This is CFO Secrets. The weekly newsletter that knows it’s the most wonderful time of the yeeeeear… budget season.

10 Minute Read Time

In Today’s Email:

• 💭 Get your business to think ‘cash first’

• 🔢 Finance isn’t complicated

• 👞 An FP&A get together

Before, we get into this week’s post I would like to say thank you to NetSuite, who have been our sponsor for this season:

THE DEEP DIVE

Building a Cash Culture: How to Train your Business to Think ‘Cash First’

This is the final part of an 8 week season covering how to build a culture of cashflow obsession in your business.

“You have no f*cking idea what you have just done, do you?”

Those words could get me fired, but I was past caring.

Either the CEO had to see it my way, or I’d leave.

And that wasn’t a good look for anyone. I’d only joined three months earlier.

I’d been brought in as CFO at the height of a cash crisis. The mandate from the Board had been clear: “This business is terrible at managing cashflow. From the CEO downwards. You need to fix that. Whatever it takes, or we won’t survive.”

And now I saw it first hand.

The CEO had sanctioned (with the VP of Sales) a 30 day extension in payment terms for our biggest customer.

This would cost almost $50m of cashflow. It cut our cash headroom in half.

I hadn’t been consulted, and I was furious.

At our current cash burn rate, that one decision had shortened our runway to less than 3 months. We were un-investable in our current state, with no prospect of any new funding.

The CEO felt the decision was justified. They’d gotten some better sales volumes, secured some product launches, and a longer contract.

So now he bit back:

“You’re the one with no idea. If we don’t grow, we die.”

I was in this now, it was no time to pull back …

“That’s the dumbest f*cking sh*t I’ve ever heard. If we don’t grow, sure we die. But we die slow. If we run out of cash we die now. This business isn’t fit to grow. It has no right to grow. Our cost base is out of control, our cash conversion is broken. Growth is the worst thing that could happen to us right now.”

“Thanks for listing all the problems, very constructive. What do you suggest we do?”

I’d been trying to get him to listen for the last 6 weeks. This was my last shot. If this failed, I'd walk out.

I pitched that we needed to tackle things in the right order, with a high concentration of focus on each stage.

There’d be 3 stages to the turnaround. And they must be executed in order:

1. Accept the Reality. We all (especially the CEO) needed to accept the business was heading to the wall. No more ostrich behavior. This meant that, for the next 12 months, cashflow had to drive the business. Not product. Not sales. Not operations. Cashflow. We needed a new short term plan, focused 100% on cashflow.

2. Navigate the Cash Crisis. Even with a better plan, we needed to execute it. The cash culture was dreadful, and it would take time to change. That would mean heavy handed top down management. It would be uncomfortable and unusual for the business. But survival was at stake.

3. Return to Growth. Once we were in a safe place on cashflow, we could start talking about growth and strategy again. Stages 1 & 2 weren’t permanent, just necessary. Like resting up, whilst you have a broken leg.

I knew the CEO would hate it, he was from a sales background and wouldn’t want to hear this.

But he surprised me.

“OK, we’ll do it your way. What does it look like?”

I was shocked. A change in tone in the space of one conversation. I had to hammer the point home.

“You and I spend this weekend together. I’ll bring a 12 month cashflow model. And we don’t leave until we have a plan that gets that model to free cashflow positive. And with $100m of cash on balance sheet. It’s going to mean doing some stuff you don’t want to do. Including reversing that dumb payment term change.”

And that’s exactly what we did…

By the Monday morning, we had a plan. But more than a plan, the CEO and I were 100% aligned. Every decision would be led by its impact on the 12 month cashflow.

And we would together drive a cashflow culture through the business.

Once we had the same frame of reference, agreeing what we’d do got easier.

• There were 2 loss making divisions, we would shut immediately.

• All non essential capex got pushed back 12 months

• Cull 30% of our product range, transforming the cash conversion cycle.

• Reverse customer payment term changes, even if we lost business

All this would hurt sales bad in the short term, but we’d survive. And within twelve months we’d have a platform for growth.

I was impressed how quickly the CEO switched from a ditzy growth fairy, to hard ass turnaround pro. He had the humility to realize his whole approach had been wrong in the space of just a few conversations. I respected him for it, and we are still friends to this day. His humility that weekend saved both our jobs (for different reasons).

Fast forward 12 months and we were a leaner, meaner, better business. We’d had to take some tough decisions, but the bruises healed quickly. A perfect platform to grow.

And grow we did …

Once the business was in the right shape, we grew faster than we could have ever done before. And from a stronger balance sheet, with better cash conversion.

A very happy ending.

The topic for this season has been ‘how to build a culture of cashflow obsession in your business.’

Herb Kelleher said:

To change how people behave ‘behind closed doors’ is hard. Possibly the hardest thing in leadership. There is a library of textbooks on the topic of culture.

It takes years. But culture change happens when you combine strong leadership with a million small moves in the right direction.

The first seven issues of this season, give guidance on what those small moves will be. This post is about how to demonstrate the strong leadership that is needed to forge those disciplines into culture.

And to make sure people care for the businesses cashflow, even ‘when no-one is looking.’

Here are the five things you must do to drive a cash culture through your business.

1. CEO Alignment

If your CEO doesn’t care about cashflow, you will never get the business to care. That was the problem in the case study at the start of this post.

Ideally, they will be right alongside you. As the biggest cashflow advocate in the business. If that’s the case, they’re a keeper. You found a good one : )

But it’s not essential they are as much of a cashflow nerd as you. I’m yet to find a human being on the planet that cares about cashflow as much as I do. It’s important though they do not undermine the cashflow agenda.

They must be active in considering cashflow impacts in every decision. And that they get seen by the business doing so. So even when cashflow is being sacrificed, it gets done with intent. The trade-off is visible.

So what do you do if you find yourself with a CEO who doesn’t care about cashflow?

It’s your job to show them the light. Time to earn your money. If your plea falls on deaf ears, speak to their ego and their wallet.

Show them the theoretical impact on the stock price if future cash conversion is + or - 20% vs current.

When they understand how much value is at stake, most of the time they will get it. And if they don’t, they likely won’t be around long anyway …

The approach is different when you find yourself in a cash crisis (as in the earlier example). I’ll come to that later in the post.

2. Finance Leadership

As CFO of the business you are the lead cashflow advocate. You must role model this in all you do. Bore people to death if you have to:

• “Yes the capex plan is great and the payback is good. But you need to find a way to push the timing of the cashflows harder without risking the project”

• “Great job winning that new business, but couldn’t you have got them to pay a 30% deposit?”

• “Thanks for securing those payment terms improvement to 45 days, what would it take to get it to 15?”

That ever present tension is vital.

The minute that tension isn’t there, cashflow will leak and you won’t even know when it’s gone.

You need your finance team doing the same. Especially your FP&A / business partnering resource. You need them bending the ear of their business partner, as much as you do the CEO.

I insist my FP&A and business partnering teams ask the ‘WAC’ question with every piece of work they do.

WAC = What About Cashflow.

Most businesses build ROI calcs on EBIT or some equivalent profit measure. Don’t be most businesses. Use a cash measure (MFCF is perfect for this).

The mindset is everything. If you can get your whole finance team doing it, getting the business to do it is 10 x easier.

If you are a lone ranger running round a business ranting about cashflow all the time, the business will see it as your weird pet topic. Rather than something that is truly important.

3. Put Cashflow On Every Table

Make sure every P&L driving function has clear cashflow KPIs, bespoke to their function. Procurement, Ops, Sales, etc.

Give them the tools to drive their cashflow lever.

I have written before on Cashflow KPIs. And on how to use dashboards / balance scorecards.

And then make sure it gets built into the annual bonus scheme. Money motivates people, sure. But more ... the metrics you build into the bonus scheme, are the signal to the business of what is actually important. Businesses can be very noisy, often with too many KPIs.

The KPIs you have tied to the bonus scheme leave no doubt about what is most important. Make sure cashflow has a seat at that table.

Sounds obvious, but 90% of businesses I see don’t do this.

4. Educate As You Go

Brute force is often the best way to get the cashflow boulder rolling from a standing start. As I had to with my CEO years ago.

But if that’s the only tool in your toolbox, it won’t get you far.

To get real cultural change, you need people to care about cashflow management. Throughout the business. And not just do it because they get told to.

Education is the answer here.

Help people understand cashflow. Why it is important, how it links to the stock price, how working capital works, etc.

The finance function need to take that responsibility to educate the business. Through formal and informal training.

5. Eat From a Smaller Plate

Most corporate treasury pooling works as a two way street. Money flows freely back and forth between the corporate and operating companies. As cash gets generated or is needed.

I have always ran corporate treasury a different way. I prefer more friction in this process. I like my operating company teams to see the corporate treasury pool as a ‘creditor’ they have to pay.

A mouth to feed, not a benevolent parent.

There is a mechanism which determines how much they must contribute to the corporate treasury each month.

This creates a forcing function within operating companies to self solve cashflow. And done right no OpCo is ever sat on more than 4-8 weeks of expenses in cash as a comfort blanket. And this cascades down through the business.

This is a principle I have been applying in businesses I’ve led for over a decade, and it works wonderfully. I’ve used in large corporates, and also my personal SMB portfolio. I even use a similar idea with my personal finances.

I recently heard Andrew Wilkinson (Founder of Tiny) describe this as ‘eating from a smaller plate’. Wonderful. If you use a smaller plate you tend to eat less. Ensure management teams have a smaller cash balance (plate) to eat (spend) from.

I’ve also heard a similar concept gets discussed in the book ‘Profit First’ by Mike Michalowicz. But I confess this is not a book I’ve read.

If you’d like me to lay out exactly how this treasury works in more detail in a future post, let me know by hitting the button below:

Do all of these five things consistently well and you will build a culture of cashflow obsession in your business. Gradually.

There will be some situations where you don’t have time to be patient (as in the earlier example). So it begs the question of how you inject urgency. That’s a question on turnarounds, and I have a series coming on that in 2024, so you’ll have to be patient for now.

And with that, we have reached the end of this season on Building a Culture of Cashflow Obsession in Your Business.

Here is a quick recap of what we have covered in this season:

Week 0 - October 14th; Cash Is Not King

• Cash vs Cashflow

• Cash generation vs Capital allocation

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

Week 4 - November 18th; Forecasting Part 2

• How to build an indirect cashflow forecast

• Rolling monthly forecasts

• Sensitivities and shit cases

Week 5 - November 25th; Working Capital Part 1

• Negative Working Capital

• Influence on capital structure

• Influence on growth

December 2nd - Break

Week 6 - December 9th; Working Capital Part 2

• 15 Drivers of Working Capital

• Working capital design

• Component by component (receivables, inventory, payables)

Week 7 - December 16th; Building a Cash Culture (This Post)

• Getting the CEO on board

• Making cashflow the dominant business language

• Artificial cash restriction

THIS WEEK ON SOCIAL MEDIA

We all make finance sound complicated, but this really is all there is to it …

Was great to get the gang together this week:

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This is the last scheduled newsletter of 2023. I would like to thank you for tuning in this year. I’m lucky to have had lots of highs (and lows) in my CFO roles and beyond. But sharing my playbook through this newsletter has been the most rewarding pursuit of my career so far.

Thank you for being a part of that.

I’ll be back in two weeks before the new year with a sneak peek of whats to come in 2024.

Meanwhile I wish you and your family a very Merry Crisp-mas,

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]p