Thursday, July 19, 2007

Cash and growth? Not a contradiction!

Growing with the Flow - Metrics - and Georgia Tech's Charles Mulford point out that growing firms often consume much cash and the growth must be financed, it is not always the case. In fact, for many firms cash flows actually increase as the firm grows.

A look-in:
"Growth is often considered to be a cash drain," says Mulford, director of the lab and professor of accounting at Georgia Tech, but "it is not necessarily the case that growth must be financed." Some companies, he says, actually generate more cash flow as growth accelerates."
Which, using the textbook language is to say that the "Additional Funds Needed" is negative due to growth in "Spontaneously generated funds."

Not surprisingly, this is especially true at what Taleb would call scalable firms such as software.

One more look-in:
"The researchers looked at 11 companies in a range of information-technology sectors (hardware, software, telecom, services, and semiconductors) and used Microsoft as the Big Kahuna of the sector. The software giant didn’t disappoint: its core operating growth profile and free cash growth profile clocked in at 59.3 percent and 41.8 percent respectively. That is, for every added dollar in revenue growth the company can be expected to generate 59.3 cents in core operating cash flow and 41.8 cents in free cash flow."
Not earth-shattering, but definitely worth discussing in a corporate finance class!!

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