Hiding in Plain Sight: Working Capital Warfare I

Every vendor in your inbox wants to sell you AR software

Alyssa, Director of AR at ZoomInfo, hired a co-worker instead:

"Stuut has absorbed the part of AR that drains a finance team the fastest. It used to eat most of our week and produce very little. Now it just runs, and we spend our time on the accounts where we can actually move the number."

That's Stuut. The co-worker who actually does your AR work.

We've got an exclusive offer for SecretCFO readers.

3 months into the new job, and I'd had enough.

Either the CEO had to see it my way, or I'd leave before I'd even gotten started.

I'd been brought in as CFO at the height of a cash crisis. I'm talking… nose of the plane pointing downward, engines on fire, and the ground getting visibly closer with every second that went by. And now, the CEO had leaned over, grabbed the controls, and pushed the nose down further still.

My mandate from the Board had been clear: "This business is shit at managing cashflow; from the very top to bottom. You need to fix that. Whatever it takes, or we won't survive."

And now I'd seen firsthand what they'd meant.

The CEO had sanctioned, with the VP of Sales, a 30-day extension in payment terms for our biggest customer in exchange for a few points of growth.

Sure, the growth would be valuable and bring a decent EBITDA prize too. But in the short term, this would cost almost $50m of working capital. It would cut our cash headroom in half at the height of an utterly existential cashflow crisis.

I hadn't been consulted, and I was furious. I don't get angry easily. But when I do, it's not pretty.

The CEO was a smart guy… smarter than me. But he had never been in a cash-constrained environment before. In his mind, he'd just walked another $8m or so of EBITDA through the door, potentially worth close to $100m of market cap.

Working capital math (which catches many finance pros off guard, too) was simply something he'd never had to think about before.

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

He lectured me on the importance of growth. How we'd "die if we didn't grow."

Ah, fuck it. May as well go out in a blaze of glory…

"That's the dumbest shit I've ever heard. If we don't grow, sure, we die… but we die slow. And while we are dying slow, we will get other shots at fixing the growth issue before we actually die. But right now, this business isn't fit to grow. It has no right to grow. Our cost base is out of control, and our cash conversion cycle is broken. Growth is the worst thing that could happen to us right now. But, you see this number...?"

I pointed to the liquidity headroom line on a printed copy of the 13-week cashflow forecast. "When that goes to zero, that's precisely when we die. Not some nebulous point in the future, on that actual date. And with your name and my name on the headstone."

For dramatic effect (aided by the red pen in my hand), I crossed out the headroom figure in each of the 13 weeks and reduced it by $50m.

The penny dropped.

I'd been trying to get him to listen for six weeks. This was my last shot. If it failed, I'd walk, because the business couldn’t be helped. I pitched that we needed to tackle things in the right order, with concentrated focus on each stage.

Three stages. In sequence:

I knew the CEO would hate it. He was from a sales background. He wouldn't want to hear any of this.

But he surprised me… "OK. I get it. Where do we start?"

A complete change of tone in the space of one conversation. I told you he was smart. As soon as his blind spot had been checked, he learned hard and quickly.

"You and I spend this weekend together. I'll bring a 12-month cashflow model. We don't leave until we have a plan that gets us to free cashflow positive, with $100m+ of cash on the balance sheet. It's going to mean doing some things you don't want to do. Including reversing that dumb ass payment term change."

And that's exactly what we did.

By Monday morning, we had a plan. But more than that, the CEO and I were ready to go to war together. He respected that I'd been willing to throw myself in front of the bus to stop him from driving everyone off a cliff. And I deeply respected how well he'd listened and how hard he'd pivoted once he understood it.

We agreed cashflow would lead the business until we'd hit our hurdles, with one condition: We would stapled a culture into the business that respected cash along the way. Neither of us wanted to end up back here.

Once we had the same frame of reference, the hard decisions got easier:

All of it would hurt sales in the short term. But we'd survive… and I’d done the math and knew the vast majority of what we'd lose was bad sales with shitty margins anyway.

Within twelve months, we had a platform for growth.

I was impressed by how quickly the CEO switched from a ditzy growth fairy, to a hard-ass turnaround pro. He had the humility to recognize his entire approach had been wrong and to change it in the space of a few conversations. That humility saved the business, both our asses, and we're still friends today.

Fast forward twelve months: a leaner, meaner, better business. The bruises healed quickly. The perfect platform to grow.

And grow we did…

Once the business was in the right shape, we grew faster than ever. From a stronger balance sheet, with better cash conversion.

Probably the proudest chapter of my career, if I'm honest.

Now look… I know the content has been pretty AI-heavy the last two months. That was by design. There is a lot going on, and AI needed a Playbook in this moment.

But let’s get real… there’s still a job to be done for CFOs. It’s harder than ever, and it’s certainly not going to be solved by farting around with Claude Code.

Your business needs you. More now than ever:

Sure, businesses need CFOs with one eye on the future. But the other eye, not to mention the head, heart, and both hands, needs to be firmly on the wheel.

Particularly on cash. Nobody knows where interest rates are heading, when credit markets could seize up, or how long this supply shock will run. What we do know is that the businesses that come out the other side intact will be the ones that know how and when to hunker down on cashflow.

The best way to underwrite the future of your business is still: positive, maintainable free cashflow.

And the most powerful lever you have?

Same as it ever was… my favorite topic: working capital.

Over the next five weeks, we're going to get deeply forensic on what best-in-class working capital stewardship actually looks like.

Let’s dive in straight up with an example..

Let’s imagine you have a business running at $500k per month of sales. All of a sudden you experience a breakout moment: 15% sales growth month-over-month for a year. Assuming a net income margin of 10% the business will generate $14.5M of sales over the year and $1.45M of net income.

Now make some working capital assumptions:

In other words, a Cash Conversion Cycle (CCC) of 30 Days: (DSO + DIO - DPO).

Despite the profitability the business won’t generate any cashflow, in fact it will outflow ~$375k of cash over those twelve months as it lays down the additional working capital needed to react to the growth.

Now, lets run some scenarios assuming that same business starts with $1M of cash on the balance sheet:

If we take the same dynamics, but instead imagine the business had poor inventory control, and ran on a CCC of 90 days, the business would have a negative cash balance of ~$3m by Christmas… or more accurately would be dead by June.

And at that CCC, even if the business 2.5x that net margin to 25%, the business would still run out of cash in 9 months (that is despite generating ~$3.6M of profit)

Now imagine the opposite were true, the business, ran on negative CCC of 60 days, funded by a willing supplier; with tighter inventory and receivables levels. In this scenario, even if the net margin were only 5%, the cash balance would explode to over $5m (positive) by the end of the year.

In fact, at a negative 60 days CCC, even if the business operated at a 25% net loss margin, it would still survive the year (just about).

These are extreme examples, but they illustrate the power of working capital. Especially in moments of extreme business volatility.

So, let’s dig in, and start with some basics:

Working capital is the cash tied up between paying to operate your business and getting paid for what it produces.

Then there’s the textbook definition: Working Capital = Current Assets Minus Current Liabilities.

That's a perfectly good outside proxy if you are an equity analyst and all you have is a 10-K. 

But as operators inside the business, we have transaction-level detail and can find  more fidelity than that. We need to look beyond the conventional accounting definitions and be more precise.

Take cash on the balance sheet. The textbook definition would sweep all of it into working capital. But not all cash is working capital:

And that’s not the only example of things that live in the accounting definition of working capital but don’t really behave like working capital:

Any one of these could be big numbers, with a heavy influence on your working capital story.

And I could have written another ten of these if it weren't for strict editing (thank you, Drew).

The point is, working capital is the recurring, constant motion of cash that keeps your business operating. Design your working capital operating system around that idea. We'll get into exactly how you do that through this series.

So … some homework:

Working capital gets used as a lazy proxy for all kinds of other problems and poor behaviors. Because it's inherently complex, and it's very convenient to take adjacent failures (bad decisions, bad habits, bad businesses) and label them as a working capital issue. And it's precisely because working capital is complex that we need to keep the definition tight. The more clearly you define the problem, the more manageable it becomes.

A few examples worth nailing down:

Working capital is not losses in disguise. This one comes up more than it should. A cash burn gets attributed to a "working capital problem," and everyone nods along. But get under the hood, it’s just losses. Working capital has assets and liabilities underpinning it. They unwind, they cycle, and they come back. Losses are a permanent destruction of capital. They don't cycle back. They need to be financed differently, communicated differently, and fixed differently.

I saw this recently in a CPG scale-up I was considering backing as an angel. The pitch framed the capital ask as a working capital need, but under the hood, 90% of the ask was funding losses, speculating on future profits. Which is fine too, but a completely different mental model.

Working capital is not a balance sheet presentation exercise. The last decade has seen an explosion of creative working capital financing: receivables finance, PO financing, merchant cash advances, and even ad platform financing. Many of these products are specifically engineered to justify a net balance sheet presentation under GAAP. 

This is a fool’s errand and nothing more than financial doping of the cash conversion cycle. The business soon loses the muscles it needs to properly manage working capital and meanwhile gets hooked on 20+% interest rates. All while the underlying problem compounds quietly in the background. If you manage working capital like this, we can't be friends. Which would be a shame, as I was just getting to like you…

We'll get into when it is and isn't appropriate to use working capital debt later in the series.

Working capital is not a finance team only problem. Good working capital management is a full-body contact team sport, with finance as the orchestrator. But the decisions that actually move the needle (product architecture, payment terms, inventory positioning, billing triggers, contract structures) are made by sales, procurement, and operations. If your working capital program never makes it off the CFO’s desk, it will fail. We'll talk much more about this later.

Most people treat working capital as an execution problem. An overdue debt that needs chasing. Inventory that's too high and needs to come down. Supplier terms that need renegotiating.

All of those things can be true, but most working capital problems are problems of design.

The design of your working capital cycle is part of your business model. It's strategic. Some of the greatest business stories ever told were built on competitive edges found in working capital. We'll get into those in two weeks' time.

But the key takeaway as we head into this series: a working capital problem is more often than not a strategic problem. If your cash conversion cycle is broken because 70% of your inventory sits on a boat from China for twelve weeks, and you're paying at the point of departure, that goes all the way back to the design of your supply chain and your product strategy. You can chase debtors all day. It won't fix that.

We'll break all of this down over the next five weeks.

Working capital is far more strategic than most businesses give it credit for. Great design and disciplined execution are a genuine competitive advantage. One that supercharges growth when you get it right.

Get it wrong, and it'll kill you.

Next week, we look at the fundamental physics of working capital and what it reveals about your business.

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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.