Marketing Insight #001 Orders Are Growing. But Can You Afford the Growth?
Stronger demand can be good news. But fulfilling that demand may require cash long before the customer pays you.
For U.S. manufacturers, September brought encouraging signs.
The Institute for Supply Management reported that manufacturing remained in expansion territory for the ninth consecutive month. Its Manufacturing PMI registered 54.5, while the New Orders Index increased to 55.3.
Perhaps more significant, the Backlog of Orders Index jumped from 51.8 to 56.4, while customers' inventories remained in what ISM describes as "too low" territory.
For many product-based businesses, those numbers suggest something every owner wants to see:
Demand.
But stronger demand raises another question that deserves just as much attention:
Can You Afford the Growth?
A new order creates revenue.
But before that revenue becomes cash, a product-based business may need to purchase materials, increase inventory, add labor, expand production, pay freight, extend customer credit, or invest in additional capacity.
Those expenditures don't wait until the customer pays.
That's why growing businesses can experience increasing sales, healthy margins, and even higher reported profits while simultaneously creating significant cash-flow pressure.
The problem isn't necessarily growth.
The problem is failing to understand the cash requirements of growth before committing to it.
A Backlog Is More Than Future Revenue
Backlog is normally viewed as good news.
And it generally is.
But management should look at backlog from another perspective as well.
A backlog is also a schedule of future purchasing, production, inventory, financing, and working-capital commitments.
Imagine receiving a substantial new order from an attractive customer.
Before collecting the receivable, your business may have to:
Purchase additional materials
Build or acquire additional inventory
Pay employees and production costs
Absorb freight and logistics expenses
Carry the finished product
Invoice the customer
Wait another 30, 45, 60, or even 90 days for payment
The sale may be profitable.
The customer may be excellent.
The growth may be exactly what the company wants.
But somebody has to finance the period between committing the cash and collecting it.
For many SMBs, that "somebody" is the business itself—or its line of credit.
The Question Isn't Simply Whether Growth Is Profitable
Profitability matters.
But it isn't the entire equation.
Management should also understand how much additional working capital each increment of growth requires.
Two companies can generate the same additional sales and experience completely different cash-flow results.
One may collect quickly, turn inventory efficiently, negotiate favorable supplier terms, and generate additional cash.
The other may build inventory, extend customer terms, pay suppliers more quickly, and consume substantial cash while reporting a profit.
Same growth.
Very different financial consequences.
That's why one of the most important questions leadership can ask is:
Is our growth creating cash—or consuming it?
And if it is consuming cash:
Is it consuming cash for the right reasons?
Growth that temporarily consumes cash to support strong margins, quality customers, and attractive long-term economics can be an excellent investment.
Growth that consumes cash because of weak pricing, excessive inventory, poor collections, or inadequate planning is something entirely different.
Cash Flow Reality Check
If orders are increasing in your business, consider discussing these questions with your management team:
How much additional working capital will our expected growth require?
Will inventory need to increase before we can fulfill those orders?
How long will it take from purchasing inventory to collecting the customer receivable?
Are the margins on the new business sufficient to justify the additional cash commitment?
Do we have enough internally generated cash and borrowing capacity to finance the growth without creating unnecessary financial pressure?
Those questions shouldn't be asked after the cash becomes tight.
They should be part of the decision before the business commits to the growth.
Growth Creates Opportunity. Cash Flow Creates Options.
The latest manufacturing numbers are encouraging.
Orders are growing.
Backlogs are growing.
Customers' inventories remain low.
For many product businesses, that may create meaningful growth opportunities.
But revenue alone doesn't determine whether that growth makes the business stronger.
The real objective is financially productive growth—growth that creates sustainable profit, strengthens cash flow over time, and increases the options available to the business.
Because profitable growth can still consume cash.
And understanding that before you grow can make the difference between growth creating opportunity—and growth creating financial pressure.
Cash Flow Creates Options™
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