📬 Eton mess: When your CEO can't cashflow...

Q: How do I actually get better at being a CFO, rather than just talking about it?

Secret CFO: Honestly? There is no substitute for hands-on experience. Learning by doing… But how do you do that on a real business when there is so much at stake? Well, you don’t have to.

That's the idea behind SimCFO. You take over a business that's already in trouble, and make the real calls: pricing, M&A, which board members are actually leveling with you. I give you honest feedback on your decisions and reasoning, not just whether the number went up (although that’s important too). Gamified, self-paced, lifetime access, so, no deadline hanging over you.

PS - I've already seen how most people do in the simulation of a covenant breach negotiation, it's not pretty. But … maybe you'll prove me wrong?

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Lots of fun stuff on tap today... This week it’s a PE special! We have three questions from PE backed CFOs with tricky sponsor politics to manage.

Here’s what’s up:

Now, let’s get into it.

The cash flow distressed CFO from UK

How do you manage the first time PE-backed CEO as a CFO in a cash strapped business? Naturally the CEO is Eton college educated and got the job through his PE mates so has no idea of cashflow and working capital management.

The reason we fail is revenue not being there yet, or Gross Margin is horrific and we give everything away for free/repair everything….

I’m new to the business so don’t want to be struck off the Ascot races VIP list… 

Any help would be appreciated!

Well, first of all, I’m delighted to hear Eton’s record of producing folk capable of failing upwards into Number 1 leadership positions remains undefeated.

It is always nice to see the underdogs win. (Number 10 North might be a longer drive though 👀)

OK, needless political satire aside.

It is hard to know what to say here. No cash, weak revenue, horrific gross margin, and a leader who may not understand cash flow or working capital management. I am not sure this is one you will fix on your own.

When businesses fail, it usually sits in one or more of three buckets:

Bad businesses can limp on for a long time if they are brilliantly run. A lot of airlines live here. A bad balance sheet usually gets found out when the economic cycle turns and there is no resilience left. I inherited a monstrously bad balance sheet once upon a time, ouch. Bad management can be the easiest to fix, but only if the people with power are willing to fix it.

So your job is not to “manage” the CEO in some clever Machiavellian way. Your job is to make the truth impossible to ignore, while keeping your own fingerprints clean and your behavior professional.

So I think the way I’d play this (if you’ve already tried to go through to him on a one-to-one basis) is transparency.

Increase the frequency, and simplicity, of reporting.

If you are genuinely under cash distress, you should have a 13-week cash flow that goes to the board weekly. This is important from a directors’ duties perspective if there is a real risk of insolvency.

And your sponsors’ love for your CEO might run out quickly if they realize he is going to lose them real money.

If your cashflow forecast slips because sales missed by £500k again this week, say that. Eventually, someone on the board should be forced to ask: “Tarquin, what are you doing about those falling sales, old boy?”

You also need to separate the symptoms from the disease. “We have no cash” is not the real problem. Why do you have no cash? Is revenue below plan? Is gross margin structurally wrong? Are you pricing badly? Are you discounting too much? Are you over-servicing customers? Are repairs being treated like a customer retention strategy rather than a margin wound? Is working capital being ignored? Is the debt structure too tight?

You can use your month end bridges for revenue, EBIT and free cashflow to make it unbelievably obvious in the reporting. And report it often. A simple story told frequently is hard to ignore.

If the CEO, nor the board, will not engage, then you need to protect yourself. In a distressed business, the CFO cannot be the only adult in the room, absorbing the risk while everyone else enjoys the pheasant.

So get your concerns on record. Keep the board informed. Make sure the directors understand the cash position. And if you are near the edge, get proper insolvency advice early.

Finally, be honest with yourself.

If your equity is underwater, the sponsor is asleep, the CEO is immovable, and you cannot see a credible route through, then you should at least consider your options.

TLDR: Don’t fight the posh CEO. Box him in with cash truth, weekly reporting, and board-level transparency.

RJM from London, UK

What do you do when a PE sponsor treats the forecast as a negotiation, not a forecast?

They push for the number they want to show internally at the PE house, force you to adopt it, then hold you accountable when the business misses a forecast you never believed in.

Ooof, RJM.

I feel your pain.

This is not easy, and it highlights one of the things I do not like about PE CFO roles.

At face value, it looks like a classic case of top-down pressure meeting bottom-up reality. You see that in all sorts of businesses, regardless of ownership structure. But PE roles are different, because despite being the CFO, you may not have direct access to manage those top-down expectations.

As a public company CFO, you talk directly to investors. For better or worse, you are accountable, but you also have access.

In a PE-backed business, that access is usually mediated through the sponsor, board, operating partner, deal team, or some other layer of people who all have their own incentives. In a way, your PE operating partner is doing part of the CFO role themselves, and doing it badly by the sounds of things.

And do not kid yourself here. You are at real risk of being set up.

I guess your business is behind its value creation plan, and your operating partner does not want to fess up to that internally. So they are forcing fiction back into budgets, then holding you accountable for missing their fiction.

That sounds like their insurance policy. When the truth comes out, they can point to “management failure in execution” and swap the team out, including you.

I might be wrong. But that is what it smells like, so watch your tail.

This is politically delicate, and the precise recommendation depends a lot on the specifics. But here is my challenge to you: can you change the frame?

It sounds like you are locked in a losing battle of negotiating each new turn of the planning cycle, whether that is annual budget, quarterly forecast, or whatever fresh little spreadsheet nightmare has been invented this month.

So how do you take the discussion outside that cycle? How do you expand the conversation in a way that is still music to the ears of your operating partner?

My suggestion would be a drains-up review against the value creation plan.

That means reviewing where the business started when the PE fund bought it, where the fund expected it to get to by exit, where it expected to be now, where it actually is, what the gap is, what is driving the gap, and what can realistically be done to close it.

Basically, a proper variance analysis against the original VCP.

Not just “why is this month’s forecast annoying?” but more “what has happened to the actual investment case?”

That does a few useful things:

That is the move I would try. A reset of the value creation conversation.

My hope is that this changes the debate and forces a more honest discussion about where the business really is. But be aware, forcing this transparency could have a wide range of consequences. Some good. Some uncomfortable. Some career-limiting if you handle it badly.

But in truth, you are probably just accelerating the future.

If this is a hopeless exercise where you and the CEO are being handed more and more rope to hang yourselves, it is better to know sooner. And better to surface it under your own control, with your own analysis, than wait for the sponsor to weaponize the miss later.

If you want more guidance on VCPs and how to fold them into your planning cycle, I wrote this piece last year.

And if you need cheering up (it sounds like you might), watch this 6-minute clip of Zinedine Zidane playing for Real Madrid to the soundtrack of Scottish band Mogwai.

TLDR: Watch your back, you are probably being set up. Reframe the debate around the value creation plan and force one version of the truth.

Mark from Amsterdam

Hi Secret CFO,

I joined a PE-backed company as CFO and found a problem that was not really in the numbers, but in the way the numbers were allowed to speak.

The business had two very different engines. One was a highly profitable but slightly boring distribution business. The other was a portfolio of very large, complex engineered projects. The CEO was an engineer, and the projects were his natural habitat. They were also his strategic signature, especially the large oil and gas projects on which the growth story to the PE owner had been built.

The reporting architecture aggregated performance into geographical segments. At that level, the business looked acceptable. But when we looked at project performance, a different picture emerged. Significant deterioration and risk was visible. The numbers were not wrong. They were just arranged in a way that made the wrong conclusion easy.

When I proposed changing the reporting structure, it immediately became clear this was not a neutral accounting issue. It would change the conversation from segment performance to the economics of individual projects most closely associated with the CEO’s legacy. He once said that if the owners found out what was happening, they would “kill his baby.”

The proposal did not land well.

My question is this. In a PE-backed company with an engaged board, sophisticated investors and every incentive to see underperforming assets clearly, why does the CFO who makes the problem visible sometimes become the problem first?

And what does that say about what the CFO role is really there to do?

Mark,

This is an interesting situation, but your framing of the question is slightly odd.

It sounds like the person who objected to your proposal was the CEO. And it sounds like they objected because your proposal would expose the economics of projects they are emotionally and professionally attached to.

So that is the answer, there is no mystery here. It hasn’t gone down well because they don’t like the answer!!

Your CEO has pet projects. They are not being properly exposed by the current reporting architecture. And your proposed change would force the business, the board, and the investors to look at them properly.

So, no, it’s not a neutral accounting change. It reveals a new truth about the business, and it’s a shift in power dynamics. But that doesn’t mean it’s wrong! In fact, quite the opposite.

If the current reporting allows underperforming projects to hide inside geographical segments, then the current reporting is not just a technical issue. It is protecting a false narrative.

And in your case, it sounds like it is protecting the CEO’s narrative.

But this is not his play money. This money belongs to the company and, ultimately, to the investors who backed the plan. If project-level economics are deteriorating, and if those projects are a drag on value, the CFO has a duty to surface that clearly.

In fact, this could be a significant value creation event. If the distribution business is strong and the engineering projects are dilutive, then simply creating transparency could change the equity story. Maybe the answer is to kill certain projects. Maybe the answer is to price them properly. Maybe the answer is to ringfence them, restructure them, change hurdle rates, or just stop letting them consume capital like a Dachshund in a sausage factory.

So I would start with the CEO, privately and directly. Show him the project economics, the enterprise value impact, and what the board will eventually see, because they will. Then make the point calmly: this needs to be surfaced, and the two of you should agree how to do that in a controlled way.

Give him options, but with a clear timeline.

For example: “I need to share this with the board quickly. I can hold off until the next board cycle, and that gives you the time to figure out how you want to land that message with the sponsor. But we cannot keep reporting the business in a way that protects a story about the business which is wrong.”

But if he refuses, or doesn’t stick to the plan, you have to report it your way anyway. Just make it clear that is where you stand. So don’t blindside him unfairly, but explain up front, you have a real duty to the board and the investors to surface what you have discovered about the economics of the business.

It’s not your job to be the CEO’s personal brand manager. You need to make sure the business can see itself clearly, especially where capital is being consumed and value is being destroyed.

TLDR: If you have discovered something that changes the economic story of the business. You have a duty to surface and fix it, however much it upsets your CEO. Where you have more options is in how you communicate, which ideally is in partnership with your CEO. But it’s ‘how’ and ‘when’ not ‘if’

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ICYMI, here are some of my favorite finance/business social media posts from this week.

My World Cup Team of the Tournament. Oh … you didn’t ask?! I’m sorry … too bad, you are getting it anyway. (Note the correction in the replies, I don’t know how I missed Dani Olmo, shame on me).

This is what people are saying about us … team? We understand Payment In Kind notes, right? RIGHT?!

Let me know what you thought of today’s Mailbag. Just hit reply… I read every message.

Last weekend’s Playbook was part III of our series: Building FP&A, and we look at the problem (ok … my problem) with business partners.

Last week’s Boardroom Brief talked with Kalin Anev Janse, CFO of the European Stability Mechanism. A bad ass CFO charged who has spent more than his fair share of time in the frying pan.

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