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What is the scissors effect?

Management Dictionary
Corporate and Market Finance, Management Control

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When a company is growing, the increase in its revenue leads to a rise in its EBITDA, while at the same time increasing its working capital requirement (WCR).

If the WCR increases faster than EBITDA, the scissors effect leads to a depletion of the company’s cash reserves.

Paradoxically, the faster a company grows, the more exposed it becomes to the scissors effect.

However, this effect is predictable and fully measurable using tools such as cash flow forecasting.

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Keywords

EBITDA (gross operating surplus), gross cash flow (cash surplus from operations), Management control, WCR, working capital requirement

Author(s)

BESANGER Serge

Professeur

INSEEC-U

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