Why Growing Businesses Run Out of Cash Before They Run Out of Profit

One of the most common reasons why businesses fail is not because they are not profitable, but simply because they run out of cash.

The business is growing strongly, new customers are being won, revenue is increasing and the business is profitable. However, there is constant pressure to make payroll, pay suppliers or fund the next stage of growth. Important business decisions are largely being made on gut feeling and the profit and loss statement alone.

On paper, the business is profitable. In reality, cash is becoming constrained.

The reason is simple: Profit does not equal cash

A business may record a profitable sale today, but not receive payment for 30, 60 or even 90 days. At the same time, suppliers, wages, super (especially now with Payday Super), PAYGW, GST, rent, all generally need to be paid before that profitable sale is turned into cash. Add growing inventory levels, investment in equipment, loan repayments, new hires, and the pressure increases further.

This challenge often emerges during periods of significant growth. Growth triggers, such as hiring staff, expanding locations, increasing stock levels, winning larger contracts or entering new markets all require cash upfront before they generate cash.

This is when cashflow forecasting becomes critical. Profit tells you whether your business model works. Cashflow tells you whether your business can continue operating and fund its next opportunity. If you get your profitability right and your cashflow wrong, the business will most likely fail.

The most effective business leaders review cashflow as closely as they review financial results. They understand what cash is expected to come in, what commitments are due, and where potential shortfalls may emerge. An accurate cashflow forecast allows them to make proactive decisions rather than reactive ones.

Systems like Xero, when combined with integrated forecasting software, pull live numbers and provide real-time cashflow forecasting, model different growth scenarios and rolling three-way forecasts to provide business leaders with clear, timely and insightful information to support more informed decision-making, based on logic rather than gut feel.

The takeaway is straightforward, profitable businesses can experience cashflow stress, but those with clear cash visibility have options, because the cash squeeze is identified before it happens.

If you would like support with cashflow forecasting/ implementing the above systems, please feel free to reach out.

Artice by Mark Dunlop ~ BDO