The most counterintuitive 45 minutes in the track
Sessions 1 to 3 separated profit from cash and followed the money to where it went. Tonight the question is what happens when the business does the thing everyone in the room wants it to do, which is grow. The answer is that growth is bought with cash before it pays anything back, so the faster a business grows the more of its own money it lends out, and the profit line reports none of that. Everything tonight is one company, Marchmont Instruments, run at five different growth rates with nothing else changed.
★ What you walk out with tonight. The growth ladder in your head: five growth rates, profit rising all the way up it and cash collapsing all the way down it. The two points on that ladder that change the conversation, one where a funding gap appears and one where it stops being temporary. And the ability to hear "we are growing fast and we are profitable" as a description of a risk rather than as the answer to a question about cash.
LiveGrowth is a purchase, not a reward4 min▶
An extra order is not free money arriving. It is a decision to buy materials, run them through a factory and pay the people who did it, all of which happens now, in exchange for a promise to be paid later. Marchmont's laboratory customers pay in 75 days. The stock those instruments came from sat on a shelf for 60 days before it shipped. Its own suppliers are paid in 30.
So the business pays for growth first and collects it last, and the wider the gap between those two dates, the more of its own cash is out on loan to its customers at any moment. Profit does not report that, because profit records the sale on the day it is made. This session is what happens when you do that over and over, faster each month.
At its base 4% a month, Marchmont earns £445,631 over twelve months and generates -£297,261 of free cash flow. The difference is £742,892, and £664,607 of it is sitting in unpaid customer invoices and unsold stock. Nobody spent it. It is out on loan.
Self-studyThe three durations that set the whole thing3 min▶
- How long customers take to pay. Marchmont: 75 days. Every day of it is a day the business funds the customer.
- How long stock sits before it ships. Marchmont: 60 days of finished instruments, held so orders can go out on request.
- How long the business takes to pay its own suppliers. Marchmont: 30 days. This one works the other way, because a supplier waiting is a supplier funding you.
- Why the arithmetic bites. Money goes out around day 30 and comes back around day 75, on every sale, and growth means each new sale is larger than the one currently being collected.
- What does not change any of this. A gross margin of 42% and twelve consecutive profitable months. Marchmont has both.
Paid for now, collected in 75 days
12 min liveBefore the ladder, the mechanism. Three consecutive months of Marchmont's sales, drawn against the calendar, explain the whole session: the costs land immediately, the money lands much later, and the bars overlap.
LiveWhy an extra sale costs money before it makes any4 min▶
Take one additional order. The materials are bought and paid for inside a month. The wages that turned them into an instrument are paid at the end of that month. The invoice goes out and is settled 75 days later. Between those two events the business is short by the cost of the order and has nothing to show for it except a number on the income statement.
One order is a rounding error. A month of extra orders is a real amount. A permanently higher level of orders is a permanently higher amount, because as soon as the first one is collected the next one is already out. That last point is the one people miss: the money is not recovered when the first customer pays, because by then the business is funding a bigger month.
LiveGrowth does not repay itself while it continues4 min▶
Marchmont's twelve month gap between profit and cash is £742,892, of which £664,607 is the build in working capital. That build is not a one-off charge that clears. It recurs every month and it gets bigger every month, because it is proportional to the size of the business and the business is getting bigger.
The consequence is that the cash cost of growth ends when growth ends, not when the first customers pay. A company that stops growing keeps the profit and stops consuming the cash. That is exactly what the 0% row of the ladder is, and it is why that row never dips.
Self-studyThe same growth at a different price4 min▶
Growth does not have one price. Change the three durations and the identical growth plan costs a different amount of cash. Collecting in 45 days rather than 75 keeps Marchmont above zero for the whole year and leaves £168,521 in the bank at month 12. Paying suppliers in 60 days rather than 30 leaves £77,892. Holding 30 days of stock rather than 60 leaves the same £77,892. All three leave twelve month profit at £445,631, unchanged to the pound.
What the model cannot price is what those changes cost elsewhere. Collecting in 45 days means going back on terms customers have already agreed. Paying in 60 spends supplier goodwill. Holding 30 days of stock is a decision to risk a stockout on an instrument a laboratory wanted this week. The cash saving is measured. The rest of the bill is real and is not in any of these numbers.
Five growth rates, one company
12 min liveSame margin, same customers, same terms, same cost base. The only thing that changes between these five runs is how fast revenue grows. Profit climbs the ladder. Cash falls off it.
| Monthly growth | Cash goes negative | Lowest cash point | Back above zero | Twelve month profit |
|---|---|---|---|---|
| 0% | never | £260,062 (m1) | never below it | £165,627 |
| 2% | never | £186,555 (m12) | never below it | £296,285 |
| 4% | month 10 | -£115,501 (m19) | month 28 | £445,631 |
| 6% | month 6 | -£897,962 (m31) | not by month 48 | £616,336 |
| 8% | month 5 | -£7,885,358 (m48) | not by month 48 | £811,427 |
LiveRead the two ends of the ladder4 min▶
At the top of the ladder, flat. Marchmont earns £165,627 over twelve months, its cash never goes below where it started and there is nothing to discuss. It is also a company that is going nowhere, which is why nobody chooses this row.
At the bottom, 8% a month. Marchmont earns £811,427, nearly five times the flat case, and its cash is -£7,885,358 by month 48. Nothing went wrong in between. The margin is the same 42%, the customers are the same laboratories, every month is profitable. It sold more, and selling more is what put it there.
LiveThe two thresholds4 min▶
Between 2% and 4%, a funding gap appears. At 2% Marchmont's lowest point is £186,555 and it is never short of money. At 4% it goes under in month 10 and needs about £115,501 to get through. That is a different conversation but not an alarming one: the business is viable, the trough is in month 19, and it is back above zero on its own in month 28. It has a financing requirement, which is an ordinary thing for a growing company to have.
Between 4% and 6%, it stops being a temporary gap. At 6% the hole is -£897,962 at month 31 and the company has not recovered by month 48. At 8% it is still falling at month 48. The distinction is not size, it is shape: at 4% there is a bottom and a way back up, and at 6% the four years the model runs do not contain either. A gap you can see the end of can be borrowed against. One you cannot is a decision about the growth rate itself.
LiveWhere the room will split, and should4 min▶
Show this ladder to two experienced people and you get two answers that do not reconcile, and the disagreement is genuine rather than a misunderstanding to be cleared up.
One position: slow down. The 2% row earns £296,285 and never needs a penny from anyone. Growth bought with borrowed money hands control of the company to whoever lent it, and the 6% row shows how quickly the amount required stops being a facility and becomes a fundraise. On this view the growth rate is a choice and the safe one is available.
The other position: fund it. Growth that is turned down is usually given away, and market position taken by a competitor at 6% is not recoverable by a company growing at 2% with a tidy balance sheet. The 4% row recovers on its own, the requirement is about £115,501, and refusing to borrow a knowable and temporary amount to protect an optics-driven view of the balance sheet is the more expensive mistake.
Both are defensible and neither is settled by the model, because the model prices the cash and says nothing about the market that is being conceded or the control that is being sold. What it does settle is that the choice exists and has a number attached, which is more than most companies have when they make it.
Self-studyWhat this ladder does not contain3 min▶
Each row holds everything constant except growth. In a real company growing at 8% a month, terms get renegotiated, suppliers ask for more security, the cost base steps up in lumps when a factory runs out of room, and a fast growing customer base is a different set of customers with different payment behaviour. None of that is here. The ladder isolates one variable so the direction of the effect is unambiguous, and the direction is the lesson.
It is also not a statement about whether Marchmont is worth anything, or whether anyone should own a piece of it. What a business is worth uses different tools and belongs to a different course.
Put your own company on the ladder
15 min hands onNo spreadsheet. Six steps, out loud, on your own organisation or on one you know well. The aim is to leave with a rough position on the ladder and the name of the person who could tell you the exact one.
Say the 8% row both ways in one breath
"We earned £811,427, nearly five times the flat case." "Our cash position is -£7,885,358." Both sentences describe the same twelve months of the same company. Notice which one you would have put in a board pack.
Estimate your own growth rate, monthly
Not the annual figure from the plan. Revenue this month against revenue last month, roughly. Then place that number between two rows of the ladder and read across.
Write down your three durations
How long your customers take to pay, how long your stock or work in progress sits, how long you take to pay suppliers. If you do not know all three, that is the finding, and the first two are the ones that matter most.
Name which threshold you are near
Below the first one, growth is self funded and there is nothing to arrange. Between the two, there is a knowable amount to arrange and a date by which it is needed. Above the second, the growth rate itself is on the table. Say which of the three you are in.
Ask what your lowest point is and when it falls
Marchmont's is -£115,501 in month 19, and the month 12 figure of -£47,261 does not show it. Ask whoever owns the forecast for the deepest point and its date, not the year-end balance. If the answer is the year-end balance, ask again.
Draft the sentence you would use
One sentence containing the growth rate, the deepest point, the month it falls in and whether it recovers. For Marchmont: growing at 4% a month, the business goes under in month 10, bottoms at -£115,501 in month 19 and is back above zero in month 28. Session 6 is about defending that sentence in a room.
The habit to keep. Whenever a growth target is presented, ask what it costs in cash and when the deepest point falls. The target and its funding requirement are the same decision, and they are almost always made by different people in different meetings, months apart.
Three questions
Marchmont is run at 8% monthly growth instead of 0%, with nothing else changed. What happens?
Growth makes the same company more profitable and less solvent at once. The margin never changes, every month is profitable, and the money is out on loan to customers and sitting in stock.
What actually changes between the 4% row and the 6% row?
A gap with a bottom and a date can be funded. A hole that is still deepening at month 48 is a decision about the growth rate, not a financing exercise. Profit rises at 6%, to £616,336.
Someone tells a board "we are growing fast and we are profitable". How should that be heard?
Both halves of the sentence are true of Marchmont in every row of the ladder, including the one that ends almost eight million pounds down. Fast plus profitable is the combination that consumes cash, not the combination that protects it.
Homework
Twenty minutes, on your own organisation or any company whose accounts you can get hold of.
Find the growth rate and the cash line together
Write down how fast revenue grew over the last period and what happened to cash over the same period. Two numbers, one line. Then say which row of the ladder it resembles.
Ask one person for the deepest point
Ask whoever owns the cash forecast for the lowest cash balance in the plan and the month it falls in. Write down the answer, or write down that the forecast is a year-end figure only. Session 5 is about reading accounts somebody else prepared, and this is the question they are least likely to have answered for you.