BUSINESS | Growth Can Consume Cash Before It Creates It.

A business can grow revenue by 20%, report higher EBITDA — and still find itself under increasing financial pressure.

Why?

Because growth often requires cash before the benefits of that growth arrive.

More sales can mean:

→ More inventory
→ More work in progress
→ More receivables
→ More people
→ More equipment
→ More premises
→ More working capital
→ More debt

So the question shouldn’t simply be:

“How much are we growing?”

It should be:

“What does that growth require us to invest, and what are we getting in return?”

This is where I find the concept of Economic Value Added (EVA) useful.

At its simplest:

EVA = NOPAT − (Invested Capital × Cost of Capital)

In other words:

Are we generating enough Net Operating Profit After Tax (NOPAT) to compensate for the capital employed in the business?

Consider two businesses.

Both grow revenue from $50m to $60m.

But:

Business A generates strong incremental margins with relatively little additional capital.

Business B requires significant additional inventory, receivables, equipment and debt to achieve the same growth.

The revenue growth is identical.

The economics aren’t.

This is why I believe growth decisions should be evaluated through three lenses:

1. PROFITABILITY
What incremental profit does the growth generate?

2. CAPITAL
How much additional capital does it require?

3. CASH FLOW
How quickly does that investment convert back into cash?

A fourth question then becomes particularly important:

Does the return generated exceed the cost of the capital required to achieve it?

That’s the difference between simply growing a business and creating value through growth.

And sometimes the most valuable decision isn’t finding another 20% of revenue.

It is finding the 20% of revenue that creates the most value for every dollar of capital invested.

#BusinessGrowth #ValueCreation #CapitalAllocation #CashFlow #CorporateAdvisory