Page 92 - Finance for Non-Financial Managers

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Profit vs. Cash Flow
Fast Growth Means a Big Appetite for Cash
Fast-growing companies need more working capital than
those growing more slowly or not at all.When incoming 73
cash flow is delayed while fixed costs continue and paydays come
every week, there’s a limit to how long a company can operate com-
fortably, even if profitable.
Managers in fast-growing businesses should follow these three
rules:
1. Look for every opportunity to stretch their cash, especially for
large purchases.
2. Forecast their cash needs as far into the future as they can rea-
sonably see.
3. Arrange added sources of cash well before they might need it.

Now you may look at our little company, Wonder Widget,
and say that the owners could have done something to help
themselves, in spite of their failure to use some key manage-
ment tools. For example:

• They could have raised their prices to produce more profit
sooner. And that would have helped eventually, but per-
haps not in time. In fact, they were very profitable from
the beginning. The problem wasn’t in making a profit, but
in converting that profit into cash in the bank.
• They could have gotten accounts receivable financing to
help them get cash out of their receivables sooner. This
might have helped too, and perhaps it was part of the ulti-
mate solution. But history shows that most lenders aren’t
willing to lend to new companies until they’ve proven able
to conduct business reliably, so that customers are less
likely to raise complaints that would prevent prompt col-
lection of the accounts used as collateral for the loan.
• They could have raised more capital for their business
from friends, family, or outside investors. We don’t know if
they tried this and were unsuccessful because their urgent
need made potential investors wary, but we do know they
didn’t raise money in time to prevent the cash flow crisis.