Hotels, Tourism & Leisure
Real Estate and Construction
Investing in Ireland
Film, Media and the Creative Industries
Our Culture and Values
Corporate Social Responsibility
History of the Firm
Managing cash flow in high-growth companies
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 US company Admincomm Warehousing to help companies recycle their old technology. Rogers purchased old phone systems and computer monitors for a fraction of the original cost 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 equipment 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 organise 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. But then she became aware of the environmental impact of the companies she was selling to, learning of the pollution they caused burning the plastic covers off computer equipment to get at the base metals they 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 cheque if she could prove she had recycled the equipment domestically.
Her new model required an investment in expensive recycling machinery and the adoption of a new cash model. She now had to buy the old equipment, 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 which she grew into a successful enterprise. In 2013 she sold the business for six times 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 owners 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. With our Business Value Builder programme we help companies scale or maximise their sale price by helping business owners focus on the key factors that affects value in their business and a key misunderstood factor is cash flow. Contact partner Gerry O’Reilly to find out how we can help you.
Crowe's Business Value Builder Programme
+353 1 448 2279
Crowe's Business Value Builder Programme