Growing too fast: why profitable businesses run out of cash

Here’s a conversation Mr has more often than you’d think. “We’ve had our best year ever. Sales are up, we’ve hired three people, the order book’s full — and I can’t pay the GST.” It sounds like a contradiction. It isn’t. Growth is one of the most common causes of a cash crunch in healthy New Zealand businesses, and once you understand why, it’s very manageable.

Why does growth eat cash?

Picture the journey of one extra sale for a wholesaler in Auckland:

1. Day 0: buy stock from the supplier. Pay in 20 days.
2. Day 20: pay the supplier. Stock is still in the warehouse.
3. Day 45: stock sells to a retailer on 30-day terms. Invoice issued.
4. Day 75 (or later): the retailer pays.

Between day 20 and day 75, the business has paid out cash and hasn’t got it back. Multiply that by every extra sale, and a growing business can have a lot of cash tied up in stock and unpaid invoices. The faster it grows, the bigger that pile gets.

Add to that:

• Wages paid weekly or fortnightly for staff hired to cope with growth.
• Equipment and vehicles bought to handle bigger volumes.
• GST that rises with sales and is paid on the due date whether or not customers have paid (unless you’re on the payments basis).
• Provisional tax that rises after a profitable year.

How do I measure my cash gap?

The cash conversion cycle gives you a number of days:

Cash gap (days) = days to collect from customers + days stock sits − days you take to pay suppliers

An illustrative example with invented figures:

	Days
Customers pay in, on average	50
Stock sits before sale, on average	35
You pay suppliers in, on average	25
Cash gap	60

A 60-day gap means roughly two months of costs are always tied up. If monthly costs rise as you grow, the cash tied up rises with them. Service businesses without stock still have a gap — between paying staff and getting paid by clients.

Step 1: Shrink the gap before you fund it

Every day you cut from the gap is cash you don’t need to borrow.

Get paid sooner:

• deposits on orders and projects;
• progress claims on longer jobs;
• invoicing on completion, not at month-end;
• polite, systematic follow-up on day one after the due date;
• shorter terms for new customers.

Hold less stock:

• order more often in smaller quantities if supplier pricing allows;
• clear slow lines;
• keep fast-moving stock and let suppliers hold the rest.

Pay suppliers a little later (fairly):

• negotiate terms that match your customers’ terms;
• don’t stretch beyond agreements — your reputation is worth more.

Step 2: Watch the tax that follows growth

Growth has a delayed tax effect that catches many owners.

• GST grows immediately with sales.
• Income tax grows with profit — and under the standard provisional tax option, this year’s instalments are generally based on last year’s residual income tax plus 5%. A great year means bigger instalments next year, on top of any end-of-year tax still owing for the great year.

That’s why a business can feel fine during its best year, then hit a wall the following year. Our guide the second-year provisional tax shock explains it in detail, and the tax due dates tool shows when it lands.

Step 3: Forecast the next twelve months

A cash flow forecast turns all of this into a single picture — month-by-month cash in, cash out and closing balance. Include expected growth, new hires and tax on their real dates. The low point tells you how much funding, if any, you need and when. Our twelve-month cash flow forecast guide walks through it.

Step 4: Fund growth with the right tool

Funding growth is sensible — it’s how most businesses grow. The trick is matching the tool to the job:

Need	Sensible funding shape
Stock and debtors growing with sales (working capital)	Revolving or short-term facility sized on turnover
A specific large order or contract	Short-term loan repaid from that contract’s payments
Vehicles, machinery, fit-outs	Longer term matched to the asset’s working life
A step change (second site, acquisition)	Longer term, often property-secured

Unsecured options for trading businesses typically run from $5,000 to $500,000, sized on turnover and bank statements. Property-secured business loans run from $20,000 to $5,000,000. Read what can I use a business loan for? for more on matching purpose and term.

If your forecast shows a growth gap, tell us about it here — there’s no credit check to ask.

The warning signs of overtrading

Mr uses the old-fashioned word “overtrading” for growth that outruns the business’s ability to fund it. Signs to watch:

• tax payments slipping while sales rise;
• regularly paying suppliers late;
• dishonours on the business account despite strong sales;
• staff overtime ballooning;
• quality or service slipping because everyone’s stretched;
• the owner spending more time moving money than running the business.

Two or three of these and it’s time to slow growth slightly, fix terms, or put proper funding in place — before a good business gets into avoidable trouble.

An illustrative example

This case is invented.

An Auckland online homewares retailer doubles sales over twelve months after a product goes viral. To keep up, the owner orders larger stock shipments, paid before goods leave the overseas supplier, and hires two packers. Customers pay instantly online, which helps — but stock now sits for weeks in transit and in the warehouse, and the GST on the bigger import invoices hits before the stock sells.

The fix:

1. a forecast showing a cash low point around the next big shipment;
2. smaller, more frequent orders negotiated with the supplier;
3. a short-term facility sized on turnover to cover the shipment cycle;
4. a tax account for GST and next year’s higher provisional tax.

Growth continues — without the 2 a.m. bank-balance checks.

Questions to ask before you say yes to the next big order

Growth opportunities rarely arrive at a convenient time. Before you accept a large new customer or contract, run through these with your accountant or a trusted adviser:

1. What are the payment terms? A big customer on 60-day terms costs far more cash than three small ones paying on 7 days.
2. What has to be paid up front? Stock, materials, extra staff, equipment, freight.
3. What’s the margin after all costs? Including overtime, extra freight and any discount the customer expects.
4. How concentrated does this make us? If this customer becomes a large share of revenue, what happens if they leave or pay late?
5. What does it do to GST and provisional tax? Bigger sales mean bigger GST periods immediately, and potentially higher provisional tax next year.
6. How will we fund the gap? Own cash, better terms, or a facility arranged before the work starts.
7. What’s the exit if it goes wrong? Can you scale back staff or stock quickly if the contract ends early?

If you can answer all seven with confidence, the growth is probably worth funding. If two or three answers are vague, it may be worth negotiating better terms first — a deposit, progress payments or a shorter payment cycle — before committing your cash.

Growth myths Mr hears

• “More sales will fix our cash problem.” Often they make it worse in the short term.
• “We’re profitable, so the bank account will sort itself out.” Profit and cash run on different clocks.
• “We’ll worry about the tax later.” Later arrives on fixed dates — 15 January and 7 May among them.
• “Borrowing to grow is a bad sign.” Funding real, profitable growth with the right tool is how many good businesses scale.

Ask Mr about funding your growth

Growing pains are a good problem to have, and a very solvable one. Tell us how fast you’re growing, what’s tying up cash and what you’d like to fund. Asking won’t touch your credit file, your enquiry goes to one person and not a crowd of lenders, and a real specialist will help you match the funding to the need.

Please give us your recent monthly turnover and what’s driving the growth on the form — accurate numbers help us size something that fits rather than something that pinches. See if your business qualifies.