Many business owners focus on growing turnover. If more money is coming in, they assume all is well – until they run out of cash!
Statistics last year showed that 85% of small and medium sized businesses fail because of cash flow issues.
That’s because their focus on sales can be costing them as they take their focus off their bank balance.
It’s a common problem with owner-managed businesses turning over between £1 million and £3 million. The company is growing, but cash feels constantly under pressure. Wages, VAT, Corporation Tax and supplier payments seem to arrive faster than customer payments. The business owner is left wondering where all the money has gone.
The truth is that turnover and cash are not the same thing.
Growth can make a business feel poorer
One of the biggest misconceptions in business is that higher sales automatically create more cash. But the truth is that growth will often consume cash before it generates it.
Imagine your business grows from £1.5 million to £2.2 million turnover in a year. To support that growth, you may need:
- More staff
- Higher wages
- More stock
- Increased marketing
- Larger premises
- Additional equipment
- More VAT and tax liabilities
Much of that cash leaves your business before you receive payment from customers.
A growing business can therefore become cash-flow negative, even when it is profitable.
The four reasons cash disappears during growth
1. Your customers are taking longer to pay
Your profit and loss account records sales when invoices are raised. Your bank account only changes when invoices are paid.
If your debtor days increase from 30 days to 60 days, you are effectively financing your customers’ businesses.
Late payment remains a major issue across the UK. According to the Small Business Commissioner, over 1.5 million businesses are affected by late payments, with billions of pounds tied up in overdue invoices at any one time. Poor payment practices are estimated to cost the UK economy around £11 billion each year.
For a £2 million business, an extra 30 days of debtor funding can mean well over £150,000 of additional cash tied up in unpaid invoices.
2. Profit is trapped in stock
Many businesses see strong sales growth and assume the cash should be available.
But if stock levels have increased significantly, cash is sitting on shelves rather than in the bank.
A business that increases stock from £200,000 to £350,000 has absorbed £150,000 of cash, even if profitability has improved.
This is particularly common in manufacturing, wholesale, construction and distribution businesses.
3. You are paying suppliers before customers pay you
Cash flow is driven by timing. If you pay suppliers in 30 days but customers pay in 60 days, every new sale creates a funding gap.
As turnover grows, that gap becomes larger.
Many businesses only discover this problem when they reach a new turnover level and suddenly need a larger overdraft or additional finance. And that can create a real strain on the business and its owner.
4. Tax is catching up with growth
Growth creates larger VAT payments, Corporation Yax liabilities and often higher PAYE costs.
These liabilities frequently lag behind trading performance.
A business can have an excellent year, feel cash-rich initially, and then experience significant pressure when VAT and corporation tax become due.
This is one reason why businesses that rely solely on the bank balance can be caught out.
To reiterate, increasing turnover can often mean increasing costs. The cash that will eventually come in may cover the extra costs eventually. But don’t neglect the fact you’ve got a gap to bridge until those pounds hit your bank!
The warning signs we look for
Turnover growth becomes a cash-flow problem when we see patterns such as:
- Overdraft usage increasing despite higher sales
- Directors delaying drawings or dividends
- HMRC payments becoming difficult
- Suppliers being paid later
- Stress around monthly payroll
- Large debtor balances
- Stock levels rising faster than sales
These are usually symptoms of a working capital problem rather than a profitability problem.
The question every MD should ask
Instead of asking: “Are we growing?”, ask: “How much cash does our growth require?”
This is a completely different question.
A business growing at 20% may need substantially more funding than a business growing at 5%.
The fastest-growing companies are often the ones that need the strongest cash-flow management.
The solution is not necessarily cutting costs
Many business owners respond by trying to reduce overheads. Sometimes that helps. But more often the answer lies in managing working capital more effectively.
That includes:
- Reducing debtor days
- Improving credit control
- Reviewing payment terms
- Managing stock more tightly
- Forecasting VAT and tax liabilities
- Producing cash-flow forecasts
- Understanding which customers generate cash and which consume it
- Small improvements can release significant cash.
For example, reducing debtor days by just 10 days in a £2 million business could release tens of thousands of pounds back into the bank.
The businesses that handle growth best
The companies that scale successfully usually have one thing in common: they monitor cash with the same intensity that they monitor sales.
They do not wait until the bank account feels tight. They forecast cash 13 weeks ahead, review working capital monthly, and understand the cash impact of hiring, buying stock or taking on large contracts.
Growth should make a business stronger, not more financially fragile.
A practical exercise
Look at your last set of accounts and compare:
- Turnover growth
- Profit growth
- Debtor growth
- Stock growth
- Cash movement
If turnover has increased significantly but debtors and stock have increased by a similar amount, you have identified where much of your cash has gone.
That insight is often the first step towards fixing the problem.
What should I do next?
At Concept Accountancy, we help growing businesses understand not just how profitable they are, but how cash-efficient they are. A business that grows turnover without generating cash is often working much harder than it needs to.
If you’d like to know how to grow your business efficiently, we can help. Contact us today for a free chat.
