Your new branches are paying your old branches’ debts, and you can’t see it

1The scene: a reassuring balance

Composite scene, not a specific group

Month end, in the CFO’s office. The group opened four branches in twelve months, and the bank balance is close to where it was a year ago. The owner asks one question: “Do we have a cash problem?” The answer comes back: “No, thank God. The balance is steady.”

The answer is right. The question is incomplete. The balance really is steady, but nobody in the room can say where the steadiness comes from. Is it because the old branches make money? Or because the new branches brought cash sales and credit purchases, and the account filled up with money that isn’t ours yet?

In many groups, cash is tracked for the group as a whole: one account, one number, one sense of relief. That is exactly where the problem hides.

2The image: the loan that looks like income

Picture a friend lending you fifty thousand riyals, no paperwork, no fixed date. Your balance goes up and you sleep well. If you forget it’s a loan, you’ll think it was a great month, and you’ll spend accordingly.

Your suppliers do this every day. The customer pays for the meal tonight; the chicken, the bread and the packaging get paid for weeks later. In between, the supplier’s money is sleeping in your account. That’s a loan (a salfa, as we say), not income.

The loan itself isn’t the problem; it’s a blessing if you know it’s there. The problem is that every new branch brings a new loan: more purchases on credit, cash sales from day one. What you owe suppliers grows, the balance looks fine, even while a branch on the other side of the city loses money every month.

In one sentence: the new branch brings a loan, the loan covers the old branch’s loss, and the statement says “thank God”.

3The idea beneath

In 2001, Neil Churchill and John Mullins asked a blunt question in Harvard Business Review: how fast can your company grow while financing itself?¹ Their answer: growth has a speed limit set by cash, even for a profitable company. The limit depends on three things: how many days cash spends cycling through operations, how much cash is tied up per riyal of sales, and how much cash each riyal of sales generates. A company that grows past it can run out of cash while making money on paper.

In most industries, growth eats cash: you buy, make, sell on credit, then wait. A restaurant is upside down. The cash conversion cycle, in plain words, is the days stock sits with you, plus the days you wait to collect from customers, minus the days your supplier gives you to pay. In a restaurant, stock sits for a few days, collection at the branch is almost immediate (what delivery platforms collect reaches you on your contract’s settlement cycle), and suppliers give you weeks. The cycle comes out negative, and the supplier ends up financing your operations.

In Churchill and Mullins’s framework, that raises the growth speed a company can afford. Here I’m adding something of my own, and I own it: in our sector the negative cycle doesn’t just raise the speed limit, it makes the limit look higher than it is. The loan grows with every opening, and the balance can’t tell a riyal a branch earned from a riyal a supplier let you hold. As long as you keep opening, the loan refills. When you stop, whatever it was covering shows up.

I don’t know of a published Saudi study measuring the cash conversion cycle or supplier terms in private restaurant groups. So I won’t give you a market number. The number that matters is in your books.

4The number on the napkin: the pause test

One question: if we opened no branches for six months, what would our balance be?

Work it out from your own numbers in five lines:

1. Today’s balance.
2. Plus six months of operating cash from existing branches, after rent, salaries, overheads and debt repayments. Branch by branch, not group total.
3. Minus what you’ve already committed to branches not yet open: rent paid in advance, contractors, fit-out.
4. Minus the shrinking loan: if weak branches’ purchases fall, what you hold for suppliers falls, and you pay the difference out of pocket. The loan = average daily purchases × (supplier days − stock days).
5. The result is your pause number. Put it next to the balance you see today.

Composite example

Composite example with illustrative numbers. Not a specific group and not a market average

• 16 branches buy about SAR 66,000 a day between them. Suppliers give 60 days; stock sits for 10. The loan = 66,000 × 50 days = SAR 3.3 million of supplier money in the account.
• Four of the branches opened this year, each buying SAR 5,000 a day, so each added SAR 250,000: SAR 1 million of new loan.
• Nine healthy branches generate SAR 150,000 a month. All of it, plus a bank facility, went into fitting out the four new branches.
• Three old branches lose SAR 80,000 a month in cash between them: SAR 960,000 a year.
• On the statement: SAR 1 million in from the loan, SAR 960,000 out to losses. The balance is “steady”, and the CFO is telling the truth when he says so.

Now the pause test, assuming the new branches cover themselves. Six months without an opening: the nine healthy branches generate SAR 900,000. The three weak ones lose SAR 480,000. If their purchases fall 20%, from SAR 10,000 a day to 8,000, their loan shrinks from SAR 500,000 to 400,000, and you pay out another SAR 100,000.

SAR 580,000 of every 900,000 the healthy branches generate goes to cover three branches. About two thirds. Nobody saw it, because the openings’ loan was covering it. The new branches weren’t paying their own debts. They were paying the old ones’.

5Where the money leaks

The closing decision gets delayed. A losing branch doesn’t show up in the balance, so it never reaches the decision table. Every month of delay is paid from a loan that won’t last.

Short money funds long things. Supplier credit falls due in weeks; a branch pays back its capital over many months. The doctrine’s thresholds are 18 months as the target and 30 as the ceiling.² When you fund fit-outs or losses with money due soon, you’re betting the next opening arrives on time. And if corporate sales come in on credit terms, the cycle flips for that channel, and growth there eats cash instead of generating it.³

Stopping becomes impossible. A group living on the loan can’t say “not now”, because pausing is exactly what exposes the gap. It opens because it can’t afford not to.⁴ That’s the opposite of disciplined growth.

The supplier knows before your board does. When growth slows and you start paying late, the first to notice is the supplier, and the supplier sets your next terms.

6The Sunday-morning question

The question: how much cash did each cohort of branches generate this month, before the loan?

Three cash measures

And the rule that governs the whole table: opening cash never covers an old branch’s losses without a written, dated decision: who decided, how much, until what date, and the number at which the branch closes if it isn’t met. It’s the doctrine’s next-riyal rule, applied to a riyal that was never yours in the first place.⁵

8Credit, and next episode

The cash speed limit on growth is Neil Churchill and John Mullins’s idea; the cash conversion cycle is textbook management accounting. The claim that supplier credit hides an old branch’s losses as long as openings continue is my extension of their idea to our restaurants, and if it’s wrong, that’s on me, not them.

And the loan isn’t the only thing in your books that looks like income. Next episode: the delivery order. Extra sales, or an ad you pay commission on?