If you’re not familiar with the idea of discounted cash flow, consider applying a reverse compounded interest rate. A reverse, or negative rate will reduce principal when applied to a positive value. For example, a $1,000, zero-coupon bond that’s due to mature next year at its face value has a lower value today. Its present value is its future value a year out minus an amount equal to the going interest rate on that type of financial instrument. In the same way, the present value of a business is the sum of all future cash flows discounted back to today. The negative interest rate we would apply to a company’s future cashflow projections is actually a risk-adjusted investment-return figure. In Chapter 14 we’ll discuss company valuation in depth, but the point for now is that in talking about sales growth, we are also talking in a parallel way about value growth.

As we briefly discussed in the previous chapter, there are two dimensions to the way sales growth affects cash flow—the growth effect itself and the management effect. Sales growth will naturally tend to have a somewhat proportional impact on virtually every other significant income-statement and balance-sheet line item. This occurs as rising sales figures ripple through the financial statements period by period. But management decisions about how to pursue and facilitate that growth, such as allowing customers easier credit terms or other changes to the marketing mix can have a substantial impact on cash flow, too. This challenges management to respond creatively to the operational issues involved in any significant growth.

Taken From : Cash Rules