As per commented by be Scott Allen in his article entitled “Cash (flow) really is king”, he said that cash and its effects on a particular business organization certainly identifies its role in contributing to the advancement of different business entities. Hence, the owners of the business [the entrepreneurs] who are less able to evaluate their capabilities based on money are usually not able of committing or achieving the success that they ought to attain.
Scott gave at least two main reasons why there is a certain existence of monetary flow dilemma among business organizations today. He mentioned the two major reasons as follows: 1. Business owners are often unrealistic in predicting their cash flow. They tend to overestimate income and underestimate expenses. 2. Business owners fail to anticipate a cash shortage and run out of money, forcing them to suspend or cease operations, even though they have active customers.
(Source: Allen, Scott, 2004, Internet) Certainly, keeping the two major reasons in mind, it could be noted that the main reason of this dilemma on money is particularly resulted from the fact that business owners lack the knowledge on how much pressure on money their company could actually take. According to Scott Allen, “cash” being the primary king in the business industry is noted as the main source of the existence of any business organization.
It could be observed that there needs to be a certain consideration given to how a particular business organization tries to regulate the funds that they already have and the amount of revenue that they receive from annual operations. Not being able to do this particular task may result to several destructive outcomes for the business. As continued by Scott Allen he said that “Employees can't wait on paychecks until your customers pay. Your landlord doesn't care that you're talking to investors and will have the money in a couple of months.
Suppliers may not be willing to extend your credit any further and you may not be able to purchase the goods you need in order to deliver to your customer and receive payment. ” (2007, Internet) From the said statement of Allen, it could be noted that the shortage of cash flow within business organizations actually affects the way the organization particularly operates for the sake of its stake holder’s concern. The stake holders particularly referring to the customer, the employees, the administration as well as the supporting organizations of the said business company have a strong contribution to the progress of the business.
This is the reason why it is very important on the business organization’s part that the welfare of the said stakeholders are given ample attention by the administration of the business organizations concerned with the situation discussed herein. Aside form this, the inability of the administration to identify the elements that primarily contribute to the cash flow shortage in the organization actually affects that capability of the whole business company to advance further towards higher profit inflow of the monetary funds taken from revenues of the said company.
How then could the said elements be further identified? This is where the understanding of SGR or Sustainable Growth Rate could be applied by the entrepreneurs who are facing the said dilemma being discussed within the context of this paper. Each business organization is entitled in being able to attain progress as they continue operating as an entity of employment within the society. It could be observed that there are things needed to be considered though when the progressive state of business is aimed to be achieved.
Hence, the capability of a certain organization to achieve continuous growth is then measured through the use of the scaling brought into existence by the utilization of the formula that is used to calculate the SGR percentage of a certain business organization. The SGR formula or model examines the capability of different business organizations in attaining the primary goals of progress that it aims to achieve. This particular model of evaluation is more likely much integrated on the realistic views on the said business probabilities.
Through the said realistic views, the capabilities and the limitations of the organization could then be measured well thus making it easier for the owners of the business to predict the future issues that may arise that in some point may result to either the progress or the failure of the organization. The SGR formula primarily is the calculation of the expenses that are expected from the company and the revenues that are scheduled to be achieved by the organization in an annual-based operation.
To understand the formula better, it appears this way: SGR = ROE * Earnings Retention Rate = (Profit Margin * Asset Efficiency * Capital Structure) * Retention Rate = [(Net Income/Sales) * (Sales/Assets) * (Assets/ Beginning of Period Equity)] * (1 – Dividend Payout Ratio) From the given formula, it could be observed that there exist the different elements of business operations that are involved within the procedure of gaining the best interest there is for the organization’s profit to be able to ensure the progress of the said business entity.
The evaluation of the business based on the real scenario that the organization is undergoing would actually lead to direct realization of the fact that the company could only take a certain pressure on expenses based from the funds that are available for the organization to make use of. Hence, through this, the administration of the organization would have a better time spent on actually balancing the cash flows in and out of the business (Hasan, 2003, 16). Furthermore, the article entitled “Sustainable Growth: Is There Room to Grow? ” asses the importance of the said process of business growth evaluation:
This metric assumes that over the evaluation period: (1) the company will grow sales as rapidly as market conditions permit; (2) management is unwilling to sell new equity; and (3) the company maintains it current capital structure and dividend policy. As growth requires commensurate increases in assets for support — without equity issuance, any asset increases must be funded with added liabilities or from retained earnings. Thus if financial policies are unchanged, the rate of shareholder equity growth will limit sales growth.
Source: A Deloitte Research Viewpoint, 2001, Internet