If your ambition is to propel your business into rapid growth, it’s imperative to maintain a positive cash flow cycle or have the capacity to secure substantial funding quickly. Anything less could lead you to grow yourself out of business.

A positive cash flow cycle essentially means you receive payments before you must make payments to others. Conversely, a negative cash flow cycle entails paying out before funds come in.

While a lifestyle business with healthy margins might withstand a negative cash flow cycle, a growth-oriented business cannot afford to do so, risking swift bankruptcy.

Growing Yourself Bankrupt   

To illustrate this point, let’s examine the story of Shelley Rogers, who faced the dire consequences of scaling a business with a negative cash flow cycle. Rogers initiated Admincomm Warehousing to assist companies in recycling old technology. Rogers purchased old phones and computer monitors at a discount, later reselling them to recyclers who would remove the valuable base metals from the retired technology.

Initially, she had a positive cash flow cycle, securing the rights to old equipment, inviting Chinese recyclers to Calgary to place bids on it, and receiving full payment before shipping the materials to China. Rogers would then pay her electronics suppliers 30 to 60 days after finding a buyer and receiving full payment.

This business model worked exceptionally well in a world hungry for resources. However, as Rogers expanded and decided to recycle the equipment domestically in Canada, the business model shifted. Now, she had to invest in an expensive recycling machine and alter the cash model, purchasing equipment, recycling materials, and awaiting reimbursement from the government. The faster the business grew, the tighter its cash flow became, ultimately leading to its failure.

Rogers’ Return With A Positive Cash Flow Model

Rogers, undeterred, rose from this setback by learning from the experience. She founded a new company, TopFlight Assets Services, in the same industry. Instead of acquiring old technology, she adopted a consignment model, allowing her to conserve cash. This strategic shift led to the success of TopFlight, culminating in its sale in 2013 to CSI Leasing, one of the world’s largest equipment leasing companies, for six times Earnings Before Interest Taxes Depreciation and Amortization (EBITDA).

The crucial lesson from Rogers’ journey lies in the recognition that cash flow is not solely about profits on a Profit & Loss Statement. Acquirers value cash flow deeply because it reflects the money your business generates or requires to operate. When acquiring a business, investors often need to finance it, and if constant cash infusions are necessary, the acquirer must commit more funds, impacting the return on investment. Therefore, whether your objective is scaling or selling for a premium, maintaining a positive cash flow cycle is not just beneficial; it’s a prerequisite for sustained success.

If you’re interested in improving your business’s cash flow cycle, you can reach out to us here.