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Can you simply grow out of trouble?

Written by: Hemant Karandikar

Article Overview: 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.

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Can you simply grow out of trouble?

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.

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Article Tags: better future, business processes, cagr, creditor, debtors, forward integration, global economy, gross margins, group companies, growth prospects, illiquid assets, incremental revenue, interest payments, machinery business, machinery market, operating cash flow, order fulfillment, sales turnover, slump, strategic advantage

About the Author: Hemant Karandikar
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Hemant Karandikar advises companies on business & brand strategy, on business transformation, and for achieving breakthroughs in business processes. He leverages this expertise in product creation projects for companies along with his design associates. He coaches business leaders and executives for developing leadership skills. Hemant founded Exponient Consulting and Learning Leadership. Previously, Hemant was Managing Director, GWT Global Weighing (now Sartorius Mechatronics) and held position of General Manager at Philips India. He is an alumnus of Indian Institute of Technology, Bombay, India.

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