Original Research

The danger of high growth combined with a large non-cash working capital base: A descriptive analysis

W. Steyn, W. D. Hamman, E. V.D.M. Smit
South African Journal of Business Management | Vol 33, No 1 | a696 | DOI: https://doi.org/10.4102/sajbm.v33i1.696 | © 2018 W. Steyn, W. D. Hamman, E. V.D.M. Smit | This work is licensed under CC Attribution 4.0
Submitted: 12 October 2018 | Published: 31 March 2002

About the author(s)

W. Steyn, Graduate School of Business, University of Stellenbosch, South Africa
W. D. Hamman, Graduate School of Business, University of Stellenbosch, South Africa
E. V.D.M. Smit, Graduate School of Business, University of Stellenbosch, South Africa

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Abstract

A high growth rate may not be the ultimate measure of a successful company. This article shows that growth at too high a rate, for a company with a high non-cash working capital component, may lead to financial difficulties.
While the income statement of a company is based on the accrual of income and expenses, the cash flow statement is based on the receipt and payment of cash. A company experiencing high sales growth, depending on the extent of its non-cash working capital, will find that the cash flow from operating activities before the payment of dividends will not grow as quickly as the net profit after taxation. This is because the accrual part included in the net profit after taxation is also growing at a high rate. At such a growth rate, operating activities do not generate sufficient cash to sustain the day-to-day activities of the company.

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