Apple Computer is one of the most successful companies in history but it had humble beginnings. Steve Jobs and Steve Wozniak started the company in 1976Wozniak developed a working personal computer and Jobs arranged to sell hand-assembled motherboards to a retail computer shop, which agreed to pay cash upon delivery. Apples parts supplier agreed to accept payment after the motherboards were delivered to the retailer. Jobs and Wozniak used personal savings and a small loan to cover early startup expenses and get to the point they could collect from the retailer.

In the terminology above, Apple had low asset intensityit had low inventories and accounts receivable, no plant and equipment, and accounts payable covering all the parts. Apple had a built-in profit margin that was high, enabling the venture to generate positive free cash flow when the founders delivered the devices to the retailer.

In early 1977, two experienced executives, Mike Markkula and Mike Scott, joined the team. Markkula agreed to invest $250,000 in equity capital and loan guarantees. In fiscal 1977 (ending 9/30/1977), Apple made a $42,000 profit on $774,000 in sales. Total salaries for everyone at Apple in that year were only $43,000. Because Apple had to invest more in plant and equipment, accounts receivable, and inventories, free cash flow was -$131,000. The company needed external capital to make up the cash flow shortfall.

As it turned out, Mike Markkula arranged for a loan of $150,000, which enabled Apple to get through the year and end up with a small amount of cash on the balance sheet. Markkula prepared financial forecasts for fiscal 1978 and 1979. He tried to raise equity capital to finance the explosive growth he thought Apple could achieve.

Markkula created multiple scenarios for Apple that reflected different assumptions about sales growth and the level of accounts receivable from retail computer stores. He was concerned about the implications of getting paid in 60 days instead of 30 or 45 days, as he hoped.

Markkulas forecasts are summarized below (along with actual values for 1977):

Year (000s)	1977 Actual	1978 Forecast	1978 Forecast	1978 Forecast	1978 Forecast
Days Accounts Receivable		@30 Days	@45 Days	@60 Days	@45 Days, 70%
Revenues	$774.0	$13,502.0	$13,502.0	$13,502.0	$10,026.0
Net Profit	$0.0	$2,238.0	$2,238.0	$2,238.0	$1,159.0
Free Cash Flow	-$130.9	$145.0	-$1,156.0	-$1,813.0	-$1,206.0
Ending Debt	$150.0	$0.0	$1,186.0	$1,843.0	$1,225.0

Markkulas base case scenario for 1978 was that the company would have sales of $13.5 million, 45 days of accounts receivable, and free cash flow of ($1,156,000), as highlighted above in bold. He projected a minor equity infusion of $120,000, which is why debt rises from $150,000 at the end of 1977 to $1,186,000 at the end of 1978. If he could collect accounts receivable in 30 days rather than 45, he would have positive free cash flow during the year and be able to pay off all debt.

Why might Apple struggle to get paid in 30 days, as opposed to 45?