Are there downsides to growth? Yes.

For one thing, rapid growth can create a perilous cash flow situation. A common pattern is that a company shells out cash to purchase materials and labor in anticipation of rapid sales increases. It then turns those materials into products and sales but, as you know, cash doesn’t come in until months after the initial purchases. If the company doesn’t hit its forecasts, cash is tied up in inventory. Cash is like blood or oxygen; without it, you die. And growth eats cash. This is why roughly half of all bankruptcies occur after a year of record sales.

KEY QUESTION: Do you have consistent sources of cash, ideally generated internally, to fuel the growth of your business?

Growth sucks cash. This is the first law of entrepreneurial gravity.

We encourage management teams to set aside an hour or more each month to brainstorm ways to improve each of these cash cycle components. This is a powerful exercise to do with the broader middle-management team at a half- to full-day monthly management meeting. It will give everyone a better understanding of how cash flows through the business and how each function can contribute positively.

As a business owner, you should also consider that equity is the most expensive source of funding and that it is usually cheaper to source debt financing…

… it is mission-critical over time that management grow EBIT faster than the investment in net operating assets.

That was a difficult time for me. I love building businesses, not disassembling them. However, we all have an opportunity to learn in everything we do. I came away from this experience with a profound appreciation of the importance of cash in corporate performance—“free cash flow” as the single most important measure of corporate soundness and performance.