This is CFO Secrets. The Saturday morning newsletter that gives CFO insights you won’t find on a ‘cheat sheet.’

5 Minute Read Time

In Today’s Email:

• 💸 Kicking off the Cash Flow Season

• 🪮 SBF’s view on CFOs

• 🚽 Community Adjusted Free Cash Flow

We’re back baby, with a new 8 part series covering the nuts and bolts of cashflow.

But before we get into it, CFO Secrets has it’s first sponsor.

And it’s a big dog …

A WORD FROM THIS SEASON’S SPONSOR…

THE DEEP DIVE

Introduction to Cashflow: Cash vs Cashflow

This is the first week in an 8 week season covering cashflow.

148 Days.

That’s how long we had.

I’d joined a business as CFO with a nine figure annual cash burn rate.

And I don’t mean a Silicon Valley type burn rate. The ‘cool’ type. Where anything goes as long as sales are growing fast enough to get the next round of funding away. (Remember those days??)

I’m talking about a once profitable, mature business.

Now burning cash because they were in a tough sector and badly run.

Costs were out of control. No care for controlling inventory. They’d give 3 month payment terms to any customer that gave a hint of growth potential. No-one was watching supplier terms. And money got wasted on vanity capex and R&D projects.

There was no equity check coming to keep things running. There was only one path. We had to get this business to cashflow breakeven ASAP. We had to fix the bucket (more on that later).

I liked turnarounds, but wow. This was a biggun.

And bigger than expected. I’d done my diligence, but I’d under-estimated how broken the core business was.

How little I could rely on the business to make the right decisions.

And even if the decisions were right, the execution was dreadful. Rotten to the core.

Too deep to fix in even 2 or 3 years. The full journey would need 5 years.

But for cashflow we didn’t have the luxury of measuring in years. We had days.

148 to be precise.

Well… technically 147 days now.

It’s 3am, and for the third time this week I’ve woken in a panic about how I’d make payroll for thousands of people.

It’s the most visceral feeling I’ve experienced in business.

This business has no choice other than to put cash flow as priority 1, 2 & 3.

And it was me that had to lead the way.

What I would discover in the years that followed would form the best learning experiences of my corporate career.

The full story of that turnaround will have to wait for another time, but the truth is, there was no silver bullet. There never is.

It was thousands of small things.

Thousands of small things that together could turn the burning oil tanker. A little at first. But eventually it would need a full 180.

This new season of CFO Secrets is titled “Building a Cashflow Obsessed Business.”

Most businesses make financial decisions through the lens of the Income Statement. P&L is just a leading indicator to cash flow. Cash flow is the end goal. You pay bills with $ in the bank, not numbers in spreadsheets.

And shifting the lens from P&L to cashflow is hard.

And there is no secret formula to making that shift.

It’s just basics, but executed brilliantly.

Unfortunately, that’s not very sexy. And neither is it difficult, but it is hard.

So in this season we will be focusing on how to build a culture of cashflow obsession in your business

As always, unless I say otherwise, my content will focus on large complex businesses. Multi national corporates.

That is especially important for this season.

Installing that culture is harder in a larger business. There are a huge number of levers, managed by a huge number of people. And complexity in business tends to operate as a power function. So, that’s huge² for those keeping count.

Anyway … I want to start this new season, with a rant.

“But Uncle Secret, we thought you’d had a couple of weeks off. Aren’t you well rested?”

Afraid not, folks.

I’ve got something I need to get off my chest.

And it’s three little words:

Cash. Is. King.

Unless you live under a rock, you will have heard this used again and again in corporate life.

It’s up there with ‘let’s circle back’, ‘boil the ocean’, and ‘blue sky thinking’ in top tier business buzzword bullsh*t bingo.

Unless it wasn’t clear enough already, I don’t like this phrase.

It’s a nice enough sentiment, and the alliteration is sure memorable.

But nine times out of ten its used as a lazy trope. By someone who doesn’t understand what it means.

Whenever I hear ‘Cash is King’ in my business now, I respond with this: “No. You mean cash flow is king. And it isn’t just king, around here. It’s King, Queen, Rook… it’s the whole chessboard.”

Distinguishing between Cash and Cashflow is important. They get managed in different ways.

Cash is the water level in the bucket

Cashflow is the speed at which the bucket fills or empties.

A full bucket is no good to you if it’s full of holes.

Likewise, an empty bucket isn’t a big problem, if you are confident in your ability to fill it.

This series will be entirely focused on getting better at filling your bucket.

It will not focus on what you do with the water in the bucket (treasury management and capital allocation).

These are important too, but they are different skills.

Cashflow is generated in the business operations. It’s decentralized.

Whereas capital allocation and treasury management is best performed centrally.

Starbucks generate $2bn to $3bn of free cashflow per year.

That cashflow gets delivered one $4 cup of coffee at a time, by 400,000 baristas all over the world. That’s a lot of people to get rowing in the same direction to ‘fill the bucket.’

Starbucks also have between $3bn and $6bn of cash on their balance sheet. Who manages that? A small number of treasury pros sat in Seattle, using a capital allocation framework. Goalseeking to the optimal outcome.

Both difficult jobs, but very different. One decentralized, one centralized.

Treasury functions hold no levers for cashflow generation. Those levers sit in business operations. With the people that make and sell stuff.

Don’t worry…

We will come back to capital allocation and treasury management. But they are so important, and so different, they deserve seasons in their own right.

The core theme of this season will be how to build the reporting, forecasting and management systems to deliver cash flow. How you get those 400,000 baristas all doing the things that need to be done to drive cashflow.

Do the right things well enough, for long enough, and it will become a culture.

And once a cashflow culture is embedded into your business, it starts to feel a bit easier.

Here’s a run down of the curriculum we will cover over the next 7 weeks:

Week 1 - October 21st; Maintainable Free Cashflow

• What is MFCF?

• Above vs Below the line

• How to use MFCF in the business

• Categorization

Week 2 - October 28th; Reporting Cashflow

• Reporting Cadence

• Metrics

• Using cashflow reporting to drive behavior

November 4th - Break

Week 3 - November 11th; Forecasting Part 1

• Direct vs indirect cashflows

• How to build a weekly rolling cashflow forecast

• Actualization

• Daily treasury management

Week 4 - November 18th; Forecasting Part 2

• How to build an indirect cashflow forecast

• Rolling monthly forecasts

• Sensitivities and shit cases

• Integrating treasury

Week 5 - November 25th; Working Capital Part 1

• Why it matters.

• What working capital is not

• Influence on capital structure

• Influence on growth

December 2nd - Break

Week 6 - December 9th; Working Capital Part 2

• How to drive it

• Working capital design - Cost of capital arbitrage

• Component by component (receivables, inventory, payables)

• Working capital platforms

Week 7 - December 16th; Building a cash culture

• Getting the CEO on board

• Making it the dominant business language

• Artificial cash restriction

• Cash flow turnarounds.

Cashflow has been unfashionable for the last 15 years.

Whilst interest rates were low, it was easy to get a cheap top up for your bucket when you needed it.

It was easier than the hard work of patching up the holes in the bucket.

But not any more … managing cashflow is fashionable again.

Money has a price again.

It’s about time.

Strap in…

This is going to be fun.

Next week we will dive into Maintainable Free Cash Flow 😍. My favorite metric. I CANNOT wait.

THIS WEEK ON SOCIAL MEDIA

This quote from Sam Bankman-Fried made me laugh:

Well, Sam … I guess you found out

Elon’s ‘X’ invented a nonsense cashflow measure and then declared victory with it being positive. Meanwhile FinTwit joined hands and laughed hard:

FEEDBACK CORNER

A review from last time:

AND FINALLY…

That’s all for this week. It’s good to be back

As always you can find me here:

• CFO Secrets

• Twitter

• LinkedIn

• Threads

Thank you to today’s sponsor; NetSuite.

I’ve got big plans for this newsletter, and a sponsor will help me improve the quality of the content, reach more people, all whilst keeping it free.

Plus, Mrs Secret CFO wants a new purse, and she sure as hell won’t pay for it herself …

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]