If fast company growth is a priority, you need one of two things:
Positive cash flow
The resource to raise money quickly
If you don’t have either of these attributes, you will soon grow beyond what you can realistically manage.
Positive Cash Flow Cycles: Why This Matters
So, what’s a positive cash flow cycle? This means, simply, that you are collecting payments before you shell out to your suppliers.
The opposite, known as a negative cash flow cycle, would mean that you are paying out before you get paid.
Few business models will allow you to operate with negative cash flow, but the margins have to be very good to make it work. Any fast growing company, however, will suffer and likely go bankrupt quickly unless they are funded with outside cash i.e., investors.
Here’s a perfect example – this story has itself been recycled dozens of times, but it’s very illustrative of what can happen, even with the best of intentions.
The company is Admincomm Warehousing, a recycling company out of Calgary, in western Canada. The business model was based on recycling old phone and computer systems, which the company would purchase for peanuts and then sell to recyclers who would pillage the components and raw materials to resell.
At the outset, business was brisk. The company had a positive cash flow cycle. They bought the old equipment, sold it to recyclers in China who would pay up-front for the goods.
Admincomm would then ship it out in containers and pay their suppliers 30 to 60 days later.
Business was good. What Admincomm was doing, however, turned out to be unsustainable from an environmental standpoint. The Chinese companies were applying an approach that was dangerous and irresponsible, so Admincomm decided to explore alternatives.
The decision to scale up was based on keeping the recycling process in Canada, where they could take advantage of a government-funded program that would pay for responsible domestic recycling. Special equipment was required to comply with the program, and they had to implement a new cash model because instead of getting paid up-front, they would have to wait for a check from the government.
Now, they had to purchase the materials, recycle it all, and wait for the money, which could sometimes take months.
The faster the company growth, the more significant the impact it had on their cash flow. Eventually, the enterprise failed.
How Admincomm Rose From The Ashes
Having learned from their missteps, the company re-emerged as a new entity in the same space. In this iteration, they weren’t purchasing the equipment outright but sold it on consignment instead, saving the company a lot of cash.
As a result, the company grew. It was sold for six times EBITDA to one of the largest equipment leasing companies in the world. This result would not have been possible without the company’s strong commitment to achieving positive cash flow.
Beyond P&L: What Your Potential Buyers are Looking For
Many business owners think that cash flow is all about the profits showing on their P&L statements. But that’s not correct thinking. Sure, a potential buyer for your business is interested in your margins, but they are also concerned with cash flow. Cash flow is the heart of your business; it’s what you need to keep it all going.
It’s a simple equation. A buyer will probably need to finance at least some of the purchase cost, and if your business continually needs infusions of cash, they will need more money to make it work.
Acquiring a business is all about seeing a return on investment. The more the buyer has to invest, the higher return they will expect. If you have negative cash flow, the amount that they are willing to pay to you will be reduced.
In the end, whether your objective is to scale up or sell at a premium, maintaining positive cash flow is a must.
If you would like to learn more about positive cash flow and its role in scaling up your business, schedule a call with me today. I’d love to show you how I can help.