A Billion for Growth: How More Orders Can Mean Less Cash

A company can have more orders than the year before, a nearly completed production line and a growing workforce, yet see less money in its bank account. For Simon Šimonka, director of financing and marketing at SID Bank, that is not necessarily a sign of failure. It can be the signature of growth that has moved too quickly.

Companies often plan carefully for the cost of a machine, a technology upgrade or a new production capacity. What they overlook, Šimonka says, is what comes after the investment: expansion itself. Higher production requires larger inventories, more receivables and additional cash for day-to-day operations. The result can be a liquidity squeeze just when the investment has been completed successfully.

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These are classic real-world situations.

This creates one of the less intuitive financial paradoxes for managers. A company can sell more, generate more revenue and even make a larger profit, while its available cash begins to run out. “We are completely focused on the investment and its costs, while at the same time forgetting about working capital,” Šimonka says.

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We are completely focused on the investment and its costs, while at the same time forgetting about working capital.

The issue is gaining importance as SID Bank and the Ministry of the Economy, Labour and Sport put together a broader €1 billion financing mechanism for the economy. The size of the package may work well in political speeches and headlines, but the more important question is what it produces. In a few years, the meaningful measures will be whether companies have raised productivity and value added per employee, developed new products, increased exports, entered new markets and triggered additional private investment.

The framework includes four products covering different stages of business development. They support research and development, investment in prototypes or production, and permanent working capital after expansion. The first three offer maturities of up to 20 years and grace periods of up to five years. A fourth instrument, allocated €500 million, is intended as a liquidity safeguard for companies hit by events outside their control, including crisis hotspots, broken supply chains, natural disasters or a possible new pandemic. Development projects will face another test: how many make it from prototype to commercial production.

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We have a product for research and development. We can continue with an investment product. Once development is complete, we can invest in a prototype or production.