But, as the saying goes, don’t hold your breath. This kind of good luck doesn’t happen very often and can’t be predicted or relied on. Ironically, lucky scenarios such as these can be bad luck if the growth is not managed well. These cases didn’t require planning to create additional demand; that is the good luck part. But some planning was definitely required to handle the financial, people and other kinds of resource strains that such growth normally triggers.

Any growth beyond what is sustainable in cash terms will cause financial problems every time. Well, almost every time. There is one exception: excess assets. If a company has more inventory than it needs to keep things running smoothly, then additional sales volume doesn’t take cash; it simply uses up excess inventory. Having any asset that either isn’t needed, or isn’t needed in the current quantity to keep the business running smoothly, is a cash-conversion opportunity. A company can sell any excess asset, then use the cash to finance growth beyond what is otherwise sustainable from just cash profits and proportional debt increases. The key here is that management needs to know within a fairly tight range just what rate of sales growth can actually be sustained, given normal cash profit and debt-percentage levels. If management doesn’t have a sense of that range, it will likely target sales levels either lower than are optimally achievable or higher than are healthily sustainable. There is an optimal growth rate, and management needs to focus on it. If overall proportions of debt and equity in the business are about what they should be, and if both the fundamentals and the swing factors are stable, then calculating the sustainable growth rate is fairly easy, as we will discuss later in this chapter.

Taken From : Cash Rules