Insights — xl Financial

Six pieces, complete

01 / 02

Nothing here is a teaser, and there is no form in front of any of it.

Six pieces below, complete on the page. Each one takes a single thing that quietly costs owners money, explains the mechanism behind it, and gives you a check you can run on your own business this week without calling anyone. They are written by the people who hold the seats, which is why they read like notes from inside a business rather than a summary of an industry.

01DEBT AND LENDERS

4–9%TYPICAL GAP BETWEEN REPORTED AND TESTED EBITDA

Your covenant headroom is smaller than the number in your board pack.

Almost every covenant breach we have been called into was visible two quarters earlier, in a definition nobody had read. The EBITDA your board sees is management EBITDA. The EBITDA your lender tests is defined in the facility agreement, and it usually excludes some of the add-backs you rely on — restructuring costs, owner remuneration adjustments, capitalized development, and in most agreements anything non-recurring that has now recurred twice. The gap between the two numbers is typically between four and nine percent of reported EBITDA, and it is entirely on your side of the table to find.

RUN THIS CHECK THIS WEEK

Open the facility agreement at the definitions clause. Rebuild last quarter’s test using only the add-backs that survive it. If your headroom drops by more than half a turn, that is your real position.

02MARGIN

7 of 10TOP ACCOUNTS THAT CHANGE RANK WHEN COST-TO-SERVE IS APPLIED

Your biggest customer is probably your least profitable one.

Overhead allocated on revenue makes large customers look good automatically, because the allocation follows the very thing that makes them large. Allocate on what actually consumes the business instead — order lines, deliveries, returns, credit notes, calls to the office — and the ranking of the top ten inverts more often than not. The mechanism is simple: your biggest account is usually the one with the most frequent small orders, the tightest delivery windows, the longest payment terms and the most administrative contact. None of that is in a revenue-based allocation.

RUN THIS CHECK THIS WEEK

Take your top ten accounts. Count order lines, deliveries and returns for each over twelve months. Divide your operating cost by total lines rather than by revenue. Re-rank. The account that moves furthest down is the conversation to have.

03TRANSACTIONS

12–18 moLEAD TIME TO FIX WHAT DILIGENCE WOULD OTHERWISE PRICE

A buyer finds in week two what you have known for years.

Diligence almost never uncovers something the owner did not already suspect. It uncovers the things nobody wrote down. Revenue recognized on a basis that made sense internally and does not survive a policy review. A key customer with no contract. Stock valued at cost that has not moved in two years. Owner expenses inside operating cost. Each one becomes a price adjustment, and the adjustment is always larger than the item, because a buyer who finds one starts pricing the risk of the ones they have not found yet.

RUN THIS CHECK THIS WEEK

List the five things you would rather a buyer did not look at closely. That list is the diligence report. Every one of them is fixable in twelve to eighteen months and roughly none of them are fixable in the eight weeks after an offer arrives.

04CASH

1 day = 0.5%OF ANNUAL REVENUE RELEASED, PER DAY OFF THE CASH CYCLE

Profitable businesses draw on an overdraft for two reasons, and both are countable.

The first is stock that stopped moving but is still being reordered, because the reorder point was set on demand that no longer exists and nobody revisits it. The second is receivables nobody chases because the customer is important. Both are measurable in days, and days convert directly into cash: for most distributors and manufacturers, one day off the cash conversion cycle is worth roughly one two-hundredth of annual revenue in released cash. Take sixty days out and you have released most of a quarter.

RUN THIS CHECK THIS WEEK

Decompose your cash cycle into days inventory, days receivable and days payable. Work the biggest one first. Do not start a stock reduction program if your receivables are the larger number — that is the most common wasted year in this work.

05CONSTRUCTION

2.4xBONDING CAPACITY GAIN FROM REPORTING ALONE, ONE ENGAGEMENT

Bonding capacity follows the schedule your surety trusts, not your revenue.

Contractors grow into a bonding ceiling and assume the limit is about size. It is almost always about a work-in-progress schedule the surety cannot rely on. If percentage-complete is an estimate nobody has challenged, if variations are argued at final account rather than priced when instructed, and if the schedule going to the surety does not reconcile to the management accounts, the underwriter discounts everything. They are not doubting the business. They are pricing the reporting.

RUN THIS CHECK THIS WEEK

Ask your surety what would have to change for the limit to move. The answer is almost never revenue. It is a schedule on a fixed rhythm, on a defensible basis, reconciling to the accounts.

06BUYING ADVICE

8QUESTIONS THAT SEPARATE A FIRM FROM A WEBSITE

Eight questions worth asking any fractional CFO, including us.

Who exactly holds the seat, and is that person named in the agreement. Who covers them when they are away, and has that person ever run your file. What does responsive mean, in hours, for a payroll that will not run at six on a Friday. On which working day does the close finish and the pack land, and what happens if it slips. What is in scope in writing, and what stays with your accountant. Does any part of your income come from anyone other than your own clients. Who owns the models at the end, and in what format. How will we both know at ninety days whether this worked. We looked at more than forty firms in this category before writing this list, and almost none of them publish an answer to a single one of these.

RUN THIS CHECK THIS WEEK

Put all eight to every firm on your list, including us, and ask for the answers in writing. A firm that answers all eight in writing is worth talking to whether or not it is us. Ours are on the Why xl page already, and they are clauses in the agreement rather than sentences on a website.

The Brief — free, and always will be

One of these a month, by email, before it goes on the site.

Roughly eight hundred words. No pitch, no follow-up call, one click to stop.

What we write about

02 / 02

What we write about, and why it is always these things.

Six subjects, because these are the six places the money actually goes missing.

CASH AND WORKING CAPITAL

Where profitable businesses lose the money they never see. Stock, receivables, terms, and the cycle underneath all three.

LENDERS AND COVENANTS

What the facility agreement actually tests, what a lender reads first, and what moves a limit.

MARGIN AND PRICING

Cost to serve, allocation, unit economics, and the customers a revenue-based view flatters.

TRANSACTIONS

What diligence prices, how far ahead it has to be fixed, and what a buyer is really discounting.

THE FINANCE FUNCTION ITSELF

The close, the controls, the systems and the people — and what a function has to look like before anything ambitious is built on it.

BUYING FINANCE LEADERSHIP

How to compare firms in a category where almost nobody publishes a term, a date or a response time.

If something here sounds like you

Every one of these was written after a conversation that started exactly the way yours would.

Each piece on this page came out of a real engagement. If one of them describes what is happening in your business, that is the conversation to have. An hour with a partner, nothing to prepare, and a written note back within two working days.

01THE CHECKSSix of them on this page, each one runnable on your own numbers without calling anyone.

02THE BRIEFFree, and always will be. One of these a month, by email, before it goes on the site. Roughly eight hundred words. No pitch, no follow-up call, one click to stop.

03THE CALLAn hour with a partner when something here sounds like your week.

04THE NOTEWhat we heard and what we would look at first, in writing, within two working days.

BOOK A CONVERSATION SEE HOW AN ENGAGEMENT RUNS

ONE HOUR · NO CHARGE · A WRITTEN NOTE BACK WITHIN TWO WORKING DAYS