If you are in a high-fixed-cost business, the “growth takes cash” truism doesn’t kick in very much until you approach capacity. This is due to the fact that gross margins are quite high. A motel, for example, would be typical of this high-fixed-cost kind of business. The direct cost of renting out one additional room is a very small fraction of the revenue one takes in from the guest, thus we see very high gross margins. On the other hand, on a busy holiday weekend in a resort area, you can’t quickly, easily or inexpensively load up on an extra couple of dozen rooms to accommodate demand. Across the street, there’s a restaurant that can extend its waiting line, open earlier, close later and place larger orders with its food and beverage wholesalers. Its gross margins, though, are a lot lower than yours. In the motel business, your slow season doesn’t automatically bring with it reduced mortgage payments or taxes, your biggest costs. But in the slow midwinter, your friend the restaurateur’s food, beverage and labor costs drop by 75%.

Take the time to get familiar with the cost structure of your industry and company. It will give you a real edge in understanding why things are the way they are and, more important, how they might be changed for the better. Understanding such financial structures will also help liberate you from the tunnel vision that a preoccupation with your own function can sometimes force on you. If your responsibility is sales or marketing, for example, an understanding of cash flow and the cash drivers should help you broaden your focus. This refocusing needs to go beyond straight sales volume and expand to include of pricing, selling-expense control and product-line breadth. Other things being equal, for example, it is often better
to cut sales volume back a bit rather than to shave price just to get a few more deals. The particulars of that equation, though, depend on the specifics of cost, margin and step-function issues in your company and industry.

Taken From : Cash Rules