External Financing and Corporate Growth In a book on Corporate Finance, the author writes that 'all other things constant' the higher the rate of growth in sales or assets, the greater will be the need for external financing(bank loans, debt securities, or equity). His reasoning is based on the $\text{Assets}=\text{Liabilities} + \text{Equity}$ equation. My question is why can't a company manager use his cash, in the current-assets, to drive the growth in sales or assets? And why should this equality be maintained in this situation? To answer just that by def. of equity, i.e. assets minus liabilities, in this last question seems to be not answering at all...

Any help would be appreciated
The assertion of the book is based on the phenomenon of commercial credit - the fact that business-to-business sales almost always are on credit, and the differences between terms-of-credit that a company gives to its customers, compared to the terms of credit that enjoys from its suppliers. It describes the (short-term) phenomenon, peculiar to some, that "the higher the sales and the profits, the lower the cash available".

A simplified bottom-up unfolding of how this can happen is as follows: Assume that a company has steady monthly sales $S$ for the years 2013 and 2014. Assume that the terms-of-credit that extends to its customers is "60 days/two months". Roughly, this means that the Accounts Receivables at the end of, say, year 2013 equal the amount of two months of sales (assume away any seasonality), denote it $AR_{2014} =2S$. On the other side, the company has only a "1 month" period to pay its suppliers. Assume the monthly Costs of Sales is $cS$. 

So during year 2014 the Cash flow from the Customers-Suppliers loop has been

$$CF_{2014}=12\cdot S - 12\cdot cS = 12(1-c)S$$.

Now assume that starting from January 2015, Sales go up 20%.

During the year 2015  the Collections will be $2S + 10\cdot 1.2\cdot S$: November-December 2014 Sales collected in January-February 2015, and 10 months of collecting the increased sales amount.

As for Accounts Payable, during 2015 the company will have to pay $CSpay = cS + 111\cdot 1.2\cdot cS$ (we keep Inventories constant in value for simplicity).

So for 2015 we will have

$$CF_{2015}=2S + 1.2\cdot 10\cdot S - cS - 1.2\cdot11\cdot cS$$

$$=[14 - 14.2c]S$$

Depending on the value of $c$ we may have $CF_{2015} &lt; CF_{2014}$ (in the specific example, we will need to have $c &gt;0.91$ , i.e. a very small mixed profit margin $1-c$).

Namely, the combination of sales growth with the gap in the terms of credit, may result in the company having less cash available to cover its other, operational expenses like salaries etc. But even if this is not the case, the increase in Cash Flow may not be enough to cover the increase in other Assets that accompany an increase in Sales: an increase of the value of Inventories, but also possibly investments. Both will require increased cash. Also, operational expenses, like marketing or labor cost may have to increase. If the terms-of-credit gap is large and the sales growth aggressive, the company will require a Cash injection from shareholders or a bank loan to be able to pay all its obligations, even though its Sales has gone up.

The above are compacted nicely into a Balance-Sheet-point of view (where the equality $\text{Assets}=\text{Liabilities} + \text{Equity}$ holds always by construction, given how the terms involved are defined and measured). In fact, the Balance Sheet approach is the way many Finance Directors use to get a quick taste of what kind of financing will the company need next year. Essentially, the increased funds "automatically" injected by increased suppliers credit (due to increased purchases), plus any projected increased retained profits, may not be enough to cover the increase in the Current Assets due to the increase in Accounts Receivable (and possibly the increase in Inventories and in Fixed Assets that accompany the growth of Sales growth).
It may be the case that such an expansion may be profitable in terms of "Profit &amp; Loss" while at the  same time having a negative effect on the Cash Flow, in the short-term.

Indeed, the difference could be covered by running down the cash reserves of the company, but in many cases, companies do not hold so much cash to do that. Then, one has to close the gap by for example, increasing Liabilities, say, taking a loan.