Mergers and acquisitions aren't all the same.

There are five flavors to savor.

Let's break them down 🧵: 1. Horizontal

Horizontal M&A is where two similar businesses come together.

This means two direct competitors combining (often one eating the other). Or two businesses operating in different segments of the same market.

E.g. Disney acquiring 21st Century Fox.

What the f*ck does a CFO do all day anyway...?

Here's how I spend my time:

🧵 Before we start...

This split is based upon a large mature Company in steady state. With some form of funding from the capital markets.

It will be different for non-steady state situations (we'll cover that later)

Let’s jump in

For any CFO, mastering capital allocation is non-negotiable.

Here are the fundamentals in just 3 minutes 🧵: There are three options for a Board of Directors to allocate capital within a business:

1. Strengthen Balance Sheet
2. Grow The Business
3. Returning Capital to Shareholders.

Your job as CFO is to guide them to the right one.

Let’s dive into each…

I have spent the last 17 years fixing broken finance functions.

Here are 11 mistakes I see consistently in poor finance functions:

🧵 1. Soggy Monthly Closes

The monthly performance feedback loop is the most vital control in a business.

Underperforming businesses always have soggy monthly closes:
- Closing in 15 days when it could be 8
- Constant restatements
- Failure to explain performance

Business growth lives or dies by working capital.

Two business A & B:
Both have the same P&L unit economics
Base Sales = $500k per month
Operating Profit Margin = 10%
Both start with $1m cash in bank.

Both hit a growth vein.
Sales start growing at 15% per month.
Assuming no operating leverage that mean each make operating profit of $1.5m inside 12 months.

But now let's assume both have different working capital models.

Business A has a long working capital cycle:
- 90 days of forward sales in inventory.
- Pays supplier on 30 day terms
- Gives customers 60 day terms

Business B has a leaner working cycle
- 30 days of forward sales in inventory
- Pays suppliers on 90 day terms
- Gives customers 30 day terms

The Income Statements would look identical for both businesses.

Yet when you look at cashflow they are night and day.

At the end of the year Business B is sitting pretty with $3.6m in the bank.

Business A is dead and buried by Month 5.

Optimizing the working capital cycle is one of the most high leverage things you can do for growth. The key point here is the working capital cost of marginal sales growth.

In Business A it’s roughly 30 cents per $ of sales growth,
On a business that is earning only 10 cents per sales $ of contribution that means for every $ of sales growth a net investment of 20 cents of cash is needed. Crippling. Explains why the red line bends downwards.

Whereas in business B it’s roughly -8 cents per $ of working capital.
On the same contribution margin that means each $ of sales growth GENERATES 18 cents of cash.

There is a storm brewing in the UK.

A miscarriage of justice, 23 years in the making.

A tragedy of deceit, death and dodgy systems that could tear down a 364 year old institution.

This is the story of fraud at the Post Office 👇 What is the post office?

The Post Office is a retail network of 11,500 branches.

Owned by the British government providing mail, financial and government services to the public.

Need to send a package? Renew a passport? Change foreign currency?

Head to the Post Office:

We are taught that costs are either fixed or variable:

o Fixed Costs = Costs fixed in $ regardless of output
o Variable Costs = Vary directly in $ with output

But that isn't the full story ... Businesses with a higher proportion of fixed costs (or high operating leverage) have a steeper cost curve.

Low op leverage companies have a shallower cost curve.

This all assumes a simple relationship between costs and output.

But in practice, this is not how costs behave...

How to compete on price and win.

Being cheap is easy.

Anyone can lower their prices.

And lower prices = more volume, right?

But lower prices can only win, if they are underpinned by lower costs.

So, if you are competing on price, it’s not really price you are competing on. You are competing on cost.

Specifically on Cost per Unit.

Selling cheaper is not a competitive advantage. Buying cheaper, and operating cheaper is.

And the easiest way to cost leadership is scale.

This is known as operating leverage. As volumes grow some costs stay fixed (rent, indirect salaries, etc). And so as units grow, Cost per Unit falls.

And lower costs per unit, mean you can sustainably offer lower prices. Which drives more volume, which reduce cost per unit further, and so on.

Here’s an example of a one product business, with:

Variable cost: $30 per unit
Fixed cost: $10,000,000 per year
Profit Margin: $20 per unit

At higher volumes the business gets the benefit of lower fixed costs per unit:

At 100,000 units per year, the business has to charge $150 per unit. And at 1,000,000 units it can charge $60 per unit, and still make it's $20 per unit (and on 10x higher units).

This is how scale players squeeze out smaller competitors on price.

In reality, the 100,000 units go to zero, because no customer will pay $150, when they could pay $60 for the same thing.

There is be definition only room for 1 or 2 cost leaders in each market. That’s tough for new entrants.

So how do you build a cost advantage to navigate around strong incumbents?

Let’s talk about two different ways:

1. Find a niche where you can lead.
2. Re-engineer the supply chain.

See below for a dive into each
1. Find a niche where you can win.

We said the goal is lowest operating cost per unit.

But what is a ‘unit’?

Walmart pride themselves on an operating cost of around 20% of sales. When you consider what they do, this is incredible.

120,000 different products under one roof, and a complex bunch of services; deli, apparel, pharmacy, etc.

It’s hard to think of a way of offering that size of range in a bricks and mortar store for a cheaper cost per unit.

But that doesn’t mean they can’t be out maneuvered in specific areas.

Costco do this brilliantly on bulk products, where they can compete and win on cost with Walmart.

Let’s take bottled water as an example.

Costco stock one bottled water product; the Kirkland Ellis slab of 40 x 16.9 fl oz.

If you search for bottled water 16.9 fl oz on the Walmart website you will find 488 results.

Big packs, small packs, single bottles, flavored, electrolytes, countless brands.

Each of those products, needs supply management, transport, warehousing, merchandising, checkout.

That complexity creates a fixed cost in itself that has to be absorbed by every product.

Costco have defined their market around bulk, and engineered their whole business to serve that need as efficiently as possible.

This is an example of two Goliaths approaching cost leadership differently.

But this can work with other approaches too. You can compete on price at a different quality point. Or on a narrower range / product category

One common winning niche is Geography.

This is how a scrappy dude like @gas_biz can take on national gas station chains on cost and win.

By defining a clear geography where he knows he can be the lowest cost gas supplier.

And then building the network to deliver the best gas prices to that Geography.

Low gas prices = More customers = More gas volumes = More transport and buying efficiencies = Even lower delivered gas prices

Find a niche where you can win on cost.

Then get the flywheel going.

4D Budgets...

When you create an annual budget, you do so across 4 distinct dimensions:
1. Horizontal
2. Vertical
3. Organizational
4. Building Blocks

By defining these properly for your business, you will:
- make the financial modeling simpler and better
- make it clear who is responsible for what.

Taking each in turn:

1. Horizontal - Time Series

Time Horizon: For a budget this is normally one year.
Time Interval: Either monthly or weekly depending on the cycle of your business (CPG = Weekly. B2B Saas = Monthly)

You will need a data set for:
Year 0 (the year prior to the budget)
Year 1 (the budget year - the one you are modeling)

You will be approx three quarters of the way through year 0 at the time you set the budget for year 2. So you will need some forecast assumptions for the rest of year 0.

2. Vertical - Chart of Accounts & KPIs

You will need to capture a budget for each account in your chart of accounts across the Income Statement, Balance Sheet (and impute a cash flow).

You should also identify the KPIs and profit drivers you want to capture.

Think of this as the 10-20 metrics that drive your income statement. Examples:
- Price, volume, mix indicators; $ per unit, units
- Growth and margins by channel
- Operational activity metrics
- Cost efficiency measures; activity per labor hour

You will thank yourself for this later.

By having KPIs budgeted at the same level of detail as the financials, you can allocate your budget into KPI targets across the business and at all levels.

3. Organizational - Operating Units

This is determined by organizational design. How is your business organized?

Regions, countries, business units, product groups, factories, departments?

Getting the right atomic unit here is the hard bit.

The key is to mirror the level at which the Income Statement is driven.

You should define the hierarchy clearly, and be able to allocate each unit to a responsible exec.

4. Building Blocks - How is it built?

Picture this like a ‘waterfall' or 'bridge' format walking from Year 0, to Year 1.

What is the level you want to want understand those moves at? I.e. what are the building blocks?

Make sure your building blocks distinguish Full Year Impacts (FYI) from Part Year Impacts (PYI)
FYI - the annualization impact of something that has already happened (during Year 0)
PYI - the part year impact of something that is expected to happen, but hasn't happened yet (during Year 1.)

Typically building blocks fit into 6 buckets:
Growth. The natural effect of growth assumptions of the business
Risks. Things that will worsen profit year on year; e.g. inflation
Initiatives. Things that can be done to improve profit (and offset risks); e.g. price increases, efficiencies
Investments. Discretionary investments that will worsen profit in year. But for the good of the long term health of the business; e.g. R&D or marketing investment.
Tasks. An allocated, but not identified initiative; e.g. we need to reduce labor by $10m but we don't where yet
Contingency. Unallocated prudency to allow for one or more assumptions / component to miss; e.g. the budget 'adds up' to $30m EBIT, but we only 'need' $25m in total, so we have a $5m contingency.

By using these blocks smartly you can ensure your budget puts tension in the right place. Remember: the budget is a behavior driving tool

---------------

Those are the 4 dimensions of a budget.

By defining them clearly up front, it will make the budget process much easier. The number of items in each dimension will determine the design of your financial model.

The complexity is multiplicative.

e.g: 52 weeks x 200 accounts x 30 locations x 10 building blocks = 3.12m data points to model / manage.

That is likely too big to be practical in Excel.

Business growth lives or dies by working capital.

Two business A & B:
Both have the same P&L unit economics
Base Sales = $500k per month
Operating Profit Margin = 10%
Both start with $1m cash in bank.

Both hit a growth vein.
Sales start growing at 15% per month.
Assuming no operating leverage that mean each make operating profit of $1.5m inside 12 months.

But now let's assume both have different working capital models.

Business A has a long working capital cycle:
- 90 days of forward sales in inventory.
- Pays supplier on 30 day terms
- Gives customers 60 day terms

Business B has a leaner working cycle
- 30 days of forward sales in inventory
- Pays suppliers on 90 day terms
- Gives customers 30 day terms

The Income Statements would look identical for both businesses.

Yet when you look at cashflow they are night and day.

At the end of the year Business B is sitting pretty with $3.6m in the bank.

Business A is dead and buried by Month 5.

Optimizing the working capital cycle is one of the most high leverage things you can do for growth.
The key point here is the working capital cost of marginal sales growth.

In Business A it’s roughly 30 cents per $ of sales growth,
On a business that is earning only 10 cents per sales $ of contribution that means for every $ of sales growth a net investment of 20 cents of cash is needed. Crippling. Explains why the red line bends downwards.

Whereas in business B it’s roughly -8 cents per $ of working capital.
On the same contribution margin that means each $ of sales growth GENERATES 18 cents of cash.

How to win the corporate rat race: Make your boss look good

Your boss will decide what the rest of the business thinks of you.

Make them look good in front of their boss.

If they are mobile, so are you.

Building a great finance team is HARD 😅

But get it right, and it makes your life 10x easier as CFO.

It took me 10 years to perfect a framework that worked.

Let me share it 👇 There are lots of things that go into building a great finance team.

So, where do you start?

Simple.

You start with getting the right structure...

McKinsey say 70% of ERP rollouts FAIL

But why is it so HARD?

Let me break it down: 👇 First up. What’s an ERP?

ERP = Enterprise Resource Planning.

Three of the most boring words ever put alongside each other.

But what an ERP can do is not boring.

Most accountants are really bad at job interviews.

And I mean BAAAAAAD.

But thats good news.

It means it's easy to stand out with the right prep.

Here’s how to do it 👇 The first job interview I had when I left audit (nearly 20 years ago) was horrible.

I didn’t make time to prepare properly and I embarrassed myself.

It’s not even a funny story, it was just f*cking awful.

I promised I wouldn’t let it happen again.

There are 5 sacred Planning & Reporting processes to drive financial performance.

Here's the breakdown 👇

(Warning: Contains controversial views about rolling forecasts) You might have heard this called ‘FP&A.’

FP&A is short for Financial Planning & Analysis.

It is a set of finance processes that work together to improve future business performance.

The detail of the processes differ, but the approach is common to most mature businesses.

How does a CFO prep for an earnings call?

Short answer … it’s a sh*t ton of work.

Here’s what I do: ⬇️ 1.  Stay on top of performance

No good waiting until the quarter is gone

I use weekly updates and monthly management reports to track performance vs plan inside the quarter.

If something comes off; I’m onto the relevant finance team to ensure there’s a plan.

95% of people are reading balance sheets WRONG.

Stop wasting time with the ratios they taught you in business school.

Here’s how you read a balance sheet like a CFO.

Let's go! 👇 There are three key things to understand from the balance sheet:

1. Capital Structure
2. Working Capital Profile
3. Liquidity Headroom

Let's tackle them each in turn

Wanna know how the books get cooked? 🧑‍🍳📚

Silly question. Of course you do…

Here’s how: 👇👇👇 First things first.

Let’s clarify some definitions.

I often see people confuse ‘creative accounting’ with fraud.

There are levels to this game.

Balance sheets.

How do they work? And why are they so important?

Give me 5 minutes and I'll explain.

This is the beginners guide to the balance sheet 👇 First principles:

A balance sheet summarizes the financial position of a business at a point in time.

Think of it like taking a polaroid of the finances of a business.

It captures a moment.

Larry David should have CRUSHED Mocha Joe with his coffee shop.

But he didn't.

He didn't work his gross margin hard enough.

Here's what he should have done: This story starts way back when Larry David refused to tip a coffee vendor; Mocha Joe.

And for good reason ... Mocha Joe is a weapons grade asshole.

This rivalry boils on.

So Larry sets up a store next door to Mocha Joe to compete directly.

A spite store.

Avoid these 6 common budgeting mistakes and get better financial results in your business: 1. The budget should derive from Year 1 of the Long Term Plan.

• The Long Term Plan sets the broader financial direction
• First year shapes the detailed budget's framework
• This alignment anchors budgeting in broader plan

Align your budget with long-term financial plan.