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.

Owners like Gary choose to spend money every day to grow their businesses. However, sometimes they are actually spending their hard-earned money to cover management-influenced waste (read that again).

To tackle the cash conversion cycle, start by reading “How Fast Can Your Company Afford to Grow?” a Harvard Business Review article by Neil C. Churchill and John W. Mullins.

Similarly, veteran tech executive Steve Blank wrote that many fast- moving and growing companies have excessive “organizational debt”—which “can kill the company even quicker” than technical debt. Steve defines organizational debt as compromises made to “just get it done.” Sometimes it’s necessary, and smart, to prioritize the most important work and get to the rest later. Yet, like borrowing too much money, so much organizational debt can accumulate that your company struggles to pay it down.

Dismantling the leveraged buyout industry would get rid of an overhanging threat across the entire managerial class; it would open up a huge space for different models of corporate governance.

But how would you go about doing that? If someone thinks that they could run a company better than the existing management, they’re allowed to spend their money buying it; preventing that from happening would involve a great disruption to the system. You can’t stop the management of a company from taking on debt, either. A lot of the time, taking on debt — even risking bankruptcy — is the correct and necessary thing for a company to do. As soon as you start trying to design regulatory regimes to prevent ‘excessive’ corporate borrowing, or distinguishing between companies on the basis of their owners, you quickly start to realise that this is a case where the law of requisite variety is telling you the project is doomed* —the variety of financial situations that a company can be in is much greater than anything that could be written into a rule.

*Buried here, in this footnote towards the end of the book, is probably the most useful and valuable piece of advice in all its pages: checking whether Ashby’s law of requisite variety has been respected is a great way of spotting a doomed project. It will even tell you if the project is going to fail because of insufficient resources or fail because it’s an impossible thing to achieve.