A Forgotten Cash Trap When Growing

Quick Insight

Your metrics are not your strategy. They measure key aspects of your strategy. Employees can focus on the metrics at the expense of the company’s success. For each of your metrics, identify how your employees may act, both good and bad, to achieve the target. Performance metrics must be paired with the guardrails of strong company ethics and internal control structure.

Permanent working capital is a net asset that people often forget needs to be funded. It’s part of the reason that fast-growing companies run into cash flow issues.

Permanent working capital is a net asset that people often forget needs to be funded. It’s that portion of working capital that is expected to generate on a consistent and uninterrupted level. In other words, it's net current assets that you’ll never receive in cash until you no longer operate.

The biggest source of this is the timing of your cash conversion cycle. The cash conversions cycle is the time from when you pay for inventory or staff to produce your product or service until you receive cash from your customer.

For a company that sells goods, you will need to buy a large amount of inventory to stock your store. You will constantly have that amount of inventory in your store until you close. Also, the longer it takes to collect cash from your customers, the larger your permanent working capital.

When growing, make sure to project the increase in inventory or staff costs that you will need to fund before you start collecting cash from that growth. It’s easy to anticipate profits from growth while missing the lag between cash outflows and inflows. Time is money; that lag of time needs cash.

I wish you readiness for growth. I wish you well.

- Rob Stephens

Further Insight

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