I’m closing another loan this week. I did the site visit last week. This is me, in front of the Ike or as the naval folks referred to it, a floating airport. Also got to tour an active submarine and touched a torpedo. Some benefits to my job!
Working capital is the most underestimated force in business.
Let’s imagine you have a business running at $ 500k per month of sales.
All of a sudden you experience a breakout moment:
- 15% sales growth month-over-month for a year
- With a net income margin of 10%
Extending that growth will lead to a total of $14.5M sales in the first year and $1.45M net income.
Now make some working capital assumptions:
- Days Sales Outstanding (DSO) of 30 Days
- Days Inventory Outstanding (DIO) of 30 Days
- Days Payable Outstanding (DPO) of 30 Days
i.e. a Cash Conversion Cycle (CCC) of 30 Days: (DSO + DIO - DPO).
Despite the $1.45M profitability, the business won’t generate any cashflow in year one. In fact it will outflow ~$375k of cash over those twelve months as it lays down the additional working capital needed to react to the growth.
Now, lets run some scenarios (see the image) assuming that same business starts with $ 1M of cash on the balance sheet:
If we assume the same dynamics, but instead imagine the business had poor inventory control, and ran on a CCC of 90 days. That same business would now have a negative cash balance of ~$3m by Christmas… or more accurately would be dead by June.
And at that CCC, even if the business 2.5x that net margin to 25%, the business would still run out of cash in 9 months (that is despite now generating ~$3.6M of profit).
Now imagine the opposite were true, the business, ran on a negative CCC of 60 days, funded by a willing supplier; with very tight inventory and receivables levels.
In this scenario, even if the net margin were only 5%, the cash balance would explode to over $ 5M (positive) by the end of the year.
In fact, at a negative 60 days CCC, even if the business operated at a 25% net loss margin, it would still survive the year (just about).
This illustrates how much more sensitive working capital (and cashflow) is to changes in the business, than any profit metric you can choose.
I call this effect: The Cashflow Megaphone.
And as a long time turnaround CFO, understanding this inside out was the most valuable technical weapon in my armory in bending broken cashflows back into the black.
And in times of volatile trading and macro conditions, these dynamics are more important than ever (especially when supply chains are gummed up like they are right now)
Not profound to say, but they didn’t win the division last year bc they played poorly within the East (esp. Toronto). And the sweep in Tampa was a tough start. Obv nine games, including three in the division beforehand - but ~5-2 across that 5/18-5/24 home stand would be nice. #Yankees
@TalkinJake@LukeBecker_YN26 Caballero’s clearly earned the right to keep playing. I’d happily keep Volpe down. That said, if club *must* bring him back, while he hasn’t done it much, Jose should at least play LF v LHP (career wRC+ v LHP) in addition to reps elsewhere. #Yankees
@BRappy55 With this group this kind of situation always feels a little trap-like (e.g. Miami and Indiana of recent vintage). But think they’ll ultimately be just fine #knicks
Been a long time, and assume I’m just posting into a rabbit hole - but always a privilege to spend a wonderful night with my beautiful wife @ElleTyse (and get a good #Yankees win and *maybe* a more favorable #Knicks matchup). Hope folks are well! #hey#love
#NFL another fun playoff game substantially (obv ton of things either team could have done better) determined by the whims of what is and what isn’t pass interference….no big rooting interest here, but if you’re gonna let em play one end, call it the same
@Restructuring__ (Ha, try searching “Pari Passu” on Amazon sometime - perhaps not shockingly, not what a #restructuring geek would necessarily expect). You do terrific, first-in-class work - thanks - and very happy holiday!
@YankeesFanEarl Folks, can’t two things be true? Brian Cashman’s been a great steward of this club and Lord knows one could far worse. He’s also highly imperfect and it’s been time for a new voice for a little while now. #Yankees
@FourSavages@ncostanzo24 So, my usual optimism is pretty much gone with Volpe - though i’m willing to consider that the shoulder messed with him this year, his ceiling is clearly significantly lower than what many of us had hoped for. That said, what do you expect Cash to say? #Yankees
Private credit returning 12% to institutions: “Too complex for retail”
Same strategies at 7% with compressed spreads: “Retail deserves access to these opportunities!”
Democratization always arrives after the alpha leaves