probability events.

What’s the difference?

A 10% event is the sort of thing you might expect once every ten years. A major economic downswing for example.

It seems reasonable that you should ensure you are well funded for that scenario.

But what about 1%, a 1 in 100 year event.

Maybe a pandemic is an example here. I don’t think any CFO could be criticised in 2019 for not having the funding in place to withstand a pandemic.

99 years out of 100 they would be capital inefficient.

The detail is very specific to your business. Just be clear on what events your funding is designed to withstand, and which it isn’t.

Hopefully these are helpful and timely. I could write a dedicated newsletter on each of the ten commandments above. One day I will.

MEME OF THE WEEK

One of my own this week : )

BOOK CLUB

CFO decision making is never about black and white. If it was, it would be easy. Having a mental framework for how you step through those shades of gray is a vital skill to for the budding CFO.

Vol 1 of The Great Mental Models by Shane Parrish is a nice overview of the 10-12 main mental models, including first principles thinking, Occam’s razor, and thought experiments.

If you try and wrote learn every model in this book, you’ll end up frustrated. I suggest finding two or three that resonate with you, and work on applying them in practice.

FEEDBACK CORNER

A review from a crispy one:

FRIDAY JARED

Greg is having a break. He’s tagging in another lanky TV nerd. Pied Piper’s very own loyal CFO; Jared Dunn.

As always, you can find me here on CFO Secrets. And I’ll be busier on twitter over the coming weeks.

Anyway, until next week…

Stay Crispy,

The Secret CFO

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director or friend. Well, maybe I’m your friend. But I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need to make the right decisions.