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have made the point repeatedly that growth takes cash, and lots of growth takes lots of cash. For that reason, per- haps the only thing worse for a company than no growth is poorly planned-for growth. Such unplanned or poorly planned growth inevitably heightens the risk that unantici- pated cash shortages will leave the enterprise stranded at the edge of the road, out of gas. Despite a growing emphasis in the business world on cash flow in general and its relationship to sales growth in particular, companies often tend to listen to the cash-flow words without hearing the cash-flow message.For many people in senior management, there is still an essential conflict between what they hear and what their gut tells them. Sales-volume growth has been so ingrained into
entrepreneurs (as well it should be!) that it often combines with some simplistic, mostly erroneous logic to tell them something that is false, yet hard to ignore:
a) the company needs cash, therefore b) sell lots of stuff, and
c) customers will give us money, and d) the cash problem will go away
The reason this thought pattern is mostlyrather than total- ly false is that it often works—but only in certain limited and relatively short-term situations. Yes, you can sell a few more items out of inventory without replacing them right away. Yes, you can negotiate earlier payment terms with a couple of clients on specific orders. Yes, you can negotiate extended terms with one or two suppliers for a specified project or purpose. Yes, in an emergency you can get your plant to close for two weeks in a slow season for a cash-conserving companywide vacation. But you cannot do any, much less all, of these things consistently, across the board, without creating long-term stress fractures in your business.
At the same time that new directions and resources are tak- ing form and being put into motion to increase sales growth, all of the more routine elements of the business’s existing operations have to continue smoothly. And that continuance will likely involve a lot of additional pressure on your people, your organizational structures and your finances. As you gear up to grow rapidly and prepare to digest that growth, a whole lot can go wrong. There is also an interdependence among all those pieces that can easily get bent out of shape under the increased pressure.
Occasionally a business gets lucky and, due to fortuitous cir- cumstances, manages to avoid much of the hard work and good planning normally required for generating significant sales growth. This is usually a matter of just being in the right place at the right time as the market comes to you. Here are several examples.
■ A medium-size natural-foods wholesaler happened to have a well- known expert on natural foods move to its community and take a personal interest in spreading the natural-foods mes-
sage throughout the area the wholesaler served.
■ A small chain of upscale shoe storeshad major new luxury-hous- ing developments built in three of its five markets over a two- year period.
■ A large ornamental ironworks shopsaw its business triple in three years because of the influence of a talented interior designer who specified a lot of wrought iron in several new commer- cial buildings.
But, as the saying goes, don’t hold your breath. This kind of good luck doesn’t happen very often and can’t be predicted or relied on. Ironically, lucky scenarios such as these can be bad luck if the growth is not managed well. These cases didn’t require planning to create additional demand; that is the good luck part. But some planning was definitely required to handle the financial, people and other kinds of resource strains that such growth normally triggers.
Any growth beyond what is sustainable in cash terms will cause financial problems every time. Well, almost every time.
There is one exception: excess assets. If a company has more inventory than it needs to keep things running smoothly, then additional sales volume doesn’t take cash; it simply uses up excess inventory. Having any asset that either isn’t needed, or isn’t needed in the current quantity to keep the business run- ning smoothly, is a cash-conversion opportunity. A company can sell any excess asset, then use the cash to finance growth beyond what is otherwise sustainable from just cash profits and proportional debt increases. The key here is that man- agement needs to know within a fairly tight range just what rate of sales growth can actually be sustained, given normal cash profit and debt-percentage levels. If management doesn’t have a sense of that range, it will likely target sales levels either lower than are optimally achievable or higher than are health- ily sustainable. There is an optimal growth rate, and manage- ment needs to focus on it. If overall proportions of debt and equity in the business are about what they should be, and if both the fundamentals and the swing factors are stable, then calculating the sustainable growth rate is fairly easy, as we will discuss later in this chapter.