It is a frustrating situation that many successful business owners eventually encounter. Sales are increasing. Customers are placing larger orders. Your pipeline looks strong. You may even be hiring employees to keep up with demand.
Yet somehow, there never seems to be enough cash in the bank.
The problem may not be that your business is unprofitable. It may be that your growth is consuming working capital faster than your customers are paying you.
This is one of the most important financial concepts for a growing business: profit and cash flow are not the same thing.
Revenue Does Not Equal Cash
Imagine your company lands a $100,000 contract with a reputable commercial customer.
You complete the work and send a $100,000 invoice with Net 60 payment terms. On your financial statements, you may have generated $100,000 in revenue.
But you don’t have $100,000 in the bank.
Instead, you have a $100,000 account receivable.
Meanwhile, you may have already paid your employees, purchased materials, paid subcontractors, covered fuel and operating expenses, and incurred other costs associated with completing the job.
Your business earned the revenue, but the cash is still sitting on your customer’s balance sheet.
Now imagine you win three more contracts.
Your sales are growing—but so is the amount of money tied up in accounts receivable.
This is why a rapidly growing company can experience a cash-flow shortage even when sales and profits are increasing.
Growth Can Actually Increase Your Cash-Flow Problem
Many business owners assume that more sales automatically mean more cash.
Unfortunately, that’s not always true.
Consider a staffing company. The company wins a new $500,000 contract. The customer pays invoices in 45 days, but employees expect to be paid every week.
The company must fund payroll for several weeks before collecting the money it has already earned.
The same situation can occur in manufacturing, distribution, construction-related services, healthcare staffing, oilfield services, IT services, and many other industries.
The faster the company grows, the more working capital it may need.
This creates a simple equation:
More sales + slower customer payments = greater working-capital requirements.
If a business does not plan for that gap, growth can put tremendous pressure on its finances.
Five Reasons a Growing Business Can Be Short on Cash
1. Customers Are Taking Too Long to Pay
One of the most common causes of cash-flow problems is slow-paying customers.
If your customers routinely pay in 45, 60, or 90 days, you are effectively financing their operations.
That may be manageable when your company is small. But as sales increase, the amount of money tied up in unpaid invoices can become substantial.
Review your accounts receivable aging report regularly.
Pay particular attention to invoices that are:
- Approaching their due date
- Past due
- Significantly older than your normal payment terms
- Associated with customers who consistently pay late
A strong sales department can generate business, but your accounting and collections processes determine how quickly that business turns into cash.
2. You’re Growing Faster Than Your Working Capital
Suppose your company previously generated $1 million in annual sales.
Now you have an opportunity to grow to $2 million.
That sounds like a great development—but doubling sales may require substantially more working capital.
You may need to:
- Hire additional employees
- Purchase more inventory
- Buy raw materials
- Increase production
- Expand facilities
- Pay additional subcontractors
- Increase marketing expenses
- Carry larger accounts receivable balances
If your customers pay slowly, you may need significantly more cash to support the additional revenue.
Before accepting a major new contract, ask an important question:
“How much cash will I need to fulfill this contract before I get paid?”
That answer can be more important than the size of the contract itself.
3. Your Customers Have Long Payment Terms
Net 30 may sound reasonable.
Net 60 requires more patience.
Net 90 can create a significant working-capital challenge.
Long payment terms aren’t necessarily bad. Large commercial customers often expect them, and refusing those terms could cost you business.
The issue is making sure your company has a strategy for managing the resulting cash-flow gap.
The longer your customers take to pay, the longer your company must carry the cost of providing the products or services.
4. Your Expenses Are Growing Faster Than Your Collections
Another warning sign is when expenses increase immediately while customer payments arrive much later.
Payroll is a perfect example.
Your employees expect to be paid on schedule whether your customers have paid their invoices or not.
The same applies to rent, insurance, utilities, suppliers, taxes, equipment payments, and other operating expenses.
This is why successful business owners monitor both sides of the cash-flow equation:
How quickly is money coming in, and how quickly is money going out?
5. You Don’t Have a Cash-Flow Forecast
Many business owners know approximately how much money is in their bank account today.
Fewer know what their cash position will look like 30, 60, or 90 days from now.
A rolling cash-flow forecast can help identify problems before they become emergencies.
At a minimum, project:
- Expected customer collections
- Payroll
- Supplier payments
- Taxes
- Debt payments
- Rent and other fixed expenses
- Planned purchases
- Expected sales growth
The goal isn’t to predict the future perfectly.
The goal is to identify potential cash shortages early enough to do something about them.
What Can a Business Do About a Cash-Flow Shortage?
The first step is to determine whether the problem is temporary or structural.
If a few customers are unusually late, improving collections may solve the problem.
If your margins are too low, increasing sales won’t necessarily fix the situation. You may need to raise prices, reduce expenses, or change your customer mix.
If your business is profitable but has substantial money tied up in accounts receivable, working-capital financing may be worth considering.
One option available to some businesses is invoice factoring.
How Invoice Factoring Can Help
Instead of waiting 30, 60, or 90 days for a customer to pay, the business can access working capital sooner.
For example, suppose your company has $100,000 in qualifying invoices outstanding.
Rather than waiting for your customers to pay, a factoring company may advance a percentage of those invoices, subject to the specific factoring agreement.
When the customer ultimately pays, the remaining reserve—less applicable fees—is released according to the agreement.
The result is that your accounts receivable can become a source of working capital rather than simply money that you have to wait for.
Factoring can be particularly useful for businesses that are growing rapidly, have strong commercial customers, or need additional working capital to support payroll, inventory, materials, or expansion.
It is also important to understand that factoring is different from a traditional bank loan. Qualification and structure depend on the factoring company and the specific transaction, and the creditworthiness of the business’s customers can be an important factor.
Don’t Let Cash Flow Stop a Good Business
A lack of cash doesn’t necessarily mean you have a bad business.
Sometimes it means you have a good business that is growing faster than its cash cycle can support.
The key is recognizing the difference.
If your sales are increasing but your bank account isn’t keeping pace, take a close look at your accounts receivable, payment terms, operating expenses, profit margins, and working-capital requirements.
Ask yourself:
“If my sales increased by 25% tomorrow, would I have enough cash to support that growth?”
If the answer is no, don’t wait until the shortage becomes a crisis.
Develop a plan now.
That may mean improving collections, negotiating better supplier terms, adjusting customer payment terms, building a larger cash reserve, obtaining a traditional credit facility when appropriate, or exploring invoice factoring.
Sales create opportunity.
Profit creates value.
But cash flow gives a business the ability to keep moving forward.
