Wednesday, March 14, 2007

Definition of Cash Constraint

I'm currently working on a book "Maximizing Cash Flow: The Theory of Constraints Way". Goldratt doesn't cover cash flow and it's not even included under the topic of Throughput Accounting. It is however, one of the most important topics for business owners. 80% of the businesses started with year will be out of business within 3 years and the reason is CASH. Many of these businesses will have even been "profitable" when they were forced to close. This happens because they run into a cash constraint.

Cash is your constraint if and only if[1]:

  • You have sufficient orders AND
  • You have sufficient capacity to fulfill orders AND
  • You have sufficient vendors to supply the raw materials/services needed for the orders AND
  • Your vendors are refusing to supply on credit and they will supply only against cash AND
  • You do not have enough cash to pay your vendors so that you can fulfill your orders.

When cash is your constraint, going out of business is usually not far behind. Most small businesses go out of business because they have run into cash trouble. A cash constraint situation can occur to profitable businesses simply because they must pay vendors before they receive their payments – their cash-to-cash cycle times are too long.

Send me your #1 question about cash to and I will send you the answer to your question along all the other questions/answers that are submitted.

[1] Definition adapted from one provided by Ravi Gilani, a TOC Consultant in India. Ravi helps clients by putting the right measures in place.

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