No Man's Land: A Survival Manual for Growing Midsize Companies by Doug Tatum

Author:Doug Tatum [Tatum, Doug]
Language: eng
Format: mobi
Publisher: Portfolio
Published: 2007-09-13T04:00:00+00:00

Microeconomics of Growth

As these charts suggest, businesses that reach a certain threshold grow faster and become more profitable, but also require more cash. Think of it this way: “Net income” on accrual-based financial statements predicts cash flow by approximating how much cash your business will eventually generate. If your business wasn’t growing and it made a million bucks during the year, all things being equal, your business at the end of the year would show an additional million dollars in cash. Yet if you take most businesses up the growth curve rapidly, the million dollars shows up in inventory, receivables, or even infrastructure—in other words, in noncash assets. The cash will catch up on the balance sheet only when the business slows down.*

My aim here is not to make you chastise yourself for failing at company-level microeconomics, but rather to alert you to a critical problem facing your business. As a result of the speed of change, the leadership of gazelles often loses its ability to predict their business’s cash needs far enough in advance to provide for the company’s finances. To take up the driving metaphor again, entrepreneurs don’t know how to read their fuel gauge, and as a result they all too frequently find themselves running on empty. Then they grow desperate. They make bad decisions about customers, investors, and partners. Sensing the size of the opportunity before them, and the consequences of the potential failure, they sometimes lose their integrity. This, truly, is a moment of maximum vulnerability.

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