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Remember the fall of 2008?

The banks were imploding. I was working in an FP&A role at a large corporate.

At the time, the big concern was that the short-term credit market would freeze up, making it impossible to recycle corporate commercial paper.

The instruction came down from the CFO: Leave nothing to chance.

We needed to drag more than a billion dollars out of working capital. We had to ensure the cash reserves were there, even if the credit wasn’t. It was the right move under the circumstances.

My slice of the pie was to work with the Divisional COO to reduce inventories by $250m within 6 months. We agreed on the plan, gave it a project name, made a huge fanfare, and briefed the ops teams.

A month later, my team produced the first progress reports to see how much of the nine-figure tasking had been delivered. We had a great operations team that loved a challenge.

But it wasn’t good news.

The answer was zero.

In fact, inventories had increased by $10m. All that noise, and we'd delivered nothing?

I had to take the news to the COO. A strange man with a love for uncomfortable silences. He quickly diagnosed the problem:

“My operations directors have a million things to worry about. They are ace at driving the 15 KPIs we tell them are important. And they are just as good at ignoring everything else. This is what I’ve trained them to do. That focus is why they are so good.

If we want inventory reduction to get taken seriously... we have to build it into their performance management cycle. Their reporting. Their bonus targets. We need to make it Topic #1 at weekly performance meetings. We need to drive it as hard as we do EBITDA, product quality, and customer service. Only then will the numbers move.”

It sounds obvious now, but this wasn't an uncommon problem. And doing it is much harder than saying it. Left to their own devices, most businesses will not optimize cashflow.

Sure, it will become a pet topic every now and then. But you never know when you’ll need that cashflow muscle.

And cashflow is not a light switch. You can’t just flick it on when the market crashes.

It’s like an elite athlete taking the summer off and expecting to be at their peak on the first day of the season. It doesn't happen without the preseason grind.

Except in business, no one tells you when the season starts. You just have to be ready. And that’s more true than ever, especially in the omni-chaos of the 2020s.

I learned my lesson. From that point on, for my finance teams, cashflow would always be a priority. Even when it wasn't. To get it right, identifying the “Cashflow Personalities” in the business would be the foundation (more on that later).

If you want cashflow to get a seat at the operations table, it’s on you, as CFO, to make it happen.

Welcome to part 3 of this 5-week series on Cashflow Mastery:

Now we have a clean way of dividing between two different management systems for cashflow:

This week, we are focusing on the former. How to squeeze every last drop of MFCF juice out of the operational lemon.

Next week, we’ll focus on how to make the lemonade.

The Cashflow Personality Test

The answer to driving MFCF aggressively in your business lies in a small but critical tweak to the Financial Planning & Analysis operation.

Your FP&A cycle is probably built around your P&L…

I know what you’re thinking: “Not me… we model out a 3-statement rolling forecast every month.”

OK … but do you? Do you really?

FP&A is typically great at identifying the key assumption levers to drive the P&L. Let's say you have two product categories: Widgets and Thingymabobs.

We’d agree that we should model these two categories separately.

Now, what if I told you that our biggest customer for Thingymabobs was growing faster than any other, and the gross margin on that account was only 35%? You’d spot a risk of margin dilution through mix, right? You would immediately model that customer as a separate unit.

You’d make sure you didn’t f*ck up your P&L model by falling into the ‘average trap.’

Here’s my challenge to you: Would you do the same for cash?

Imagine the margins were the same across all customers. But your biggest, fastest-growing Thingymabob customer demanded 90-day payment terms. And they require 30 days of consignment inventory at your risk. Plus, their specific product line requires heavy upfront CapEx.

A total cash drain that is growing faster than everything else. A single customer dynamic completely changes the shape of the cashflow.

Catching that kind of nuance is oftentimes lost in the FP&A function.

Instead, the ability to forecast, report, and manage those issues gets abstracted away into a few generic "Average DSO" assumptions buried in the model.

So here’s the killer point:

You HAVE to identify the different Cashflow Personalities inside your business.

You might be lucky. These might match your P&L categories. But they probably won't. A single customer or a single product variation can completely skew the physics of your bank account.

Here are a few common outlier "Cashflow Personalities" I’ve seen:

Am I saying you have to model every single SKU and customer to find these outliers? Definitely not.

Get the level right, and you avoid the 'snow blindness' of trying to model every single customer and SKU.

It isn't about mapping the whole universe. It is about surgical precision. Pulling out the handful of drivers that actually move the needle.

It’s about materiality to cash flow.

You have to be very good at identifying which personalities live in your business. And spotting when something doesn’t fit your current profile.

And then you need to build your FP&A cycle behind those profiles, so you can understand the effect on the total.

I’m living this right now as I rapidly expand my content business:

I’ve had to plan for the effect on the total profile quite carefully.

Elevating Your FP&A Cycle

Once you have identified the Cashflow Personalities in your business, you can't just leave them in a spreadsheet. You need to wire them into the nervous system of your company.

You do this by elevating your FP&A cycle to ensure these personalities are captured at every single touchpoint.

I could write a whole series on this alone. Instead, here is the cheat sheet on how to integrate Cashflow Personalities into the Sacred FP&A processes (with links to the deep dives from my FP&A Series from last year):

This may seem subtle, but it isn’t.

For most businesses, cash management is an island. It is managed out of Finance, hard to disaggregate, and find ownership. Creating 1:1 outcome:driver relationships is much harder for cashflow than the P&L. And the CFO is left tearing their hair out because they can’t get the business engaged in cash.

By following this process, you bridge that gap. You plug cashflow directly into the core management system of the business.

And sure, this makes your modeling a little more complex. It gives you a little more reconciliation work to do.

But that is your job. You are here to absorb the complexity, crunch it up, and serve it back to the business as ice-cold Cashflow Insight Smoothies.

When the plan fails

All this process and governance is great. But what happens when the plan becomes a sh*tshow, the variance analysis turns red, and the bank balance starts to slide?

The business stops caring about "long-term value" and looks at you to brute-force the cash back to a safe place.

This is when I deploy the Cashflow Surge.

If you’ve embedded cashflow into your FP&A cycle, cash drivers should be one of many important metrics managed by the operators. During a Surge, we rip it out of their hands and make it the only metric.

The Golden Rule: Keep it short.

A Cashflow Surge is an invasive surgery. When it is necessary, it is necessary, but it can be damaging to the long-term health of the business. It is distracting and often destroys growth momentum.

So, treat it like surgery: Get in, fix the problem, and get out. Do not leave the patient on the operating table longer than necessary.

(I wrote more about the mechanics of the Cashflow Surge here).

We’ll get deeper into governance to plan and course correction in the final week of this series.

A word on working capital

I am deliberately not getting too deep into the weeds on working capital today.

We have a full series coming in a few months called Working Capital Warfare, and I don’t want to steal its thunder.

This series is focusing on Strategic cash management. That series will get super Tactical.

BUT…

The shape and design of your working capital is central to this story.

You’ll notice in the Cashflow Personality examples above, the difference between a 'Workhorse' and an 'Aristocrat' isn't just the margin. It is the outlying shape of the Cash Conversion Cycle.

It is the difference between extreme negative and extreme positive working capital that defines much of the personality profile of your cashflow. Not all of it. CapEx and profitability matters too, but working capital shape is often the dominant feature.

I have written about the specific physics of this previously (in the 2023 Cashflow Series).

The power of MFCF in the wild

A story from the Wall Street Journal caught my eye this week, reporting on the collapse of First Brands Group, the autoparts manufacturing giant.

At the heart of that collapse was ‘supply chain finance.’

These are off-balance sheet facilities that allow a business to pay suppliers later, while the supplier draws their cash early, with a lender funding the gap (using the buyer's credit rating).

Crucially, this appears on the balance sheet merely as "Accounts Payable." To an untrained eye, it just looks like the business is getting great payment terms. An operational win. All reportable as free cash flow.

But dig deeper, and it gets ugly.

Genuine Parts (owner of the NAPA brand), another player heavy in this game, reportedly had supply chain finance obligations of $3.1 billion, or about 51% of their total accounts payable, according to the WSJ investigation.

That is roughly 24 times their trailing twelve-month free cashflow.

The real problem with these facilities is that giving businesses a shortcut to "free cashflow" destroys the core discipline needed to manage working capital. The business assumes these platforms will be indefinite and unlimited.

And they never are. When the music stops… ouch. All it needs is a small shift in the lenders credit appetite (or a growth in demand for the credit). And you can be left with payment terms your suppliers won’t trade on, and no bank to underpin the gap. Armaggedon.

It’s like a 100m sprinter taking steroids to keep up with the competition. When they finally have to come clean, they realize they’ve lost the underlying muscle and technique to run the race.

A CFO grounded in MFCF principles would not have treated that financial doping as operational cashflow. They would have flagged it internally as a debt decision (which is what it is), even if it doesn’t technically sit on the balance sheet as such.

It might not have changed the decision to use the facility, but it would have changed how the business measured itself. It would have forced the procurement teams to negotiate real payment terms based on leverage and relationships, rather than relying on a bank's arbitrage. Or for the business to solve for cash another way.

There are whole supply chains that are now built (and hooked) on these financial products, having lost all working capital discipline.

(I ranted further on this topic on Substack this week, specifically on what the Accounting Standard bodies should be doing to force clarity on this.)

I say this because I’ve seen it firsthand.

In fact, inheriting a balance sheet hooked on working capital drugs like this was the core inspiration for me to create MFCF.

It is a spiral that is incredibly difficult to exit.

And it wasn't just the debt that was the problem. It was the operational rot that came with it.

MFCF cashflows should be managed intensively for efficiency. And the best way to do that is to take the cashflow island and connect it to the operations mainland via an enhanced FP&A bridge. That is how you make sure the millions of tiny decisions made in the business every day add up to the most efficient MFCF conversion.

But not all cashflows should be managed that way. That is what the second cashflow management system is for. Those cashflows that sit outside the MFCF decision and look more like capital allocation moves (the poker bets). That is where we head next week.

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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.