Everyone loves growth – that is, until the cash gets tight

Revenue is vanity, profit is sanity, cash flow is king.

Growing businesses need cash. Either the business produces the cash, or you find outside resources to supply it, but if you outgrow your ability to raise cash, game over.

Cash is the “real thing,” not the accrual number on your income statement. Cash pays employees, pays vendors and funds growth initiatives.

The goal for your business is to create a positive cash flow, meaning you get cash before you pay others, versus a negative cash flow cycle, which is when you have to pay out before your money comes in.

Business owners have two paths to choose when designing their business – lifestyle or enterprise.

A lifestyle business basically relies on the owner for its existence. He or she has the customer relationships, know-how and more. And if a lifestyle business has good margins, it often can get away with a negative cash-flow cycle.

However, an enterprise business is one that can run (and move to the next generation) without the owner. This business requires a lot of cash to grow, and if it falls into a negative cash flow cycle, it could quickly find itself at bankruptcy’s doors.


To illustrate, take a look at this general commercial construction contractor, which we will call ABC. It unwittingly decided to scale a business with a negative cash flow cycle.

ABC had a strong business development arm and was creating opportunities everywhere in its region. Sales numbers looked great, and everyone was excited about the growth.

However, several months into expansion, things began to break down. First, some of the new customers were “big players” and their payment terms were often 60 or more days.

The company had significant payroll and subcontractor commitments with these large jobs, and neither were interested in 60-plus day terms to get paid.


Additionally, the company had a “we can do anything mentality” and was finding itself in opportunities that were over its head.

It could, in fact, solve the problems, but the cost was exceeding contract prices. This was another drain on cash.

Soon the company found itself going from “darlings of the bank” to “special assets.” The company still was very successful but was pushing loan covenants, and the bank pushed back.

What happened? The faster the company grew, the less cash it had.


The ownership of the ABC family business began to understand the severity of the situation. The company and the family’s private assets were at risk. Things had to change.

ABC immediately reviewed where significant sources of cash were within the company.

First, it had some large accounts-receivable balances with customers that required C-suite attention. Second, all new work had to meet a minimum gross margin target, or it would not pursue. And third, it got serious about managing the projects to meet or exceed gross margin targets.

In a fairly short period (90 days), things began to turn around.

ABC learned the hard way what many business owners learn – cash flow does not equal profits on a profit and loss statement. While profit is important, cash flow – the money your business makes (or needs) to run – trumps all.


When it comes to maximizing the value of your business, think like a buyer, whether it is family member or outside third party.

When someone buys your business, he or she likely will need to finance it. And what most sellers don’t understand is the buyer has to write two checks.

The first is obvious – it is to you, the owner. But there is a second check to be written (most people don’t think about this one), and that is for working capital.

The problem is both checks come from the same checkbook. The larger the check for working capital, the smaller the check to you.


So, whether your goal is to scale, transition to family or sell for a premium, having a positive cash flow cycle is a prerequisite.

Most family business owners want to create wealth, exit on their terms and empower the next generation to continue the legacy of their blood, sweat and tears.

The key is to start now to drive value drivers, such as cash flow.

Because if you wait, you will run out of runway. It happens all too often.

< Compass Point Consulting and its strategic partner, Legacy Planning Partners, will hold a workshop, “The Value Points,” focusing on the three components of growth and succession for businesses with annual revenues between $5 million and $100 million – scaling up/value acceleration; personal financial certainty; and the third chapter. The workshop is 7:30-10:30 a.m. Oct. 30 at Lehigh Country Club in Lower Macungie Township. Registration is required via tgarrity@compasspt.com.

Tom Garrity is managing partner of Compass Point Consulting LLC in Hanover Township, Northampton County. He is a certified coach with Gazelles International and a certified exit planning adviser with the Exit Planning Institute. Compass Point provides growth and business transition consulting to family businesses. He can be reached at 610-336-0514 or tgarrity@compasspt.com.

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