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- 𧱠How to Build a Cashflow Culture
𧱠How to Build a Cashflow Culture
And what to do in a cash crisis
This is CFO Secrets. The weekly newsletter that knows itâs the most wonderful time of the yeeeeear⊠budget season.
10 Minute Read Time
In Todayâs Email:
đ Get your business to think âcash firstâ
đą Finance isnât complicated
đ An FP&A get together
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THE DEEP DIVE
Building a Cash Culture: How to Train your Business to Think âCash Firstâ
This is the final part of an 8 week season covering how to build a culture of cashflow obsession in your business.
âYou have no f*cking idea what you have just done, do you?â
Those words could get me fired, but I was past caring.
Either the CEO had to see it my way, or Iâd leave.
And that wasnât a good look for anyone. Iâd only joined three months earlier.
Iâd been brought in as CFO at the height of a cash crisis. The mandate from the Board had been clear: âThis business is terrible at managing cashflow. From the CEO downwards. You need to fix that. Whatever it takes, or we wonât survive.â
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 hadnât 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. Theyâd gotten some better sales volumes, secured some product launches, and a longer contract.
So now he bit back:
âYouâre the one with no idea. If we donât grow, we die.â
I was in this now, it was no time to pull back âŠ
âThatâs the dumbest f*cking sh*t Iâve ever heard. If we donât grow, sure we die. But we die slow. If we run out of cash we die now. This business isnât 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.â
âThanks for listing all the problems, very constructive. What do you suggest we do?â
Iâd 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.
Thereâd be 3 stages to the turnaround. And they must be executed in order:
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.
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.
Return to Growth. Once we were in a safe place on cashflow, we could start talking about growth and strategy again. Stages 1 & 2 werenât 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 wouldnât want to hear this.
But he surprised me.
âOK, weâll do it your way. What does it look like?â
I was shocked. A change in tone in the space of one conversation. I had to hammer the point home.
âYou and I spend this weekend together. Iâll bring a 12 month cashflow model. And we donât leave until we have a plan that gets that model to free cashflow positive. And with $100m of cash on balance sheet. Itâs going to mean doing some stuff you donât want to do. Including reversing that dumb payment term change.â
And thatâs exactly what we didâŠ
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 weâd 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 weâd survive. And within twelve months weâd 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. Weâd had to take some tough decisions, but the bruises healed quickly. A perfect platform to grow.
And grow we did âŠ
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 âhow to build a culture of cashflow obsession in your business.â
Herb Kelleher said:
âCulture is what people do when no-one is looking.â
To change how people behave âbehind closed doorsâ 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 âwhen no-one is looking.â
Here are the five things you must do to drive a cash culture through your business.
1. CEO Alignment
If your CEO doesnât 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 thatâs the case, theyâre a keeper. You found a good one : )
But itâs not essential they are as much of a cashflow nerd as you. Iâm yet to find a human being on the planet that cares about cashflow as much as I do. Itâs 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 doesnât care about cashflow?
Itâs 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 donât, they likely wonât be around long anyway âŠ
The approach is different when you find yourself in a cash crisis (as in the earlier example). Iâll 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:
âYes 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 projectâ
âGreat job winning that new business, but couldnât you have got them to pay a 30% deposit?â
âThanks for securing those payment terms improvement to 45 days, what would it take to get it to 15?â
That ever present tension is vital.
The minute that tension isnât there, cashflow will leak and you wonât even know when itâs 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 âWACâ question with every piece of work they do.
WAC = What About Cashflow.
Most businesses build ROI calcs on EBIT or some equivalent profit measure. Donât 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 donât 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 thatâs the only tool in your toolbox, it wonât 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 âcreditorâ 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 Iâve led for over a decade, and it works wonderfully. Iâve 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 âeating from a smaller plateâ. 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.
Iâve also heard a similar concept gets discussed in the book âProfit Firstâ by Mike Michalowicz. But I confess this is not a book Iâve read.
If youâd 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 donât have time to be patient (as in the earlier example). So it begs the question of how you inject urgency. Thatâs a question on turnarounds, and I have a series coming on that in 2024, so youâll 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
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
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
We all make finance sound complicated, but this really is all there is to it âŠ
Gonna put this on the wall at Enduring Ventures world headquarters.
h/t @rledbetterCPA
â Xavier Helgesen (@XavierHelgesen)
7:27 PM âą Dec 8, 2023
Was great to get the gang together this week:
So good to get the FP&A team together for an offsite today
â The Secret CFO (@SecretCFO)
5:50 PM âą Dec 13, 2023
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If you have enjoyed this seasonâs content, donât forget to check out the NetSuite guide to AI and Machine Learning.
As always you can find me here:
This is the last scheduled newsletter of 2023. I would like to thank you for tuning in this year. Iâm 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.
Iâll 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 Iâm 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
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