Imagine two companies with the exact same Income Statement.
Both seek growth and manage to find capital to double their marketing budgets.
Like their margin structure, their CAC and new customer AOV’s are also exactly the same.
Dollar signs are spinning in the founders’ eyes. 50% growth is possible!
But Company A carries far more inventory than Company B.
So Company A has much higher Net Working Capital Needs.
Causing A to have a much slower Cash Conversion Cycle.
All that growth needs inventory. It needs working capital.
Company A has to fund $650K more working capital than Company B. That’s 1.8X more than B.
‘But I can borrow it’ says A. So, let’s do some quick napkin math on MCA’s. Assuming a 6% factor and a 150 day repayment timeframe, Company A is looking at payments amounting to 25% of sales v B’s 14%.
But wait. Can either companies margin structure even support those payments? No! And this is how companies enter short term borrowing negative spirals.
Your ability to cycle capital faster directly impacts your ability to grow. Let’s assume founders of A Company A and Company B are willing to be break even in pursuit of growth. Company B can grow more. Because they cycle faster, they can borrow more and which they can funnel into acquisition.
Obviously this analysis is highly simplified. And please don’t use this to make borrowing decisions!
The key takeaway is that the speed with which you can cycle your capital has massive implications on not just your ability to survive in this challenging environment, but ultimately in your ability to thrive. Increase your cycles!
If you have questions or learn more about I help founders generate wealth through better finance, let’s talk.