Gymshark's Billion-dollar Venture fuelled by Recurring Negative Cash Flows

In the dynamic world of business, there are a few companies that stand out for their exceptional growth strategies. One such success story is Gymshark, the sports clothing brand that was launched in 2012 by Ben Francis and is currently valued at $1.3 billion.

Gymshark's growth from £9 million in 2015 to £176 million in 2019 was remarkable, and it achieved this feat with minimal external funding. The secret to this financial prowess lies in its negative cash conversion cycle.

A negative cash conversion cycle means that it takes longer to pay suppliers/bills than it takes to sell inventory and collect money, implying that suppliers finance operations. This strategy is often considered the ninth world wonder in business, enabling companies to grow without the need for external capital.

Gymshark's success is not just a product of its financial acumen. It is also attributed to a customer-centric approach, a great product, and a strong community of influencers and brand enthusiasts. Pre-orders or a subscription service, negotiating retail terms, and strategic partnerships with suppliers are some of the strategies Gymshark employs to control accounts payable and accounts receivable.

Minimizing the number of products and SKUs can significantly impact cash conversion cycles. By focusing on a select range, Gymshark ensures that it does not hold excessive inventory, thereby reducing the time it takes to sell inventory and collect money.

The cash conversion cycle is a metric that tracks the number of days it takes to convert inventory investment into cash, considering three variables: Days inventory outstanding, Days receivables outstanding, and Days payables outstanding. By optimising these variables, Gymshark has been able to reduce its cash conversion cycle, allowing it to have cash on hand for 36 days for every item it sells, a figure that is particularly impressive compared to that of other players in the fashion industry.

Similarly, companies like Amazon, Walmart, and Apple have reduced their growth financing needs through negative cash conversion cycles by optimising inventory management, accelerating receivables, and extending payables. Starbucks, with its $1.46 billion in stored value card liabilities, compared to $881 million in accounts receivable, is another example of a company that has effectively managed its cash conversion cycle.

On the other hand, a positive cash conversion cycle means that a company needs operating cash to finance its business and needs to continue injecting money as it grows. This is a common challenge for companies that rely heavily on physical retail to sell their products, thus naturally yielding higher days receivable.

The Kattan sisters, with Huda Beauty, built another billion-dollar enterprise with no external funding, following a similar path to Gymshark. These success stories underscore the power of a well-managed cash conversion cycle in driving business growth.

In essence, Gymshark's growth story is a testament to the power of understanding and leveraging the cash conversion cycle. As Albert Einstein once said, "Compound interest is the eighth wonder of the world. He, who understands it, earns it, and he, who doesn't, pays it." In the case of Gymshark, it seems they have truly understood and mastered this wonder.