📬 Getting payback: Does LTV/CAC leave room for manipulation?

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Roguetrader from Lithuania asked:

Looking at a b2c online subscription-based business, which gets its billings in advance for the whole period, which is 12 to 24 months (I know, the dream of every CFO to have such a cash conversion machine).

The business is heavily driven by ads. Typical CAC payback ratios are not very useful because CAC is most often paid back right away, due to advance billings for the whole period. LTV/CAC is used by the business, however, in my opinion, it leaves a lot of room for manipulation.

What is another way to look at the efficiency of marketing spend?

It’s a sharp question. On the surface, this sounds like a “first-world CFO problem.” Immediate CAC payback due to upfront billings? Yes, please.

But I’m guessing the real issue here is more nuanced: managing a cashflow profile where both CAC and revenue hit hard upfront, but costs unwind monthly over a 12–24 month horizon.

To make sense of this, you’ve got to fully understand the unit economics of a single subscriber. Two approaches spring to mind:

1) Accounting View

Spread revenue evenly over the subscription term to match ongoing costs. This gives you a clear picture of contribution margin, CAC payback, and LTV on a monthly basis. Use this on a per-customer basis and across your portfolio.

2) Cashflow View

Track the actual cash lifecycle of a single subscriber: upfront CAC, upfront subscription revenue, followed by a stream of monthly service costs. Probability-weight each path based on real churn data. This gives you a distribution of cash outcomes, not just an average, which better reflects the economic reality.

I prefer the latter.

Excuse the crappy formatting, but I think this is what you are looking to understand:

Sidenote - I made this chart in less than a minute using ChatGPT just by barking poorly written instructions at it. It’s getting very good. No clever ‘prompt engineering ‘ needed.

You could discount these cashflows, too, if you wanted to get sophisticated.

Understanding this profile is critical. If your "average" CAC payback is 18 months, but that’s actually a blend of customers churning out early and others renewing multiple times, then the average is misleading. What you really need is to understand the modal paths and the cash implications of each.

One warning (especially in an M&A context). It’s easy to model a cashflow curve per lifecycle. The hard bit is predicting what % of your customers fall into each group. That’s where the real diligence comes in. Smart sellers will front-load growth with aggressive marketing spend, inflating revenue at the expense of long-term retention, to juice valuation. You’ll inherit the cashflow burden, so make sure cohort quality hasn’t been gamed in the short term.

Commercial diligence is your friend here. In particular, make sure you understand CAC by channel and churn by customer segment. That will help you rebuild the quality of your short-term earnings (and ultimately value the business).

Good luck with the deal.

Andreas from Frankfurt, Germany asked:

Thanks for all the valuable and helpful content. Following up on your recent FDD deep dive, how would you approach the working capital/true-up negotiation as a buyer in an SMB deal, expecting that the seller most likely doesn't want to understand this? Any tips from your own experience as a buyer to shift the equity value of the SMB in your favor?

Andreas. This is an astute question. You’re absolutely right: nothing kills rapport in an SMB deal faster than overcomplicating working capital mechanics. These deals are emotional. You're not just buying a company, you're buying someone’s life’s work.

In these situations, most sellers see working capital (receivables, inventory, minus payables) as no different from cash. Specifically, they see it as their cash!

This is the opposite of what you'd expect in a corporate deal, where normalized working capital is baked into enterprise value. So while it doesn’t change how you value the business, it should change how you present that valuation.

Here’s the play: Let’s say the business has $500k of earnings and $500k of working capital. You’ve decided it’s worth $2m inclusive of working capital (i.e. 4x earnings). Don’t say: “We’re paying 4x including normalized working capital.” Do say: “We’re offering 3x earnings ($1.5m) plus $500k for your working capital.”

You’re saying the same thing, but now you’re talking in their language. No post-closing true-up. No “adjusted net working capital peg.” Just a simple, upfront offer.

Why this works: Sellers hate post-closing adjustments. They don’t trust them. They won’t understand your logic, they’ll just assume you’re trying to screw them.

Rapport is everything in SMB deals. And you earn that by speaking their language, not yours.

Of course, this approach only works if you're confident in the working capital you’re buying. Spend time understanding the AR and inventory (aging, turnover, and any risks, like obsolescence or customer concentration). Raise those points early and respectfully. It’s part of diligence and part of building trust.

In short: same economics, but structured to feel fair, transparent, and frictionless to the seller.

Ken L. from Houston, TX asked:

Appreciated this week’s monthly business review piece - the CEO-CFO “loop behind the loop” point really resonated.

But I work in a private equity-backed business, where the ‘MPR’ and board meeting can often become one thing - muddying the waters. In that situation, how would you toe the line between the governance of a board meeting and exec rigor of an MPR?

How would you handle it differently vs. traditional corporate?

Thanks Ken, this might actually be a good thing.

In PE-backed businesses, the convergence of the Monthly Performance Review (MPR) and board meeting isn’t always a failure of structure. It can be a feature. It often reflects a high-velocity operating rhythm where governance and execution are closely aligned. It’s common in turnaround environments, for example, where everyone ‘drops down a level.’

If done well, it means fewer surprises, faster decisions, and clear accountability from boardroom to the shop floor.

But it does shift the burden elsewhere.

If your board meeting is doubling as an MPR, you need to create space for the exec team to align before the board. That might mean a shorter pre-board MPR, or even just a structured pre-read with commentary. Otherwise, you’re debating unresolved issues in front of your investors. Which in the right environment might be ok, or it might make you look out of control. You also don’t want your board meeting to feel choreographed so there is a fine balance to find that suits you, and your investors. It depends on the dynamic.

Where it gets trickier is when the board’s too operational, or crowding out true exec debate. That’s usually a trust gap. You can close it with consistency, clarity, and execution. Over time, they’ll give you more space.

Ultimately, it’s about being deliberate. It’s fine to collapse the two meetings into one, just be sharp on where operational issues get debated and where decisions get made.

PS – If you missed it (shame on you), here's the full MPR playbook I wrote last week.

Every week, I’ll share a book I loved or found useful.

A few of the biggest stories that every CFO is paying close attention to. This is the section you probably don’t want to see your name in.

OpenAI CFO says new structure opens door for potential IPO

OpenAI’s CFO did not rulw out an IPO during a recent speaking engagement… but she also told the audience, “Nobody tweet in this room that Sarah Friar just said anything about OpenAI ultimately going public. I did not. I said it could happen." Either way, the company behind ChatGPT is making sure it can IPO if it so chooses (and more importantly, that it can continue to raise money) via conversion to a public benefit corporation.

Credit to Sarah for anticipating how her comments could be received and clarifying them in-flight. That is a CFO that can think on their feet in front of a crowd… an important quality for a public company CFO : )

Record CFO Turnover Is a Sign of the Times

It looks like the annual post-year-end CFO clear out was especially acute this year. What boards need today is very different from what they needed five years ago. Classic CFO skills are more important than ever in the current global macro environment, but companies also need to prepare for a very different future with AI. Be that unicorn that can do both.

ICYMI, here are some of my favorite finance/business social media posts from this week. In the words of Kendall Roy, “all bangers, all the time.”:

This has always been a real problem…glad to see it finally getting some airtime.

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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.