Why growing businesses run out of cash
A sale can earn a profit before the customer pays. If you buy materials and pay people to fill the next order while the last invoice is still open, growth can widen the gap. Start by finding where the cash went. The answer determines whether to collect faster, change terms, fix pricing or arrange working capital.
Reconcile profit to the change in cash
Compare two consecutive closed balance sheets. For a simplified example in thousands, assume profit of 20, customer balances up 30, inventory up 12 and supplier balances up 8. With no other changes, operating cash movement is 20 − 30 − 12 + 8 = −14. Customers owe more cash, more cash sits on the shelf, and supplier credit has covered only part of the difference.
For your actual business, also account for noncash expenses, other working-capital accounts, equipment purchases, debt movements and owner distributions. Tie the result to the change in bank cash. An unexplained remainder is a question for the close team.
Give the gap to the person who can change it
| What moved? | What to check next |
|---|---|
| Receivables grew faster than sales. | Sort the aging by customer and due date. Distinguish a disputed invoice from a customer paying to agreed terms. Collections can resolve a dispute; sales may need to renegotiate the next order. |
| Inventory rose ahead of a busy season. | Separate stock committed to confirmed orders from speculative purchases. Ask when each batch turns into an invoice and when that invoice turns into cash. |
| Margins fell while volume rose. | Reprice a representative order using actual labor, materials and freight. Borrowing can bridge collection time; it does not repair a sale that costs more to fulfill than it earns. |
Before accepting the next large order, put its cash outlays and receipts on a weekly calendar. Identify the deepest shortfall and the date it unwinds. If it never unwinds in a realistic case, revisit the order terms or margin before treating the problem as a short-term financing need.