How to Boost Cash Flow with ROA: High Growth Secret

What’s the secret to keeping your coffers full while growing rapidly? Enter Return on Assets (ROA) – your ticket to cash flow mastery.

Why ROA is Your New Friend

ROA, calculated as net profit divided by total assets, is more than just a financial ratio. It’s a powerful indicator of your company’s ability to generate cash efficiently. The higher your ROA, the more cash you can generate with fewer assets. For high-growth companies, this is pure gold.

The High ROA Advantage

Picture this scenario: Company A: Sales $100, profit 10% of sales, Assets $300 Company B: Sales $100, profit 10% of sales, Assets $100

Both companies want to double their sales. Here’s what happens: Company A needs $300 more in assets, resulting in a $300 cash outflow. Company B, with its higher ROA, only needs $100 more, resulting in a $100 cash outflow.

The verdict? Company B’s higher ROA allows it to grow more because the capital requirement for sales growth is less. To many small businesses cash is often a limitation to growth. Because every time the business grows, operations require more cash. This is where the power of high ROA is in action!

That is why high-growth companies need high ROA.

Unveiling Your True ROA

To get an accurate picture of your ROA, focus on operational assets. Strip away the non-essentials like idle cash or stock investments. What you’re left with is the true engine of your business – the assets that directly drive your sales.

Boosting Your ROA

ROA is dismantled into net profit/sales × sales/total assets (=ROA (net profit/total assets) ). The first part shows how profitable your products or services are. The second is how many times you turn your assets. Like if you have 10 inventory and sell 100 items in a month, you turned assets 10 times.

To enhance ROA and have fewer assets, you can:

  1. Increase Profitability (Net Profit / Sales):

o Increase the sales price by providing better solutions for clients’ specific problems

o Reduce costs by measures such as restructuring or enhancing marketing strategy

  • Accelerate Asset Turnover (Sales / Total Assets):

o Sell products or services fast. This is accomplished by making products more popular so clients buy like crazy. Or you cut some features that actually very few customers want, to produce items faster.

o Cut assets that don’t contribute to operations. Like nice company cars? Sell them and buy second-hand 10yo Toyotas.

By maximizing your ROA, you’re setting up your business for sustainable, cash-rich growth.

Your ROA Action Plan

  1. Regularly track your ROA
  2. Analyze both profitability and asset turnover components
  3. Implement strategies to boost both aspects of ROA