Cash Flow and Working Capital

Business growth lives or dies by working capital.

Two business A & B:
- Both have the same P&L unit economics
- Base Sales = $500k per month
- Operating Profit Margin = 10%
- Both start with $1m cash in bank.

Both hit a growth vein. Sales start growing at 15% per month. Assuming no operating leverage that mean each make operating profit of $1.5m inside 12 months.

But now let's assume both have different working capital models.

Business A has a long working capital cycle:
- 90 days of forward sales in inventory.
- Pays supplier on 30 day terms
- Gives customers 60 day terms

Business B has a leaner working cycle
- 30 days of forward sales in inventory
- Pays suppliers on 90 day terms
- Gives customers 30 day terms

The Income Statements would look identical for both businesses. Yet when you look at cashflow they are night and day.

At the end of the year Business B is sitting pretty with $3.6m in the bank.

Business A is dead and buried by Month 5.

Optimizing the working capital cycle is one of the most high leverage things you can do for growth.

Original post - https://www.cfosecrets.io