Growing revenue, shrinking cash: five usual causes

Sales are up on last year. The order book is full. And yet every month-end there is a scramble to pay suppliers and salaries. Owners in this position often assume the problem is temporary, or that the finance team is being cautious. Usually it is neither. Growth consumes cash before it produces it, and the faster a business grows, the more cash it absorbs.

The profit and loss account will not show this. It records a sale when the invoice is raised, not when the money arrives. Cash is a different story, and five causes account for most of the gap.

1. More sales means more money owed to you

This is the unavoidable one. If customers pay in 60 days and monthly sales double, the money they owe you doubles too, even though nothing about the terms has changed. That money is earned but not yet collected, and until it is, the business has to fund the costs behind those sales from somewhere else. Growth turns into receivables before it turns into cash.

What to watch: receivables in money terms, not just days. A stable collection period still means more cash tied up as sales grow, and that extra working capital has to be planned and funded.

2. More sales usually needs more stock

In trading, distribution and manufacturing businesses, selling more means holding more: more stock on shelves, more in transit, more raw materials. That stock is paid for before it is sold. New warehouses or product lines add to it, and slow-moving lines are rarely reviewed until a write-off forces the issue.

What to watch: stock days rising, or a growing share of stock older than six months.

3. Winning new customers often means easier terms

Growth may come from new customers and new contracts, and those are often won on easier terms. A large customer, a government entity or a distributor negotiates 90 or 120 days, and the sales team agrees because the contract is worth winning. This compounds the first cause: receivables now grow faster than sales.

Warning sign: receivables growing faster than revenue. If sales rose by a fifth and money owed by customers rose by half, the business is financing its customers.

In practice: one trading company grew tenfold over ten years. On paper it was a success story, yet its owners never received a dividend. Year after year, the company had extended payment terms to win and keep customers. Credit risk stayed low, because the customers were sound, but the cash stayed with them. Eventually the owners stepped in and forced a review of the credit policy and collection strategy. Sales became harder work, as the team had to find customers willing to pay on shorter terms, but the cash position improved.

4. Supplier terms are getting shorter

Growth can weaken a business's position with its suppliers. A new principal asks for payment in advance, a supplier tightens terms after a late payment, or the company switches to a cheaper source that demands cash on order. The cash cycle gets squeezed from both ends: customers pay later while suppliers are paid sooner.

Warning sign: payables days falling while receivables days rise.

5. Growth is funded from operating cash

Growth may also require new branches, fit-outs, vehicles and systems. In many cases, these are paid for from the cash the business generates rather than through external funding, and they absorb any surplus from operations. Each decision makes sense on its own. Together they drain the working capital the existing business needs to run.

Warning sign: capital spending is approved project by project, with no view of the total against cash generated.

What to do first

The fix starts with a simple cash forecast, thirteen weeks ahead, updated weekly, that includes the working capital each month's sales will need. It shows when the pressure points will come, which is what a profit forecast cannot do. Alongside it, three questions are worth answering with real data:

• How much extra working capital does each additional unit of sales tie up, and how will we fund it?
• Which customers and contracts take the longest to pay, and are we pricing that delay?
• Which planned investments can be phased, leased or financed instead of paid from operations?

None of this means slowing growth. It means knowing what each part of the growth costs in cash, and deciding with that in view.

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