Page 91 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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Wonder Widget example, one “yes” out of two isn’t enough.
Now, let’s stop for a moment and consider the situation. The
owners of Wonder Widget had a hit on their hands in terms of
demand. There were lots of people eager to buy their new widg-
ets and the company probably pushed productivity to the limit
to meet as much of that demand as possible. So they ordered
lots of materials, hired lots of laborers, shipped lots of product,
and then waited for lots of customers to pay them.
$150,000
Gray line = Profits
$100,000 Black line = Cash Balance
$50,000

$0

-$50,000

-$100,000

-$150,000

-$200,000
1 2 3 4 5

Figure 5-2. Cash flow curve of a fast-growing startup company

They had to invest their cash up front to set up the company,
make the product, ship the product, and invoice the customers.
Meantime, since a new company often doesn’t get much slack
from its vendors, they probably had to pay their bills on time,
often earlier than if they’d been in business for a while. And of
course, if their customers thought that startup Wonder Widget
was glad for the business and would be patient for their money,
some may have delayed slightly in paying their bills.
But none of these things by themselves would have ren-
dered the company insolvent, yet the sum of them did exactly
that, because they all added up to critically delay the cash flow.