The Comprehensive Guide on How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, + Website

CHAPTER 19

EXPANSION AND CONTRACTION IMPACTS ON CASH FLOW

Setting the Stage

The single best statement we’ve heard over the years related to really understanding the impact of expanding and contracting business cycles on cash flows goes like this (pardon our language but this is coming straight from the horse’s mouth, a client of ours for more than 20 years):

We don’t need a bank going into a recession but we sure as hell need one coming out!

This client operates a personnel staffing or “Temp” business—an industry that is highly sensitive to changing economic conditions and often a leading indicator of future economic activity (as businesses tend to secure temporary or part-time employees first to ensure that a real recovery is taking place and then they hire the employees full time when their confidence is higher). At first this statement may appear contradictory as if a company is anticipating a downturn, resulting in incurring net losses for 12 to 24 months, it would seem that additional cash or financing from a bank would be required to support ongoing operations. But as you learn in this chapter, the exact opposite is generally the rule of thumb as it’s during high growth and expansion periods when cash resources become the most constrained.

Our goal in this chapter is not to pick on banks and evaluate their lending practices and standards (as covering this material would represent an entirely new book), rather this chapter is designed to help the reader better understand the ...