Sales Are Growing. Why Is Cash Still Tight?

Sales can grow while cash stays tight because money may leave your business before customers pay you. More stock, higher delivery costs or thinner margins can add pressure. The sales total alone cannot tell you which of these is happening.

If you are getting more orders but still checking the bank balance before paying a supplier, start by tracing the money. You need a clearer picture of what has been earned, what has been collected and what is already committed.

What is the difference between sales, profit and cash?

• Sales show the value of goods or services sold. Some customers may still owe you for those sales.
• Profit compares income with the costs recorded for that period. The amount depends on which costs have been deducted; gross profit and net profit answer different questions.
• Cash is the money the business holds. Cash flow describes money coming in and going out over time.

A profit figure does not tell you how much cash is ready to pay this week’s bills. The US Securities and Exchange Commission’s guide to financial statements explains why profit and cash movement are reported separately.

Where might the pressure be coming from?

Customers pay after you have paid for the work

Follow a recent order from start to finish. When did you pay for materials or work? When could you invoice? When was payment due, and when did it actually arrive?

Even a customer who pays on the agreed date can leave a gap if your own payments fall earlier. Late payments can make that gap longer. If several orders follow the same pattern, a busier month may require more cash before the receipts arrive.

Stock and unfinished work absorb money

Look at what you have already paid for but have not yet sold or collected payment against. This could include materials on a shelf, finished stock moving slowly or work waiting for completion and billing.

Keep paid-for stock separate from stock bought on credit. The first has already used cash; the second has a payment still to come. Australia’s government guide to cash flow covers inventory, payment dates and ongoing costs as connected parts of the picture.

Each sale leaves less than you expected

A larger sales figure can hide a smaller amount left after the cost of supplying those sales. Have discounts increased? Are purchase prices higher? Does some work involve delivery, rework or extra service that was not allowed for when quoting?

Gross profit still has to help cover other business expenses, such as rent and administration. The Business Development Bank of Canada’s cash-flow guidance explains this distinction and why margins belong beside payment timing in your review.

These are possible explanations to investigate. One may matter much more than the others in your business.

A checklist: money due in, money due out and cash tied up

Use your records to make three short lists. Choose a period that includes your next important payment dates. Put a date beside each amount, and mark uncertain information rather than treating it as confirmed.

Money due in

• Which customers owe money, and how much?
• What is the agreed payment date? Is it overdue?
• Has the customer confirmed payment, or are you assuming when it will arrive?
• Is anything preventing billing or payment, such as an incomplete invoice or disputed work?

Money due out

• What must be paid to suppliers, employees and other providers, and when?
• Which regular or one-off commitments are missing from your first list?
• What further spending is required to finish orders already accepted?

Cash tied up

• What stock or materials have you already paid for?
• What spending on work has not yet led to a customer payment?
• What evidence supports your expected sale or collection date?

The third list helps explain where money is sitting. It is not another total to subtract from your current balance. An unpaid customer invoice already appears under money due in; do not count it again as a separate receipt.

Use the review to ask a more precise question

Bring these lists to your accountant and compare the dates with the cash currently available. Ask which assumption needs checking first. Is the uncertainty about a customer’s payment date, the cost of fulfilling orders or stock that is taking longer to sell?

If an essential payment may be missed, seek help from your accountant promptly. This article is general guidance for organising questions, not personalised financial advice.

GrowNGive is a thinking partner for owners of operating businesses. A conversation can help you examine the business question and consider your next step; accounting, lending and tax work belong with the appropriate professionals. Read Clarity into Action to understand this approach. You remain responsible for decisions and implementation.