Strategic Discipline Blog

Cash is KING!  Cash is one of the Four Decisions you must get right in growing your business, or risk leaving significant revenues, profits, and time on the table.

A growing concern is to strike the proper balance between consuming cash and generating it. Harvard Business Review Authors Neil Churchill and John Mullins provide an article (2001) “How Fast Can Your Company Afford to Grow?” with a formula to help businesses determine how fast they can grow.  It offers a framework to help identify and manage the level of growth that a company's cash flow can support.  

If your business is growing, can keep up with just the internal pace of your cash flow?   Positioning Systems has created a tool (Excel Spreadsheet) that utilizes this formula to help you determine how fast you can afford to grow.   I’m offering five readers the opportunity to utilize this tool for free to get your feedback and discover if there are any improvements we can make.

The formula calculates an organization's self-financeable growth (SFG) rate, taking into account three critical factors:

1. A company's operating cash cycle--the amount of time the company's money is tied up in inventory and other current assets before customers pay for goods and services;
2. The amount of cash needed to finance each dollar of sales; and
3. The amount of cash generated by each dollar of sales.

In the HBR article, the authors offer a detailed hypothetical example that carefully considers these three factors; they then illustrate how a company can influence its SFG rate by carefully managing some combination of those factors.  Since the article is proprietary you’ll have to purchase the article from HBR if you wish those details, however, I feel the spreadsheet offers good instructions on how to help you accumulate the answers you need from your current and past financials. 

It’s no secret that mid-size and Fortune 500 companies are hoarding cash right now.   The present economic environment, often described as VUCA, filled with volatility, uncertainty, complexity, and ambiguity of general conditions and situations is a continuing concern for most businesses.  Your business needs to have a solid threshold on what you can invest or spend to continue to grow and when you need to pull in your horns.  How much cash reserve is enough?   What will lower costs or increase sales volume due to your cash flow?

My experience with growth is it sucks cash.   Without a reserve capacity, you endanger your business.  In 1984 as general manager of a brand new 100,000 FM radio station in Wausau, Wisconsin I learned first-hand how success can lead to extreme challenges.  The business took off quickly after our station signed on.  Everyone was listening and everyone wanted to advertise.   We beat our forecasts in the first year by over 150%.  The cost of this was severe cash flow issues.  The owner constantly provided us with money from his other radio stations to support payroll and expenses.  We were fortunate to have someone with deep pockets and who had anticipated some of these issues. 

It was a valuable lesson that I used when my partners and I started a radio station 7 years later.  We focused on crafting a budget however we invested much more time in the cash flow spreadsheet, combing it for the right receiveable time frame and making sure we knew when expenses would impact cash.   As a result, despite the same success with beating our forecast, we were able to slip through the accelerated growth without any major cash flow issues.

Need help with discovering how fast your company can afford to grow?   Send me an email with How Fast Can Your Company Afford to Grow Excel spreadsheet in the subject line, along with your contact information and I’ll email you the Excel File with instructions on how to utilize it.   All I request is that you complete a form to give me solid feedback on how it performed for you, if or how it can be improved, and how you would rate the value this tool provides.

Are you game?  The first five requests receive the spreadsheet. 

Where do you start to improve customer service?  The answer shouldn’t surprise you.  What’s the first place you discover you’re about to be treated well? Next Blog!