The business world is, hopefully, emerging from a mega-downturn. So, should the savvy businessman be focused on the top line (revenues) or the bottom line (profits)?
Says John Mullins: neither! Working capital is what companies like Costco need to survive, and it may also be precisely what your business needs to prosper.
Working capital is the cash a company needs to have on hand in the short term to keep the business running – pay its employees, suppliers, taxes and so on. The naked truth about working capital is that it doesn’t matter how clever your products or how keen your customers: if you haven’t got cash on hand to keep your business moving, you’ll be out of business, as numerous hedge funds and others learned the hard way in the financial crisis that began in 2007.
In a time of recession especially, what managers should be thinking about, in a strategic sense, is cash flow rather than profit. From a business model point of view, profits are irrelevant. Why? Failure to earn a profit won’t put you out of business, as long as you still have cash. But if you run out of cash, even if you are profitable, you’ll be gone in a heartbeat. Cash, as they say in entrepreneurial circles, is king. Consider the case of Costco, a USbased company with over 550 membership-only warehouses that, in 2008, generated over $71 billion in revenue. Costco has become the preeminent warehouse club retail chain, largely because management designed its working capital model to gain competitive advantage.
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