Abstract
The accounting sustainable growth rate is used by financial managers and bankers to determine possible financing needs and investment opportunities for companies. However, the authors contend that as this rate is based upon accrual figures that do not reflect the cash position of a company, it could lead to situations in which the company could grow itself into cash problems. In this regard they suggest a cash flow sustainable growth rate (CFSGR), which is defined as the rate at which the company can grow whilst still maintaining a target cash balance in the balance sheet. The relationship between the accounting SGR and CFSGR is then investigated. The authors found that while the accounting SGR is not affected by the non-cash components of working capital, nor by any changes in the non-cash components of working capital, the CFSGR is. Both rates are influenced by the profitability of the company. The accounting SGR is influenced by the growth in sales, while CFSGR is not. The authors do not contend that the CFSGR should replace the accounting SGR, but that it is in the company's best interest to take cognizance of the CFSGR and its implications for the company's growth and cash position.
Highlights
Strategic planners differentiate between so-called strategic objectives and financial objectives. Thompson & Strickland (1998: 37-38) refer to strategic objectives as being relevant for the long-term health of a company, whilst financial objectives refer to the shorter term
It has been shown that the accounting SG R is not affected by the non-cash components of working capital, nor by any changes in the non-cash components of working capital
The cash flow sustainable growth rate (CFSGR) is affected by the changes in the non-cash components of working capital, as well as by the profitability of the company
Summary
Strategic planners differentiate between so-called strategic objectives and financial objectives. Thompson & Strickland (1998: 37-38) refer to strategic objectives as being relevant for the long-term health of a company, whilst financial objectives refer to the shorter term. They make the point that the exploitation of such growth opportunities may consume more cash than can be generated by the existing products, services, and customers They are of the opinion that the overall financial objective for growth-stage businesses will be percentage growth rates in revenues, and sales growth rates in targeted markets, customer groups, and regions. 'the management of growth requires careful balancing of the sales objectives of the firm with its operating efficiency and financial resources' (1997: 743) In this regard, the 'sustainable growth rate' (SGR) has been defined as the 'maximum annual percentage increase in sales that can be achieved based on target operating, debt, and dividend payout ratios' (Van Home, 1997: 744). The article ends with a section of the most important conclusions regarding the SGR and CFSGR
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
