If you’re aiming for rapid business growth, maintaining a positive cash flow cycle or having the capacity to secure funding quickly is crucial. Without these, you risk outgrowing your own financial stability and potentially driving your company to failure.
**Understanding Cash Flow Cycles**
A positive cash flow cycle means you receive payment before you have to pay your suppliers. In contrast, a negative cash flow cycle requires you to pay out before your revenue comes in. While lifestyle businesses with strong margins might manage a negative cash flow cycle, growth-focused businesses can’t afford this risk and may face bankruptcy if they don’t manage cash flow effectively.
**The Perils of Expanding Without a Positive Cash Flow**
Consider the case of Shelley Rogers, who made the critical mistake of scaling her business without a positive cash flow cycle. Rogers founded Admincomm Warehousing to facilitate the recycling of outdated technology. She would acquire old phone systems and computer monitors at low prices and sell them to recyclers who extracted valuable metals from the equipment.
Initially, Admincomm had a positive cash flow cycle: Rogers would secure equipment and invite recyclers to bid, requiring full payment before the recyclers left. She would then ship the materials to China and pay her suppliers later. This model worked well initially, allowing Rogers to build a profitable lifestyle business.
However, as Rogers became aware of the environmental damage caused by her clients, she decided to shift her operations to Canada. There, she aimed to leverage a government program that offered financial incentives for domestic recycling. This shift necessitated purchasing expensive recycling machinery and adopting a new cash flow model, where she needed to buy and recycle the equipment before receiving payment from the government.
The faster Rogers tried to grow, the more her cash flow strained, eventually leading to the business’s collapse.
**A New Approach with Positive Cash Flow**
Learning from this experience, Rogers founded TopFlight Asset Services in the same industry but with a different approach. She sold much of her equipment on consignment, reducing the need for upfront cash. This strategy allowed TopFlight to thrive, and Rogers eventually sold the company in 2013 for six times its EBITDA to CSI Leasing, a leading equipment leasing firm.
The successful sale was partly due to Rogers’ focus on maintaining a positive cash flow. Many business owners confuse cash flow with profitability reported on financial statements. While profit is essential, buyers are more interested in the cash flow—the actual money needed to operate the business.
When acquiring a company, investors often need to finance the purchase. If the business requires ongoing cash infusions, the buyer must invest more, expecting a higher return. This increased investment pressure can reduce the original sale price offered to the seller.
Therefore, whether your goal is to expand rapidly or achieve a lucrative exit (or both), ensuring a positive cash flow cycle is vital.
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