Question

Many years ago I purchased several small companies. The retail operations that faced the consumer were instant sources of cash, as transactions were either cash or credit card. The printing operation we purchased, however, was a different challenge as all sales were on accounts payable. What problems do you think we ran into in the printing business when sales skyrocketed?

Answer 1

When the sales skyrocketed, the following problem was possibly faced :

Due to the long cash conversion cycle, the working capital investment would have increased. The cash receipts from customers would have been insufficient to fund the short-term payables. Hence, the payables would have to be funded with short-term financing which may have been difficult to obtain. The use of short-term financing would have increased the financing expense, and reduced the return on assets and net profits.

Further expansion and growth of sales would have been hampered due to non-availability of cash. Beyond a certain point, even short-term working capital financing is insufficient to fund growth. Hence, this would have been an obstacle to growth.