While moderate and conservative companies cautiously rely on their own resources, the more ambitious mid-sized companies are willing to take on more risk to pursue greater rewards.
For finance executives at many mid-sized companies, cash not only is king, it is also comfort.
In a recent survey sponsored by CIT and conducted by CFO Research, finance and other senior executives from midsized companies (between $25 million and $1 billion in revenues) expressed a decided preference for relying on their own resources to fuel their growth plans. About two-thirds of the respondents said that operating cash flow will be one of their three most important sources of funding for growth, and almost four in ten said they will also use cash reserves.
Of course, if you want to use your cash, you have to have it first, and the ability to generate cash is uneven across the board. While a majority of finance executives (57%) reported that their companies' revenues are higher than they were a year ago, nearly 45% said either that revenues have stagnated (24%) or that they are doing worse than a year ago (20%).
As the controller of a manufacturing company complained, "Increased inventory, slowing cash flow, increased A/R…These will be a drain on our cash flow which could impact the growth initiatives we have in place for the year. We may have to draw down our credit line to sustain operations while cash is tied up in inventory and A/R."
Companies like this are more likely to find themselves between a rock and a hard place when it comes to finding the funds for growth. This may explain why the CFO of a firm in the wholesale/retail trade laments, "We have curtailed all but necessary investments in people and capital projects."
Other companies, however, find themselves in the enviable position of trying to keep up with their own growth ambitions, and such companies are actively seeking new sources of funding to fuel those ambitions. A head of finance from a private telecom firm writes that the company's most significant challenge these days is "finding lending sources with sufficient capital to meet our needs as demand accelerates for our assets and technology."
For such fast-growing companies, the pace of their growth is simply taxing their ability to keep up. A CFO in the healthcare industry notes, "Expanding to new territories has an impact on our cash as new ventures don't produce the necessary cash flow to support themselves. This has led us to either use our free cash flow or borrow more money from the bank."
Not surprisingly, then, respondents who characterize their companies' growth plans as "aggressive" have a more favorable view of debt financing than those who say they are moderate, conservative, or expect to rationalize. Two-thirds of these growth-focused executives (67%) rate debt financing as one of their most important funding options, compared to 45% of all others.
But even these go-getters are sounding a note of caution. A CFO from the defense industry wrote that, now, "ROI must be higher due to the higher risk of winning projects [that require] large investments." What that means is that they must work all the harder, not just to find the funding, but also to make sure that it will pay off.
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