When revenue grows and cash shrinks

Short answer: revenue is what is sold; cash is the money that is available. The two can move in opposite directions, for example when sales grow but the money only comes in weeks later, while suppliers, salaries and inventory must be paid first.

Why it happens

A sale creates a right to receive, but it only turns into cash when the customer pays. Meanwhile, the business has already spent to produce, buy and deliver. The faster the company grows, the more money it has to advance.

The most common causes

• Receipt term longer than payment term. It receives in 60 days and pays in 30.
• Idle inventory. Money tied up in goods not yet sold.
• Low margin. Selling more at a small profit generates little new money.
• Costs that grow along, such as staff, rent and marketing.
• Discounts and defaults that reduce what actually comes in.

An example

A shop goes from $30,000 to $50,000 in sales per month, but offers payment in 60 days to attract customers. It needs to buy more inventory and pay suppliers in 30 days. In some months the bank account is lower, even though revenue has gone up. This is an illustrative example.

What to watch

• Weekly cash flow, and not only the monthly result.
• Average receipt and payment terms.
• Inventory turnover: how long goods sit idle.
• The margin of each product, to know whether growing is worth it.

Conclusion

Growing requires money before it returns money. The useful question is not only how much was sold, but when the money arrives and how much must go out until then.

A simple practice is to project cash for the next eight to twelve weeks, listing what should come in and go out in each one. If the balance turns negative in some week, there is still time to negotiate terms, collect earlier or postpone a purchase.