Your sales are growing. Why is cash still tight?

The month that looked good on paper

Picture a trading business, growing at a comfortable pace. Sales are up roughly a quarter on last year. The profit and loss shows a respectable margin. Yet the owner is watching the bank balance every morning, delaying a supplier payment here, pushing a salary transfer there. Nothing is wrong in the accounts. Nothing feels right in the bank.

This is an illustrative situation rather than a client story, but most owners recognise it. Profit is an opinion formed at a point in time. Cash is a fact with a date attached. Growth widens the distance between the two, because growth is funded before it is collected.

Growth consumes cash before it returns any

Every additional order has a sequence behind it. Stock is purchased and paid for. It sits in a warehouse. It is sold, invoiced, and then, some weeks later, collected. If the supplier expects payment in thirty days, the stock sits for sixty and the customer pays in seventy five, the business is financing more than three months of activity out of its own pocket for every sale it makes.

Scale that cycle up by twenty five percent and the funding requirement grows with it. The profit percentage has not moved. The cash requirement has. This is the single most common reason a profitable business runs short.

Five places the cash usually goes

Receivables. Look past the average collection figure. Average days can look acceptable while a handful of large accounts drift well beyond terms. Ageing by customer tells you more than a single blended number ever will.

Inventory. Stock is cash that has changed form. Ask which items have not moved in six months, what was bought because of a volume discount rather than a demand forecast, and what is being held because nobody wants to admit a purchasing mistake.

Margin. Sales growth built on quiet discounting can increase revenue and reduce cash at the same time. If discretionary discounts are not recorded and reviewed, nobody sees the pattern until the year end.

Supplier terms. Terms often shorten as volume grows, particularly when a supplier becomes nervous about exposure. A change from sixty days to thirty is a permanent withdrawal from working capital.

Capital spending. Machinery, vehicles, fit outs and deposits leave the bank but do not appear in the profit and loss in the month they are paid. Plenty of cash shortages are simply investment decisions that nobody translated into a cash plan.

A simple arithmetic example

Take a hypothetical business with annual sales of twenty million and a cash cycle of ninety days. It is carrying roughly five million of working capital. Grow sales by thirty percent with the same cycle and the requirement moves to about six and a half million. That additional one and a half million has to come from profit retained, borrowing, or from squeezing the cycle itself.

Shortening the cycle by fifteen days on the same growth releases close to a million without a single extra sale. Collections, purchasing discipline and stock control are, in practice, a funding decision.

What to do before borrowing

Borrowing to cover a working capital gap is sensible when the cycle is understood and the facility is sized to it. It is expensive when it is used to postpone a conversation about collections or purchasing.

Start with visibility. A weekly cash view covering the next thirteen weeks, receivable ageing by customer, stock ageing by item and a margin view by product or customer will usually explain the whole problem. Then assign the follow up. Collections improve when one named person owns the list and reviews it weekly with the numbers in front of them, not when the sales team is asked in general terms to chase payments.

Finally, align the commercial policy with the cash position. Credit terms, discount authority and purchase commitments are cash decisions taken by people who often do not see the cash consequence. Making that consequence visible changes behaviour faster than a policy memo.

A closing thought

Cash tightness during growth is rarely a sign that the business is failing. It is usually a sign that the operating cycle has outgrown the way it is being managed. The businesses that handle growth well are not the ones with the highest margin. They are the ones that know, week by week, where their money is sitting.