The Secret CFO

How did one VP of Finance bring Macy's to its knees with a $151M accounting scandal? Here’s how I think it all went down… (THREAD)

@HighyieldHarry That’s a pretty stellar set of names …. How the hell?!

8 firms in 12 years is crazy work in finance.

@scottmilleratx @matthere1 @alliao Very good example exactly right.

@matthere1 @SecretCFO @alliao This was exactly how Dell Computer grew insanely fast without requiring vast financing. negative working capital cycle… Just in time inventory powering build-to-order. Credit cards from customers billed on shipment. Invoices from suppliers paid net whatever.

Working capital is the most underestimated force in business. 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 - With a net income margin of 10% Extending that growth will lead to a total of $14.5M sales in the first year and $1.45M net income. Now make some working capital assumptions: - Days Sales Outstanding (DSO) of 30 Days - Days Inventory Outstanding (DIO) of 30 Days - Days Payable Outstanding (DPO) of 30 Days i.e. a Cash Conversion Cycle (CCC) of 30 Days: (DSO + DIO - DPO). Despite the $1.45M profitability, the business won’t generate any cashflow in year one. 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 (see the image) assuming that same business starts with $ 1M of cash on the balance sheet: If we assume the same dynamics, but instead imagine the business had poor inventory control, and ran on a CCC of 90 days. That same business would now 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 now generating ~$3.6M of profit). Now imagine the opposite were true, the business, ran on a negative CCC of 60 days, funded by a willing supplier; with very tight 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). This illustrates how much more sensitive working capital (and cashflow) is to changes in the business, than any profit metric you can choose. I call this effect: The Cashflow Megaphone. And as a long time turnaround CFO, understanding this inside out was the most valuable technical weapon in my armory in bending broken cashflows back into the black. And in times of volatile trading and macro conditions, these dynamics are more important than ever (especially when supply chains are gummed up like they are right now)

@theSLRguy Sorry to hear that. It catches a lot of people out

@SecretCFO This is how my first company failed. Thank you for teaching others

@DaveRekuc True dat

@SecretCFO People fall too in love with the liabilities portion of CCC and not enough with the inventory turnover portion.

@SteveWiesnerSMB Well said

Not having enough working capital is fatal. Too much can be a goldmine. Early 2000s. a PE group acquires a corporate orphan. Seriously undermanaged. $300 mm purchase price. Within 60 days they trim $25 mm of excess working capital. Too much inventory, sped up collections, pushed out payables. $25 mm lying on the ground, all because the former owner wasn't managing the business effectively. Now, in SMB land, you don't see this quite as often. Small businesses don't tend to have a lot of fat. They can't really afford it. That said, every now and then you'll come across it, especially on AP and AR. An owner who pays too quickly and collects too slowly. When that happens, you can free up a good amount of cash in a short period of time. Yes, revenue growth, margins, both are absolutely critical. But managing working capital well is also a source of return. Pay close attention when you're buying, and pay closer attention when you own.

I am writing a 5 part newsletter series called: Working Capital Warfare. You can read part one here cfosecrets.io/p/hiding-in-pl…

@atchison_dean Both are vital. There really is no reason to understand one at the expense of the other.

@SecretCFO Understanding cash flow is more important than understanding profitability.

@jjtejkl Yes , of course. But my point is that there are trade offs decisions made in the fundamental economics of the business - and working capital design is part of that. Many businesses don’t treat them that way.

@SecretCFO Most companies can probably internally fund a 15% growth rate. Cash conversion tells part of the story, but margins tell the other half. Gross margin dollars matter, a lot.

There are big retailers that look like this. But another would be early stage with a supplier with a strong balance sheet looking to sponsor growth. I am a shareholder in a small industrial distribution business, with one giant supplier who is prepared to use their balance sheet to support growth . It looks quite a lot like this . Consignment inventory, very long payment terms (supply side), etc.

@SecretCFO @alliao What kind of business has this? Honest question.

@vincerCFO @alliao No. Big gas station groups would be one large example.

@SecretCFO @alliao Yeah, but how many are young companies? I know you're just making a point.

@jonny_penn Yeah leave it with me

@SecretCFO Could you make the spreadsheet available to access pls?

@Lilly_SUG_EK Thank you!

@SecretCFO I recently recommended your newsletter to a few colleagues finance leaders. All were very happy to sign up for it.

Now look… I know the content has been pretty AI-heavy the last two months. That was by design.  We are in a moment, and I felt it was time to put my marker in the ground on where it's all heading. But it is not the most important thing. Let’s get real, there’s a job to be done. And it’s not farting around with Claude Code. Businesses need strong finance leadership, more now than ever: - The Strait of Hormuz is effectively closed. Causing huge levels of supply chain disruption. - Inflation is back. Energy, inputs, fertilizer; the commodity shock is broadening, and the margin squeeze is coming for every business that can't pass it on. Suppliers hav already sent out immediate price increase and surcharge notices. - Global trade and tariffs remain deeply unstable. The rules of cross-border commerce are still being rewritten. - SaaS and subscription business models are facing the existential challenge of a lifetime. The growth vs cashflow math has changed. - Credit markets are tightening. Who knows where interest rates will head. Refinancing walls that looked manageable two years ago are looking a lot less comfortable today. So, 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. When things get uncertain the rules are always the same ... focus on cashflow, focus on the controlables. That is why during May The Secret CFO Playbook will feature a 5 week series: Working Capital Warfare. Here's what's in store: Post I. Series Introduction - A personal story of working capital hell - Defining working capital ... properly - Common failing in working capital management - Working capital as part of your business model Post II. The Physics of Working Capital - The tidal mental model for working capital - Daily, monthly, and seasonal cycles, and how they compound - The volatility corridor: why funding the average gets you killed - What good working capital forecasting actually looks like Post III. Working Capital is Your Business Model - The magic Costco working capital flywheel - The five working capital types, and how to spot yours - Why your working capital profile is a strategic choice, and how to bend it to suit you Post IV. How to Fund Working Capital - Nike the early years - Where does working capital stop and capital structure start? - Different types of working capital funding - when to use - Supply chain finance… crack for balance sheets - Working capital in M&A Post V. The Tactical Arsenal - The receivables playbook - The payables playbook - The inventory playbook - When to trade working capital for P&L - Reporting, KPIs, and the governance layer that makes everything else stick This is my favorite topic, and I can't wait to dig in. Please sign up to my newsletter using the link in my bio

@alliao The minus 60 assumes 15 dso, 15 dio and 90 dpo. There are businesses out there with this profile, it’s rare, but they exist.

@SecretCFO Imagine a business able to command 120 days to pay lol

@RobertMSterling @jamesonhaslam The feeling is mutual my friend. Keep up the awesome work 🙏

@SecretCFO @jamesonhaslam In his defense, it’s probably because he got tired of all my complaints about working capital and NetSuite migrations over dinner 😂 Hope you’re having a GREAT weekend, brother. You inspire me so much!

every family should have at least 5 kids then you can have a doctor, a lawyer, an engineer, a contractor, and a court jester all under one proverbial roof

@RobertMSterling @jamesonhaslam Similar… I’ve got too many, and so far just seem to be collecting new dickheads I have to feed

@jamesonhaslam We have four and so far we have a food thrower, a toys in the toilet flusher, a Super Mario expert, and a teenager that won’t talk to us

@BoringBiz_ Everything always looks easier from the outside

The most successful people tend to have extremely high respect for others at the top of their field because they understand just what it takes to be there, while everyone else underestimates it

@Soles_Scream 🙏

@SecretCFO This post is

@alt_w_v_g Thanks man!

@SecretCFO Banger I can’t believe this app is free