Great write up, @cedric ! Based on this summary, I bought and devoured this book in a couple days and I have to say - it was well-worth the praise you gave it. In particular, the discussions on cash generation and the relation of ROIC, margin, and velocity were fantastic.
One question I had from this piece was the following quote:
(Conversely, companies can delay turning a profit if they have good cash generation. An exercise for the reader: how is it possible to run a company at an accounting loss with positive cash flow? What does this mean in terms of a business playbook?)
I thought about this for a bit and I think I understand on a month-to-month basis how this would work. For a simple example, let’s say I’m a factory creating and selling widgets. I have to make payroll bi-weekly and pay for electricity every month, but somehow I get my suppliers to agree to only request payment for the supplies at the end of each year.
Let’s say I sell more than enough widgets to cover payroll and electricity/maintenance for the factory, but that the total sum of cashflows after salaries and factory electricity/maintenance is not enough to cover the cost of supplies, even assuming I don’t invest the surplus cashflow in new projects and instead sit on it to pay the suppliers. So when the end of the year rolls around, I’m basically left with only one choice, right? That is, find a way to raise capital.
Is this an accurate portrayal, or am I missing something? It seems from this thought process that any cashflow-positive business showing an accounting loss will, at some point, need to raise outside capital in order to pay off the accounts payable items that are generating that accounting loss.
EDIT: Having thought about this a little more, assuming that my previous reasoning is correct, I think an interesting corollary is that in order to escape this “accounting loss with positive cashflow” situation, your ROIC must be higher than your cost of capital. Using the previous example, if that is the case, then you can use the positive cash flow to finance expansions and take out debt at the end of the year to address any accounting shortfalls. Since your ROIC is greater than your cost of capital, eventually your returns will grow to outstrip costs and your accounting loss will flip to a profit.
I’m still not completely sold on my own reasoning here, so please feel free to poke holes!