Can you simply grow out of trouble?
Can you simply grow out of trouble?
But the reality, as it turned out, was different. Despite this kind of growth and reasonable gross margins of around 40%, the company did not have enough cash. It has competition both at the high end and at the low end of market. Its entire operating cash flow goes towards repayment and interest payments on loans. It has idle assets and surplus people. Its debtors and creditor days (age) are increasing. The company has good growth prospects but needs to roll out better products. The current machinery market limits the potential for growth. The CEO wishes to diversify through forward integration for achieving higher sales turnover. Cash is needed for all this. He is desperately trying to attract equity funding. There are lessons to be learned from this story.
What are the lessons?
There are many lessons. It is clear that growth and decent margins are not enough. Business cannot be reduced to just two numbers like sales growth and margins.
As far cash is concerned, your business processes which affect cash cycle must be managed well. Typically these processes are - order fulfillment, purchasing, paying customers, receiving payments from customers. There could some more processes depending on the nature of business. But such processes must be managed tightly to generate cash commensurate with the margins.
During good times, many companies go on asset buying spree and use up cash generated from operations. Illiquid assets such as land & buildings and cross holdings in group companies do not yield incremental revenue or strategic advantage. An anticipated gain in asset prices is the reason cited for buying and holding them on. It is better to treat investments in and sales of such assets as a standalone business. When business cycle turns unfavorable, the core business suffers since these illiquid assets have to be unlocked through costly ways like loans, equity dilution, or distress sale.
Conclusion
While it is important that revenue growth and margins are given enough attention, they are really the responsibility of the operating management. Also, the operating management must be equally charged with task of ensuring proper cash flows. At the board and CEO level, the focus must clearly be on things such as –markets and sustainability of business logic, market size & growth in market size, quality of its balance sheet, product or services portfolio, brand building, innovation, leadership development, and process culture. CEO and his management team must develop and implement strategies addressing these areas.
Can you simply grow out of trouble - To learn more about this author, visit Hemant Karandikar's Website.
Like this article? Share it with your friends
I know a company, which has grown at 35% CAGR over last three years. The company is in machinery business. It is now feeling the effects of the slump in global economy. I am talking about the times before its current difficulties (it still has growth!) started. The CEO used to tell me that, with good top line growth, his company would have a better future. All that was needed was growth with good margins, according to this CEO.
But the reality, as it turned out, was different. Despite this kind of growth and reasonable gross margins of around 40%, the company did not have enough cash. It has competition both at the high end and at the low end of market. Its entire operating cash flow goes towards repayment and interest payments on loans. It has idle assets and surplus people. Its debtors and creditor days (age) are increasing. The company has good growth prospects but needs to roll out better products. The current machinery market limits the potential for growth. The CEO wishes to diversify through forward integration for achieving higher sales turnover. Cash is needed for all this. He is desperately trying to attract equity funding. There are lessons to be learned from this story.
What are the lessons?
There are many lessons. It is clear that growth and decent margins are not enough. Business cannot be reduced to just two numbers like sales growth and margins.
As far cash is concerned, your business processes which affect cash cycle must be managed well. Typically these processes are - order fulfillment, purchasing, paying customers, receiving payments from customers. There could some more processes depending on the nature of business. But such processes must be managed tightly to generate cash commensurate with the margins.
During good times, many companies go on asset buying spree and use up cash generated from operations. Illiquid assets such as land & buildings and cross holdings in group companies do not yield incremental revenue or strategic advantage. An anticipated gain in asset prices is the reason cited for buying and holding them on. It is better to treat investments in and sales of such assets as a standalone business. When business cycle turns unfavorable, the core business suffers since these illiquid assets have to be unlocked through costly ways like loans, equity dilution, or distress sale.
Conclusion
While it is important that revenue growth and margins are given enough attention, they are really the responsibility of the operating management. Also, the operating management must be equally charged with task of ensuring proper cash flows. At the board and CEO level, the focus must clearly be on things such as –markets and sustainability of business logic, market size & growth in market size, quality of its balance sheet, product or services portfolio, brand building, innovation, leadership development, and process culture. CEO and his management team must develop and implement strategies addressing these areas.
Can you simply grow out of trouble - To learn more about this author, visit Hemant Karandikar's Website.
Like this article? Share it with your friends
 | |
 |
No article feedback found. |
| |
Leave Your Feedback |
 | |
| |||
Kim CastleWith nearly two decades in the advertising and design business, with clients like Domino's Pizza, General Motors, Direct TV, Pedigree, Wolfgang Puck, Higher Octave Music, Hollywood Celebrity Products, Disney, and Paramount, as well as thousands of entrepreneurs around the world define, structure, communicate, and position their business for greater profits, BrandU(R) co-creators Kim Castle and W. Vito Montone discovered that entrepreneurs could experience the same power that big brands command for a fraction of the cost with the world's only process-based results-drive Integral approach to business creation. BrandU(R) is helping entrepreneurs grow with the power of extreme clarity from idea...to brand...to market(TM) and helping one million entrepreneurs become successful and whole so that they can make a difference in the world. Are you one of them? If you want to experience clarity all the way to the bank(TM), get started now at http://www.brandu.com. - Visit Kim Castle's Website |
|||
|
To learn more about the Evan Elite Author Program please contact us. | |||
 | |
|  |
Subscribe to Hemant's articles
 |
|
Regenerate! - Online Leadership coaching you can learn the "Regenerative Leadership" skills while being on the job.
|
|
 |
 | |
|
| |
 | |||||||
|
 | ||
 |
||
 |
||
 |
||
|
| ||
 |
| Have you written articles that would be of value to entrepreneurs? Become an expert on our site by publishing them! Expose yourself to a wide audience, drive more traffic to your website and get more sales! Click Here for details. |
|
|
 |
| Modeling the Masters: Learn the true secrets behind Walt Disney's business success factors & grow your company! Video produced by Phanta Media |
|
|
 |
"Learn straight from Evan how you can Make a Full Time Income (And More) from a Website"
Click Here To Learn More |
|
|
|
|
Get advice & tips from famous business owners, new articles by entrepreneur experts, my latest website updates, & special sneak peaks at what's to come!
|
|
|
 Dazzling Presentaion Steps Startegic Plan Creation Manners, Positivity, Heroics The Small Picture Organized in 10 mins |
|
 | ||
 |
The Top 10 GTD Times Posts
Best Posts for Productivity | |
 |
Top 50 Political Blogs
Top Political Blogs of 2009 | |
| ||
 | ||||
| ||||
|
| ||||
| ||||
|
|
|
|
|
||||||||||||
|
Email us your ideas on how to make our website more valuable! Thank you Sharon from Toronto Salsa Lessons / Classes for your suggestions to make the newsletter look like the website and profile younger entrepreneurs like Jennifer Lopez and Sean Combs!
|
|
|
| ||||||||||||
| ||||||||||||
|
|
||||||||||||