Positive Churn #1 - You Can't Grow Your Way Out Of A Hole

By Clive Birnie | April 8, 2019

Originally published by Clive Birnie on the Positive Churn Blog, 30th March 2007

If cash flow is unbalanced growing sales will make it worse.

The instinct of most manufacturing CEOs/MDs when the business is struggling and cash is tightening will be to attempt to boost sales to alleviate the crisis. This inevitably involves chasing new customers, new contracts, and often new products or variants. Invariably this will have the opposite to the desired effect because in most companies the result will be an increase in inventory and an associated deterioration in cash flow. It is better and braver to:

Shrink to Survive.

Having seen our former parent struggle for several years and repeatedly make the “Lets grow sales to solve the problem” mistake (ending in receivership) we developed the “Shrink to Survive” instinct and applied it during the torrid birth of Severn Delta. Between Oct 2003 and Jun 2004 we implemented actions that reduced annualised Turnover by 18%. We engineered an exit from our biggest volume customer and from the largest volume market for our technology. We disposed of some assets, but we also bought some new low cost “right size” assets to take the pressure from a critical bottleneck.

The results were a 30% reduction in inventory and a sequence of incoming cash waves that we used to restructure the business into a sustainable shape. More importantly we recovered every £ of the losses we had racked up in 2003 by the end of 2004.

This left the business tight, focused and easier to move to new premises (in Sept. 2005) thus opening new opportunities for productivity improvement.

I can honestly say that we did not actively “sell” during 2003, 2004 and for most of 2005. By the end of 2006 Turnover was back to the annualised level we had been at before executing “Shrink to Survive” but with half the number of SKUs, fewer customers and fewer people.

There were many other things we did in 2003-4 that contributed to creating the business we are today but “Shrink to Survive” was critical and proved the theory: “You can’t grow your way out of a hole”.

© Clive Birnie, 2007 - published with permission