Researchers have identified a cluster of anomalies that corrupt this process and lead to suboptimal allocation decisions. Among the most pernicious …

• DEFEND WHAT’S YOURS. Leaders tend to be territorial about the resources they control and are typically reluctant to share money and talent with other units, even when the returns might be higher.

• THE RICH GET RICHER. The biggest units in a multibusiness company tend to get more than their fair share of capital, not because they offer better returns, but because the leaders of these businesses have more political clout.

• GOOD MONEY AFTER BAD. Executives tend to overinvest in struggling businesses in hopes of turning them around. Research shows that in most cases, returns would have been higher if the money had been invested in less troubled units.

• SHARE THE PAIN. When cash is short, executives tend to cut spending across the board rather than protect high-priority areas.

• IT’S WHO YOU KNOW. Senior leaders with strong internal networks typically win more resources than leaders who are less well connected, irrespective of the merits of the particular business case.

• HOME IS WHERE THE HEART IS. Senior executives are less likely to defund or divest a business in which they worked earlier in their career.

• PRETTY IT UP. In competing for funds, business unit leaders have an incentive to inflate the merits of their investment proposals. These distortions are often difficult for corporate-level executives to ferret out.

• MORE OF THE SAME. Funding decisions are often made relative to last year’s budget. Every business or product line gets pretty much what it got the year before, plus or minus a few percentage points.

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.

Gross margin doesn’t get enough respect. It’s bad enough that it’s stuck in the middle of the P&L and often gets glossed over. It’s actually THE most powerful indicator of an effective sales team, a differentiated strategy, and real growth.

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 fix this, Gary had a choice of two main strategies:

1. Increasing his gross margin.

1. Reducing his working capital.

If he didn’t make a change in the relationship between working capital and profitability, his company was not going to survive.