November 2, 2022

The 1st law of “business gravity”

You can “move forward” with relatively good People, Strategy and Execution, but it is impossible to “live” a single day without Liquidity!

Increasing the value of businesses and organizations is the core goal of leaders and their teams, regardless of industry and geography. The value of businesses depends directly on Dynamic Growth in revenues and especially in Liquidity!

Unfortunately, in many cases leaders give one-dimensional importance to the increase of Revenues but not to the corresponding increase of Net Cash Flow, ignoring the first and basic law of “business gravity”:


Growth Consumes Liquidity!

As a result, they are forced to support growth either through loans or by giving away part of their shares.

The key question is: Do you have stable sources of liquidity, ideally created internally, to fuel the growth of your business?

Liquidity becomes even more critical as the business grows dynamically, as “cash absorption intensifies”. The secret is constant innovation in ways to generate sufficient profit and positive cash flow internally, so you don’t have to turn to banks (or “sharks”!) to fuel your growth.


The Dell example

When Michael Dell was rapidly growing his company in the mid-’90s, it ran out of liquidity, as happens in many fast-growing businesses. He then took Tom Meredith as chief financial officer. Meredith calculated Dell’s liquidity cycle (CCC) at 63 days. That meant it took 63 days from the moment Dell spent a dollar on anything until it came back to the business and balance sheet (the bank) as cash.

Focusing on a strategy to improve liquidity every 90 days, Meredith drove his liquidity cycle (CCC) to negative for 21 days by the time he left Dell a decade later. This meant that the company received a dollar 21 days before spending it on anything. As Dell grew faster, it created liquidity instead of consuming it!

Large corporations, by choice, hold 3 to 10 times more cash reserves than those of their competitors, as revealed by Jim Collins and Morten T. Hansen in their book Great by Choice: Uncertainty, Chaos, and Luck – Why Some Thrive Despite Them All . This allows growing companies to weather storms, which is why Bill Gates, from the beginning, decided that Microsoft would always keep an amount equivalent to a year’s operating expenses in the bank. If you’ve experienced the harsh reality of not being able to pay payroll, you’d never want to face it again.

It’s rare, and we’ve never found a business that can’t dramatically improve its cash flow! Additionally, the changes and interventions required to reduce your cash cycle almost always lead to more efficient operational excellence and customer service. You don’t have to scam your customers or suppliers to achieve better cash flow. And with more cash, you sleep much better at night!