Is Your Business Growing but Your Cash Flow Getting Worse?
Sales are increasing.
The team is getting bigger.
There is more work coming through the door.
So why does the bank account seem to be getting tighter?
It sounds contradictory, but growth can put enormous pressure on cash flow.
In fact, some businesses experience their greatest cash flow challenges while they are growing.
Growth Costs Money
Taking on more work often means spending money before you receive money.
You may need to:
- Hire additional employees
- Purchase equipment
- Carry more stock
- Increase vehicles or machinery
- Upgrade premises
- Increase software and administration costs
The revenue may eventually follow, but those costs often need to be paid first.
Your Customers Are Taking Too Long to Pay
Increasing sales does not help your bank account if customers have not paid you.
Imagine monthly sales grow from $50,000 to $100,000.
That sounds fantastic.
But if customers are taking 60 or 90 days to pay, you may be funding wages, materials and operating costs for months before receiving the cash.
As turnover grows, poor debtor management becomes increasingly expensive.
Your Margins May Be Shrinking
More revenue does not always mean more profit.
Costs can gradually increase without pricing keeping pace.
Wages rise. Materials become more expensive. Insurance increases. Fuel goes up. Software subscriptions multiply.
If your prices remain unchanged, you may be doing significantly more work without making significantly more money.
Tax Obligations Grow Too
As profits and wages increase, so can:
- GST
- PAYG withholding
- PAYG instalments
- Superannuation
- Income tax
The money in your bank account is not necessarily all yours.
Without planning, growing businesses can find themselves constantly catching up with obligations.
Owner Withdrawals Can Increase
Business growth can create a feeling that there is more money available personally.
But increasing personal spending at the same rate as business revenue can quickly absorb the additional cash being generated.
What Should You Watch?
Do not monitor turnover alone.
Keep an eye on:
- Gross profit margin
- Net profit
- Debtor days
- Cash reserves
- Tax liabilities
- Wage costs
- Owner withdrawals
These numbers tell a much more useful story.
The Bottom Line
Growth is exciting, but growth without cash flow management can become uncomfortable very quickly.
The goal is not simply to build a bigger business.
It is to build a stronger and more profitable one.
If your sales are climbing but your cash position is moving in the opposite direction, it is worth finding out why.
PLH Accountants can help you look beyond turnover and understand what your growth is actually delivering.