THE WORKPAPER · Thursday, 8 October 2026
The Momentum Tax
THE 60-SECOND VERSION
The rule: growth is paid for in cash before it pays you back. Price it in the plan, next to the revenue it buys.
The math: say a company grows 25% on a 6% cash margin. Working capital takes $2.1M of its $3.0M of cash profit, before capex. At 40% it runs short.
The file: your tax rate, your speed limit, and what each lever frees. It also solves today's challenge.
OPENING BALANCE
In August, U.S. Bank asked 1,000 senior finance leaders at US companies with $100M-plus revenue how the next three years look. Better: 71% are positive on their company's financial prospects, up from 64% in the spring. Cutting costs is still the top priority at 37%, but revenue growth has nearly caught up at 35%.
So the 2027 plan will have momentum in it. It will also have a line nobody puts in the deck: what the momentum costs before it pays.
HIRING THE GROWTH ABROAD, WITHOUT OPENING AN ENTITY
Growth in the plan usually means heads in the plan, and some of them will not live in your home country.
Two questions set the cost before the first offer goes out. Do you need a local entity to employ them? And is that person a contractor, or, as far as the local tax authority is concerned, an employee? Get the second one wrong and the back payroll taxes and penalties land on you.
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THE WORKPAPER
For the CFO or FP&A lead at a growing company that sells on net terms and carries inventory: mid-market, PE-backed, or a startup that ships hardware.
The claim: every new dollar of revenue parks cash in receivables and inventory before it comes back. That is a tax on momentum, it is payable up front, and a profitable company can grow fast enough to run out of cash paying it.
Why it is hard. The P&L books the growth the day it is earned. The cash arrives a DSO later. The inventory behind it was bought a DIO before the sale. Suppliers carry part of that for a DPO, then they want paying too.
None of it appears in a revenue plan. The plan says +25%. The board hears +25%. The $2.1M it takes to get there is in the model somewhere, on a tab nobody presents.
The idea is old. In 2001, Churchill and Mullins gave it a name and a formula in Harvard Business Review: the self-financeable growth rate, the growth a company can fund from its own operations. The speed limit below is a simpler, one-year version of the same question.
Below the limit: cash profit covers the working capital the growth parks. Above it: the growth needs cash from somewhere else, so line it up now, not in June.
THE MATH
Illustrative: a hypothetical company, invented figures, $ thousands. Revenue $40.0M this year, $50.0M in the plan (+25%). Gross margin 40%. DSO 60, DIO 75, DPO 45.
Line | Plan year | How |
|---|---|---|
Revenue growth | 10,000 | 50,000 − 40,000 |
COGS growth | 6,000 | 10,000 × 60% |
Extra receivables | 1,644 | 10,000 × 60 ÷ 365 |
Extra inventory | 1,233 | 6,000 × 75 ÷ 365 |
Extra payables (suppliers fund this) | (740) | 6,000 × 45 ÷ 365 |
The momentum tax | 2,137 | 1,644 + 1,233 − 740 |
Cash profit (illustrative: 6% of plan revenue) | 3,000 | EBITDA less cash tax and cash interest |
Cash left before capex and debt repayment | 863 | 3,000 − 2,137 |
The tax rate is 21.4 cents per new dollar: (60 + 0.6 × 30) ÷ 365. It takes 71% of the year's cash profit. Unlike the other kind, this tax is refundable. The refund arrives the year revenue shrinks, which is the one year nobody wants it.
The speed limit: 6% ÷ (21.4% − 6%) is about 39%. At 35% growth this company keeps $248k. At 40% it is $59k short, before a dollar of capex, and the gap comes from the bank balance, a lender or a shareholder.
DECISION RULES
Run it on the days new customers get, not your book average. If the growth comes from bigger customers on longer terms, the tax rate rises with the momentum.
Above the limit is not a no. It is a financing decision: a revolver, an asset-based line that advances against part of the receivables and inventory you are building, or equity. Arrange it while the numbers look good, and check what the draw does to your covenants.
Price the days before you borrow. On $50.0M of revenue, one day of DSO is $137k.
When this does not hold: customers who pay before you deliver (annual-in-advance SaaS, deposits) shrink the tax, and if they pay far enough ahead they flip it: deferred revenue funds the growth. Capex, hiring ahead of revenue and debt service are not in it, and every one of them lowers the limit.
THE FILE
The Momentum Tax: your tax rate, the bill for your plan, the speed limit, a sensitivity from 0% to 50% growth, and a Levers tab that prices one move on DSO, DIO, DPO or price. Change revenue and the three day counts first, from your own last twelve months.
The Thursday challenge. One click to answer. We show the working Monday.
Same company as The Math: plan revenue $50.0M, COGS $30.0M, DSO 60, DIO 75, DPO 45, each day count on its standard base. You get one move, in place from the first day of the plan year, and it costs nothing: no early-pay discounts, no supplier price rise, same volume, same costs. Ignore tax. Which leaves the most extra cash in the bank at the end of the plan year?
Which one move leaves the most extra cash in the bank at year end?
There is a trap in the setup. The Levers tab settles it in a minute, if you would rather check than guess. The answer, the working and the best reply run in Monday's Flash.
CARRY FORWARD
Put the momentum tax in the 2027 plan, on the line under the growth it pays for.
Work out your speed limit before the board asks for more growth.
Ask Sales what terms the big new logos in the pipeline are asking for. That is next year's DSO.
SUPPORTING SCHEDULES
What finance argued about this week.
The backup bank account: funded, or decorative? On r/CFO, a poster asked whether a second bank is worth funding. Best line in the replies: "A second account with nothing in it is just a login screen, not a backup." Several replies landed on the same size: one payroll plus the payments that cannot wait. More than one adds: run a real payment through it regularly. One reply's line of credit does not allow it at all, so read the credit agreement before you move a dollar.
Outperformed, for 3%. On r/FPandA, a poster rated 4.7 out of 5 through a merger and a new system implementation got a 3% merit increase. One reply: "That's when you bounce." If you set the merit pool this month, that thread is the retention risk, unfiltered.
SECOND OPINIONS, SAME SEAT
Tick and Tie takes one question a week. The Control Room takes the rest: put up a real number and the assumption under it, and get straight answers from people in the same seat. Nobody pitches, nobody recruits.
IMMATERIAL
Below materiality: nothing in here moves the number. You will read it first anyway.
Revenue grew 25%. So did receivables and inventory. Only revenue got a slide.
The Glossary Nobody Approved, momentum edition
Momentum: what a good quarter is called in the board deck. A bad one is called timing.
Run-rate: your best month, times twelve.
Net 90: what a big new logo's procurement team calls standard terms. Your balance sheet calls it an unsecured loan.
BELOW THE LINE
How did today's Workpaper land?
Hit reply with the number you are arguing about this month. The good ones get cleared in The Flash, anonymized, with your OK.
The Flash lands Monday, with the Tick and Tie answer.
Want to reach the people who build the budget and sign it? Sponsor an issue.
Until the next reforecast,
James
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Disclaimer: Our commentary is editorial point of view, not accounting, tax, legal or investment advice. We check every statistic we cite against its primary source, but we have not seen your books. Before you act on anything here, talk to someone who has. The rep letter still has your name on it, not ours.