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Now, on to today’s Mailbag.
We’ve got some great topics. Here’s what we’re diving into today:
Cashflow principles in action
Making the leap to CEO
To adjust or not adjust
Now, let’s get into it.
Mario from Croatia asked:
Hi Secret CFO, I've just read your latest take on MFCF. Can't thank you enough for the value you provide, it's pure gold.
Anyway, while reading the newsletter, a couple of questions came up with regard to the OpEx/CapEx allocation to MFCF or below it.
1) Let's say we have to replace an outdated machine which had a capacity of 5,000 units per day. We decide to buy a new model which has a capacity of 7,000 units per day. Is this maintenance CapEx or growth CapEx? Or would you split the amount somehow?
2) If we hire 10 new sales people to grow the business, would you treat their salary as Investment OpEx or a regular OpEx? If the former would be the case, how long would you consider their salaries as Investment OpEx before it becomes regular OpEx?
3) How do you split working capital on growth vs cycle effects? I do have a system in place, but I would love to hear which system you normally use.
Many thanks!
Love these questions, Mario. You are right in the guts of Maintainable Free Cash Flow here.
I broke the core principles down in more detail here.
Now to your specific points.
On replacing an asset that is essential to keep the business running, I would generally treat that as maintenance CapEx. Even if it’s not quite a like-for-like replacement (often an upgrade.) The key test is simple: do you have to replace it to stand still? If yes, it’s maintenance. You can try to split the spend between maintenance and growth, but in practice that often creates more confusion than clarity. It muddies accountability and breaks the link between spend and ownership, especially if you want to track things cleanly at a project level.
If the spend is genuinely about growth, I would not bury it in OpEx. I’d treat it as an operating investment rather than a recurring operating cost. The distinction is important. OpEx is assumed to recur. Operating investments are one-off, must be justified, and must prove they delivered what they promised. Over time, if that investment proves successful and becomes part of the steady-state cost base, then it can migrate into OpEx. That discipline is how you avoid permanent OpEx bloat without commensurate growth.
Working capital is the trickiest part. One reasonable approach is top-down: model a mathematical relationship between revenue and working capital, and treat changes in the cash conversion cycle as “operating,” while the incremental working capital required to support growth is “growth.” That works fine. It’s even better if you can do it bottom-up. If you understand the cashflow personalities of the business, you can start to distinguish between structural working capital drag and noise much more accurately. I wrote about that here last week.
But underpinning all of this is an important truth: none of these classifications are perfect.
This is not about precision accounting gymnastics. It’s about choosing a framework that reflects how cash really behaves, while not making it too complicated for the business to absorb.
Maintainable Free Cash Flow is far more about principles than it is about obsessively “correct” internal rules.
TLDR: Classify maintenance vs growth based on economic reality, not accounting purity. Be consistent, keep accountability clear, and remember MFCF is about principles and cash behavior, not perfection.
Nugget from the US asked:
I'm sure you've had some in your network make the transition from CFO to CEO. It obviously starts with nailing the CFO role cold in the eyes of your CEO and the Board.
After that, what process did they use to gradually expand their role to eventually land the top spot? COFO? President reporting to CEO? I know part of it would be company specific, but I feel like this is a real possibility for me, and am looking to make the right moves.
Thanks for the question, Nugget. This one comes up a lot.
If I wanted to play to the crowd, I’d tell you that CFO is the perfect pathway to CEO and point to all the Fortune 500 CEOs who came up through finance.
But the uncomfortable truth is this: great CFOs often do not make great CEOs.
In growth businesses, the CEO job is usually won and lost on product and sales. You are trying to create breakout customer value, which requires deep customer intuition, product judgment, and a tolerance for ambiguity. It’s a creative role, not an optimization role. And most CFOs are wired for optimization.
So what about more mature businesses, where the game is margin protection, cash generation, and value capture?
Here, CFOs can be a much better fit. But even then, I’ve seen COO-style skillsets outperform CFOs as CEOs more often than not. Execution, sequencing, and trade-offs matter more than analytical elegance.
I’ve watched plenty of very strong operating CFOs assume they’d be great operating CEOs. Some were. Most weren’t. The ones that failed didn’t know when not to optimize. They squeezed too early, missed growth windows, and slowly presided over product or strategic decay. It was only with hindsight that it was clear just what a mediocre job they’d done.
And I’m talking about genuinely great, strategic CFOs.
There is one notable exception, and it’s a bit ironic: very large, very complex companies. Think multiple business units, each doing hundreds of millions or billions in revenue.
In those environments, the CEO role is largely about capital allocation, portfolio management, and resource trade-offs across businesses. That does suit a finance-trained mind. Which is why you see successful high-profile CFO-to-CEO transitions at that level more often.
But don’t generalize from that. Those are exceptions that prove the rule. In companies with tens or hundreds of thousands of employees, the CFO and CEO roles already overlap significantly. The jump is actually smaller.
Now, while CFOs don’t always make great CEOs, they often make exceptional board chairs. In many cases, far better than former CEOs or operators. A good CFO-chair understands governance, capital allocation, risk, incentives, and when to get out of management’s way. They know how to ask the right questions without trying to run the business from the boardroom. That is a massively underrated pathway for CFOs with ambition beyond the finance seat.
So back to you.
The real question isn’t “how do I become a CEO?”
It’s “what kind of CEO role do I actually want?”
If you’re coming from finance, I’d bias toward optimization-heavy CEO roles. And to prepare for that, first make a deliberate move towards a COO-type role. That usually means a few uncomfortable years unlearning some finance instincts and building new ones.
Or, you may find that the right long-term landing spot is not the CEO seat at all, but a bigger CFO role, or board leadership role where your finance skillset is a true force multiplier.
There’s no shortcut here. The CFO-to-CEO path exists, but it’s narrower, more conditional, and more situational than most people want to admit.
TLDR: CFOs can make great CEOs, but it’s more common that they underwhelm, especially in growth businesses. If you want to take the CEO path, first make a leap into a true non-finance role to test how elastic your skillset and mindset are.
Billy from USA asked:
Can you do a deep dive on why EBITDA is better than Adjusted EBITDA?
Hey Billy. I’m genuinely 50:50 on whether this is satire.
This is probably the most over-discussed topic in internet finance, and it was also the first post I ever had go viral back in my Twitter days:
But I’ll take it in good faith.
The short answer is this: EBITDA is not universally better than Adjusted EBITDA. The usefulness depends entirely on how the metric is being used and how honestly it’s constructed.
Let’s start with plain EBITDA.
The strength of EBITDA is that its definition is explicit. While people are quick to point out that it’s “non-GAAP,” it might as well be GAAP. Net income is defined. Interest is defined. Tax is defined. Depreciation and amortization are defined. EBITDA is just arithmetic on those numbers.
By definition, it ignores capex, which makes it a strange ‘earnings’ metric. This is why Charlie Munger famously called it “bulls**t earnings.” And he was right, if you treat EBITDA as earnings.
But nobody worth their salt actually does (despite the LinkedIn memes).
EBITDA is best understood as:
the top of a cash flow bridge, and
a way of stripping out accounting policy noise (especially depreciation) so you can talk about operating performance before capital structure and accounting choices.
That makes it extremely useful as a starting point for cash flow analysis and margin discussion. It’s also useful internally, because the costs between revenue and EBITDA are generally operating items that non-finance people understand (real cash out costs). Once you go below EBITDA, performance becomes increasingly polluted by financing decisions and accounting treatments.
People who say “EBITDA is useless” usually just don’t understand how it’s supposed to be used.
Now, Adjusted EBITDA.
Adjusted EBITDA simply means a bespoke definition of EBITDA. It is the accounting definition of EBITDA plus or minus a clearly defined set of adjustments.
When used properly, this is incredibly valuable. It helps users understand underlying performance by:
removing one-off or non-recurring items,
normalizing timing effects,
annualizing changes that genuinely reflect a steady state,
or isolating the economics of the core business.
This is especially important around corporate finance events - M&A, fundraising, IPOs - where getting to a clean view of underlying earnings power really matters.
And yes, this is exactly where the danger lies.
Adjusted EBITDA is wide open to abuse. You are effectively giving management and advisors a lot of discretion, and when there’s a transaction involved, the incentive is obvious: inflate the number.
But if anyone is taking someone else’s definition of Adjusted EBITDA at face value without asking ‘what are the adjustments’, then they don’t really belong in finance.
Rubbishing Adjusted EBITDA wholesale is like saying calorie trackers are useless because some people ‘forget’ to log their dessert. The problem isn’t the tracking app…
A well-constructed Adjusted EBITDA bridge is the backbone of serious corporate finance. It’s where the truth lives, if you know how to read it.
The real work is in the details:
Why are margin improvements annualized, but the overhead needed to support them isn’t?
If senior roles were vacant for three months, why isn’t that “cost saving” normalized back in as a recurring expense?
How is a one-off inventory windfall treated relative to the reserve that preceded it?
Are adjustments symmetric, or conveniently one-way?
This is why Quality of Earnings work exists. And why sophisticated buyers care far more about the bridge than the headline number.
I wrote a full deep dive on this last year here.
Your job, whether you’re a CFO, investment banker, or potential acquirer, is to build a brick-by-brick understanding of the business’s cash flow profile. EBITDA is the first brick in that structure (and one of the most complex). Building a bespoke restatement to arrive at “Adjusted EBITDA” is a powerful way to develop a first-principles understanding of how the business actually makes and consumes cash.
TLDR: EBITDA isn’t “better” than Adjusted EBITDA. EBITDA is a clean, standardized starting point for understanding cash flow, and Adjusted EBITDA is a legitimate (and essential) tool to get closer to economic reality. The problem isn’t adjustments, it’s bad or biased ones.
A few of the biggest stories that every CFO is paying close attention to. This is the section you might not want to see your name in.
The retailer is going all in on AI in 2026. It’s super interesting that they are diving in with two feet, and prioritizing the customer facing experiences, more so than the back office. It’s bold, and will be fascinating to watch.
I no longer have a big meaty debt stack to worry about, but if I did, I would be looking at this moment as an opportunity window for refinancing. There is so much macro risk right now, and it’s hard to see how rates can come down significantly in the medium term.
Enrollment in US accounting programs jumped for the third year in a row. It warms my heart. Unfortunately when I gently suggest to the Secret CFO Jrs that they might want to consider studying accounting they slap me down: “No Dad, we aren’t nerds like you.” Tough, but fair.
ICYMI, here are some of my favorite finance/business social media posts from this week. It’s like KISS says: I wanna rock ‘n roll all night and party every day.
Because those books won’t close themselves…
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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.
