It is possible for a business to grow and still feel short of cash.
That does not always mean the business is failing. It may mean growth is asking the business to fund more work before the cash is collected.
This is one of the most common frustrations for growing owner-managed companies.
Sales are increasing. The pipeline looks healthy. The team is busy. Profit may even appear stronger in the accounts.
Yet the bank balance feels tight.
Why profit and cash move differently
Profit is measured when income and costs are recognised.
Cash depends on timing.
A business may win work, pay staff and suppliers, deliver the project, issue the invoice and then wait 30, 60 or 90 days for payment. If the company also carries stock or work in progress, even more cash may be tied up before revenue becomes cash.
That is why a profitable business can still feel under pressure.
The problem is not always margin.
It may be the funding gap.
What is the funding gap?
The funding gap is the period where the business has committed cash before it has collected cash from the customer.
For example, the business may need to pay wages, materials, subcontractors, VAT, rent and overheads before customer receipts arrive.
As revenue grows, this gap can become larger.
A small gap at £1m turnover may become much more demanding at £5m turnover, even if the business model is broadly the same.
Numbers to review together
To understand what growth is asking the business to fund, look at these numbers together:
- debtor days
- overdue customer balances
- work in progress or stock days
- supplier payment terms
- gross margin after realistic delivery costs
- payroll and tax payment dates
- lowest forecast cash point over the next 13 weeks
No single measure tells the whole story.
The value comes from seeing the timing together.
Why a large contract can create pressure
A large contract can look attractive because of the revenue and margin.
But before accepting it, management should understand the cash profile.
Will staff need to be recruited before billing starts?
Will materials or subcontractors be paid before the customer pays?
Are there milestone payments?
What happens if delivery overruns?
What happens if payment is late?
A contract can be profitable and still create avoidable cash pressure if the timing is not understood.
What management can do
Practical steps include:
- preparing a 13-week cash-flow forecast
- comparing forecast receipts and payments with actuals each week
- agreeing clearer payment terms where possible
- tightening debtor follow-up
- reviewing margin by contract or service line
- checking whether growth requires working capital funding
- delaying commitments where the downside case is too tight
The right action depends on the business.
Sometimes the answer is better forecasting. Sometimes it is pricing, payment terms, credit control, stock management or a more realistic growth pace.
The main point
Growth should not be judged by revenue alone.
A growing business needs to understand what each stage of growth requires from cash, people and management attention.
If turnover is increasing but cash headroom is falling, the management team needs to look beyond the sales line.
The real question is:
What is this growth asking us to fund, and are we comfortable with the risk?
FAQs
Can a profitable business run out of cash?
Yes. Profit and cash are different. A business can be profitable but still short of cash if money is tied up in debtors, stock, work in progress or delayed customer receipts.
What is a 13-week cash-flow forecast?
It is a short-term forecast of expected receipts and payments, usually reviewed weekly. It helps management identify upcoming cash pressure early enough to act.
Does cash pressure mean the business should stop growing?
Not necessarily. It means management should understand the funding requirement, timing risk and available headroom before committing to the next stage.