Growing Fast? Here's What's Likely To Kill Your Company

cash flow cycle scaling May 13, 2022

If your goal is to grow your business fast, you need a positive cash flow cycle or the  ability to raise money at a feverish pace. Anything less and you will quickly grow  yourself out of business. 

A positive cash flow cycle simply means you get paid before you have to pay others.  A negative cash flow cycle is the direct opposite: you have pay out before your  money comes in. 

A lifestyle business with good margins can often get away with a negative cash flow  cycle, but a growth-oriented business can’t, and it will quickly grow itself bankrupt. 

Growing Yourself Bankrupt  

To illustrate, take a look at the fatal decision made by Shelley Rogers, who decided  to scale a business with a negative cash flow cycle. Rogers started Admincomm  Warehousing to help companies recycle their old technology. Rogers purchased old  phone systems and computer monitors for pennies on the dollar and sold them to  recyclers who dismantled the technology down to its raw materials and sold off the  base metals. 

In the beginning, Rogers had a positive cash flow cycle. Admincomm would secure  the rights to a lot of old gear and invite a group of Chinese recyclers to fly to Calgary  to bid on the equipment. If they liked what they saw, the recyclers would be asked to  pay in full before they flew home. Then Rogers would organize a shipping container  to send the materials to China and pay her suppliers 30 to 60 days later. 

In a world hungry for resources, the business model worked and Rogers built a nice  lifestyle company with fat margins. That’s when she became aware of the  environmental impact of the companies she was selling to as they poisoned the air  in the developing world burning the plastic covers off computer gear to get at the  base metals it contained. Rogers decided to scale up her operation and start  recycling the equipment in her home country of Canada, where she could take  advantage of a government program that would send her a check if she could prove  she had recycled the equipment domestically. 

Her new model required an investment in an expensive recycling machine and the  adoption of a new cash model. She now had to buy the gear, recycle the materials  and then wait to get her money from the government. 

The faster she grew, the less cash she had. Eventually, the business failed.  

Rogers Rises From The Ashes With A Positive Cash Flow Model  

Rogers learned from the experience and built a new company in the same industry  called TopFlight Assets Services. Instead of acquiring old technology, she sold much  of it on consignment, allowing her to save cash. Rogers grew TopFlight into a  successful enterprise, which she sold in 2013 for six times Earnings Before Interest  Taxes Depreciation and Amortization (EBITDA) to CSI Leasing, one of the largest  equipment leasing companies in the world. 

Rogers got a great multiple for her business in part because of her focus on cash  flow. Many owner think cash flow means their profits on a Profit & Loss Statement.  While profit is important, acquirers also care deeply about cash flow—the money  your business makes (or needs) to run. 

The reason is simple: when an acquirer buys your business, they will likely need to  finance it. If your business needs constant infusions of cash, an acquirer will have to  commit more money to your business. Since investors are all about getting a return  on their money, the more they have to invest in your business, the higher the return  they expect, forcing them to reduce the original price they pay you. 

So, whether your goal is to scale or sell for a premium (or both), having a positive  cash flow cycle is a prerequisite.


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