Consuming too fast, Amazon’s Working Capital, Financing for Scale Ups, Mondayitis & How your CFO can double profitability
4th April 2021 Evolution Partners Newsletter
Jeff Bezos: “Advertising is the price you pay for having an unremarkable product or service.”
Hope you’re Thriving!
It’s been a good and busy week for me, you know what it’s like when you’re about to have a few days off and you become so much more productive —
getting things done, I’m sure you feel a little bit the same way about this week with a four-day break for Easter coming up. Easter means many different things to many people, but one thing that it means to many people is Easter eggs. Chocolate eggs that shared and generally overindulged, especially by children.
Consuming too fast
Now kids may love Easter because they get to overindulge in chocolate with the blessing of their parents, and let’s be fair, they probably regret it not long afterwards and for a while longer, but it’s a cultural institution in our society.
Yet kids or even adults couldn’t do that on a regular basis, they couldn’t continually indulge in too much chocolate or for that matter, they couldn’t continually indulge in too much food. Yet Joey Chestnut who according to Major League Eating is the world champion at consuming hot dogs isn’t like most people. Joey has won the world hot dog eating championship every year bar one since 2006. In the event, competitors are given 10 minutes to consume as many hot dogs as possible, and in 2020, when Joey set the world record of 75 hot dogs within the 10 minute time the person who came second — Darron Breeden, consumed 42 hot dogs. Then the person who came fourth, George Chiger who is no novice being ranked number 15 in the world only managed to down 23 hot dogs, a far cry from Chestnut’s 75. If I was really hungry and focused, perhaps I might eat 3 or 4 in ten minutes.
You or I aren’t Joey Chestnut though. He is at the absolute extreme of human consumption. Even the number two in the world can execute consumption of almost 50% less than Joey can.
The allegory here is that leaders and teams try to execute too much. “I’m impatient” they might say. Perhaps they look at the Five Roles of a CEO, or Core Values, or the Hedgehog concept and they think that they want to implement everything as soon as possible. But it fails. Because you’re not Joey Chestnut. You’re not even George Chiger, who at 23 hot dogs is still at the absolute extreme of humankind. If you can accept that you are not at the extreme then you can set much better priorities, knowing that you can only take on so much this quarter, you can only take on so much next quarter and so on into the future. Then with realistic execution expectations and the ability to zoom right out on your longer-term strategy and how you will execute that realistically over the long term you are far more likely to succeed.
Amazon’s Negative Working Capital
And just like you can take on too many priorities, some people can grow faster than they are able to fund. In the early days of Dell, they were able to grow by producing more cash than the working capital constraints required. They were collecting cash from customers 30 days before they had to pay their suppliers which they had built into their business model. When customers bought a Dell computer they would pay for it online during the transaction and then the suppliers in China would begin the process of manufacturing and shipping to the customer for which they would not be paid well into the future. And so Dell was collecting the cash upfront while the suppliers were not getting the payment for a month into the future and the customer is not getting the computer for perhaps a month into the future. This meant the more computers they sold the more cash the business produced because they had a negative working capital cash conversion cycle which was around minus 21 days. Other computer manufacturers like Compaq or HP might have had a working capital cycle of perhaps 30 days because they had to produce the computer, ship the computer to a store and then sell the computer from inventory to customers. This minus 21-day cash conversion cycle that Dell produced provided a significant advantage over these competitors because they didn’t need to fund their growth. This may have meant their primary customer was a consumer and not a company like Compaq or HP, but the advantage they obtained by not having to fund the growth of their business through working capital provided an enormous advantage.
Understanding your cash conversion cycle and the working capital requirements are fundamental for any business owner to understand how along with how your business model impacts that. In Neil Churchills HBR article How fast can your company afford to grow he outlines three critical factors for managing cash in a sustainable manner. From the article
“Fortunately, there’s a straightforward way to calculate the growth rate a company’s current operations can sustain and, conversely, the point at which it would need to adjust operations or find new funding to support its growth. In this article, we will lay out a framework for managing growth that takes into account three critical factors:
• A company’s operating cash cycle—the amount of time the company’s money is tied up in inventory and other current assets before the company is paid for the goods and services it produces.
• The amount of cash needed to finance each dollar of sales, including working capital and operating expenses.
• The amount of cash generated by each dollar of sales.
Together, these three factors determine what we call the self-financeable growth (SFG) rate—that is, the rate at which a company can sustain its growth through the revenues it generates without going hat in hand to financiers.”
That’s a great timeless article, but Dell is an older case study that might not connect with all people. This past week I came across an example of Amazon’s negative working capital cycle that breaks down the manner in which Amazon creates an advantage over its competitors where 20% of Amazon’s cash is generated from working capital – the company enjoys a negative working capital position, and this gives it two significant operational advantages from an analytical perspective:
– Negative working capital shrinks the total capital employed and enhances returns on capital.
– Negative working capital reduces the investment required for growth.
This article is important because like Dell small changes to the business model can have massive impacts on working capital. And if you are able to change your business model to spin off cash in the way Dell did or Amazon did and reduce the days in your working capital or cash conversion cycle you may not need external funding for growth.
I hope you enjoy the article here Amazon’s cash flow
The problem with financing for Scale Ups
I found an article this week that outlines the challenges that scale-ups — defined as high growth firms achieving an average annualised growth of greater than 20% per year, over a three year period — are experiencing.
From the article
“What should be avoided is the tendency to cultivate the growth of scale-ups, rather than target the firms already established. It is difficult, if not impossible, to determine in advance which start-ups will graduate to scale-up status. Research shows that the best predictor of firm performance is entrepreneurial quality. That is not easy to identify, and anyone proposing to use public money to “mentor” start-ups into scale-ups should be viewed with some caution. The benefit of targeting scale-up firms is that they are already established and market validated companies.”
“The only reasonable capital channel, then, is for the founders to put up their own assets as collateral or, as is often the case, to seek private equity. For fast-growing firms, giving up too much equity, too early can be an expensive proposition. In Canada, once companies reach scale-up status, they are usually left to their own devices to find growth financing, typically from sources abroad. This often results in the sale of majority control to investors, which significantly lowers the control and ownership stake of the founders and increases the odds of an early exit before the scale-up firm has realized its full potential.”
I hope you enjoy the article here The Innovation Imperative: Why Canada needs to prioritize scale-ups in the face of Big Tech’s dominance
This week on The Growth Whisperers podcast
This week on The Growth Whispers we’re talking about a pandemic that’s sweeping the globe and is toxic. It’s called Mondayitis and it infects a lot of people and prevents people from building enduring great companies. The most challenging part is sometimes it affects us as the senior leaders in a company because we just get sick and tired of things within the business and unfortunately, we tolerate them for so long they become normal. We talk about 7 different causes of Mondayitis and what you can do to eliminate it or prevent it.
Is there a pandemic of Mondayitis in your company – if so, what can you do about it?
Listen to The Growth Whisperers
From the vault
How Your CFO Can Double Profitability
Businesses often under-invest on the accounting side of their business, seeing it as pure overhead meant to be kept to a minimum. And given a marginal dollar, most business owners will opt to either spend it on acquiring more resources or making more sales. In fact, I’ve seen the best investment a company can make is bolstering the numbers side of the business. Hiring just one additional accounting clerk or a part-time CFO can double profitability and cash within twelve months. So how can they help the most immediately?
Read more How Your CFO Can Double Profitability
Patrick Lencioni event
In partnership with The Growth Faculty, Evolution Partners is delighted to offer you $100 discount to see Patrick Lencioni in a live virtual event this April: Patrick Lencioni: 4 Pillars of High-Performance Cultures.
New York Times best-selling author of The 5 Dysfunctions of a Team (plus 11 others), Patrick Lencioni is the global pioneer of the organisational health movement.
McKinsey research shows a healthy organisation delivers roughly 3x the returns to stakeholders than less healthy companies. And, companies that institute initiatives to improve health see tangible performance increases in as little as six months.
Named “one of the most in demand speakers in America” by the Wall Street Journal, Patrick Lencioni will deliver a fast-paced, highly practical event teaching business leaders and their teams how to create a healthy organisation and high-performing culture that takes advantage of the talent within their teams.
YOU WILL LEARN:
Practical and highly entertaining, over 2.5 hours you’ll learn:
• The 4 Disciplines Model of organisational health
• The 5 Essential Behaviours required to build a cohesive and high performing team
• The Ideal Team Player framework for identifying, hiring and developing ideal team players
• The 6 Types of Geniuses – Identify your areas of working genius that allow you to thrive at and enjoy work
• PLUS, interactive Q&A with Patrick
You will leave with immediately actionable frameworks and tools that have transformed thousands of businesses globally.
2021 Agile Leadership Summit event
I invite you (and your leadership team) to join me at the April 2021 Agile Leadership Summit.
This virtual summit is going to be a high-value event with concrete, actionable takeaways.
The three featured Keynote speakers are;
Michael Bungay Stanier
Easy Change vs Hard Change“Easy Change” is likely something you’ve already mastered. But “Hard Change” … well, that thing you find difficult to make progress on.
In this practical session, we’ll dig into:
• the difference between Easy Change and Hard Change, and why it matters
• the most common mistake made in trying to “crack” Hard Change
• the hidden force that’s most likely stopping you make progress on Hard Change
What’s Next?! How to Navigate Customer and Employee Interactions in a Pandemic (and Post-Pandemic) EraAs the pandemic continues to shape the world, businesses face new challenges on a daily basis. Smart organisations recognize that the “old way of doing business” doesn’t work anymore and that waiting and hoping for things to “get back to normal” isn’t a viable strategy. In this practical session, we’ll discover: “what’s next” in order to acknowledge the new reality, adapt to a shifting landscape, and thrive in this new environment
Radical Alignment to a Core Strategy
What are the symptoms of a lack of Core Strategy in a company? What struggles do companies face when they aren’t radically aligned around their BHAG? What strategies and tools will this monograph cover (high-level) that will allow you to address these issues and form a Core Strategy for your company to align divisional strategy around?
Building atop highly-rated North American Summits, the first Australia/Asia Agile Leadership is an opportunity for you and your leadership team to come together for a premium learning experience via a half-day series of keynotes and practical, interactive breakout sessions. You’ll learn in three key areas: how to become a highly-skilled coach CEO for your teams, how to build vision through abundance, and how to implement practical tools that create award-winning companies.
Join us for this half-day of learning on April 29, 2021, from 9:00 am – 3:00 pm AEST for only: $325 AUD.
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