In the quest to grow a business rapidly, one critical factor often determines success or failure: the cash flow cycle. Without a positive cash flow cycle or the ability to raise funds rapidly, businesses can quickly find themselves in dire straits. A positive cash flow cycle means receiving payment before having to pay suppliers or other obligations, while a negative cash flow cycle involves paying out before receiving income. While a lifestyle business with healthy margins might survive with a negative cash flow cycle, growth-oriented businesses cannot sustain such a model and may risk growing themselves into bankruptcy.
The Fatal Decision: Scaling with a Negative Cash Flow Cycle
Consider the story of Shelley Rogers, who made a fateful decision to scale a business with a negative cash flow cycle. Rogers established Admincomm Warehousing, a company focused on helping businesses recycle their old technology. Initially, the business had a positive cash flow cycle. Admincomm would acquire outdated phone systems and computer monitors at low prices and invite Chinese recyclers to bid on the equipment. The recyclers would pay in full before returning to China, and Admincomm would arrange shipment and pay suppliers 30 to 60 days later.
With high demand for resources, this business model thrived, and Rogers built a profitable lifestyle company with impressive margins. However, she became increasingly aware of the environmental impact caused by the companies she sold the technology to. To address this issue, Rogers decided to scale up her operation by recycling the equipment domestically in Canada. This required a significant investment in an expensive recycling machine and a change in the cash flow model. Rogers now had to purchase the equipment, recycle the materials, and wait for payment from the government through a recycling program.
Unfortunately, the faster the business grew, the less cash was available. Eventually, the company failed due to cash flow challenges and inadequate funds to sustain operations.
Rising from the Ashes: Embracing a Positive Cash Flow Model
Shelley Rogers learned from her experience and went on to build a new company in the same industry called TopFlight Assets Services. Instead of acquiring old technology, she focused on selling it on consignment, allowing her to conserve cash. By implementing a positive cash flow cycle, Rogers grew TopFlight into a successful enterprise. In 2013, she sold the company for six times its EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) to CSI Leasing, one of the world’s largest equipment leasing companies.
Rogers’ focus on cash flow played a significant role in achieving a favorable sale multiple for her business. While many business owners often equate cash flow with profits on a Profit & Loss Statement, it’s crucial to recognize that acquirers also attach great importance to cash flow—the actual money a business generates or requires to operate.
The reason behind this emphasis on cash flow is straightforward: when an acquirer purchases a business, they typically need to finance the transaction. If a business requires constant injections of cash, the acquirer must commit more funds. Since investors seek a return on their investment, the higher the amount they need to invest in a business, the higher the return they expect. This can lead to a reduction in the original purchase price.
Whether the goal is to scale or sell a business for a premium (or both), having a positive cash flow cycle is essential. It is a prerequisite for attracting investors and securing favorable deals. Without a healthy cash flow, businesses may find it challenging to sustain growth or maximize their value in the eyes of potential acquirers. In conclusion, entrepreneurs aiming for rapid business growth must understand the significance of cash flow. A positive cash flow cycle or the ability to raise funds quickly is vital to support growth initiatives and avoid potential pitfalls. By prioritizing cash flow and ensuring a sustainable financial model, businesses can increase their chances of success, whether they choose to scale or position themselves for a premium sale in the future.
