This article was written by Marc Obadia, the Founder of Rock Drive Business Capital, a US-focused commercial financing brokerage that helps businesses explore financing options for working capital and other business needs.
A growing business can have strong sales, healthy profit margins and a promising future and still struggle to pay its bills on time.
This can be confusing for business owners.
You may look at your sales figures and see that revenue is increasing. Your income statement may also show a profit. Yet, when payroll, supplier invoices, rent, taxes or other operating expenses become due, there may not be enough cash available in the bank account.
In many cases, the problem is not that the business is unprofitable. The problem is that cash is tied up in the normal process of running and growing the business.
This is where working capital becomes important.
Working capital is closely connected to a company’s short-term operating needs. It includes areas such as cash, accounts receivable and inventory, while current liabilities such as supplier obligations also affect the amount of liquidity available to the business.
For a growing company, the timing of cash coming in can be just as important as the amount of revenue being generated.
Here are five signs that a business may be dealing with a working-capital problem rather than a profitability problem.
1. Sales Are Increasing, but the Bank Balance Is Not
One of the clearest warning signs is when sales are growing but the amount of cash in the bank is not growing at the same pace.
Consider a business that invoices customers $200,000 during a month. On paper, that may look like a strong month.
But what happens if customers have 30-day, 45-day or 60-day payment terms?
The business may have recorded the revenue, but the cash has not arrived yet.
Meanwhile, the company may still need to pay employees, suppliers, rent, insurance, taxes, software providers and other operating expenses.
This creates a timing gap between revenue recognition and cash collection.
Accounts receivable is one of the most important areas to watch in this situation. As receivables increase, more of the company’s money is effectively tied up in unpaid customer invoices. Working-capital management therefore involves monitoring how quickly customers pay and how much cash is being held in receivables.
Business owners should regularly review:
- How much customers currently owe
- How old outstanding invoices are
- Average collection time
- Whether customers are paying according to agreed terms
- Whether payment-processing settlements are arriving when expected
- The difference between revenue invoiced and cash actually received
A growing accounts-receivable balance does not automatically mean that a company has a bad business model. It can simply mean that growth is consuming cash faster than customers are paying.
That distinction matters.
2. The Business Pays Its Costs Before Customers Pay
Another warning sign appears when the company consistently has to spend money well before it receives money from customers.
This is common across many industries.
A wholesaler may need to purchase goods before selling them. A contractor may need to pay workers and suppliers before receiving payment for a completed project. A service business may have to pay employees and other operating costs while waiting for a customer to settle an invoice.
The business can therefore be profitable over the full life of a contract while experiencing significant pressure during the period between paying its costs and collecting its revenue.
This is part of the cash conversion cycle.
The longer money remains tied up between paying for inputs and receiving customer payments, the greater the working-capital requirement can become.
For example, imagine a business receives a large customer order. It has to purchase materials, pay staff and cover transportation costs before the customer pays the final invoice.
The new order may be profitable.
But the business still needs enough cash to finance the period between the initial expenditure and the eventual collection.
This is one reason rapid growth can sometimes create financial pressure. As OpenStax explains, growing companies may need additional working capital as they purchase inventory, hire employees or take on new projects, even when they are profitable.
Business owners should therefore ask a simple question:
How long does it take between spending money to fulfil an order and receiving the customer’s money?
If that period is becoming longer as the company grows, working-capital pressure may be developing.
3. Inventory Is Absorbing More Cash
Inventory can also create a significant working-capital problem.
This is especially important for businesses that sell physical products.
When a company buys inventory, cash leaves the business. That cash does not immediately return to the bank account. It may remain tied up until the products are sold and the business receives payment.
A growing company may increase inventory because it expects higher demand.
That can be a sensible business decision.
The problem occurs when inventory grows faster than sales or when too much money is invested in products that move slowly.
For example, a retailer may increase its stock ahead of an expected busy season. If demand is weaker than expected, the business may be left with large quantities of unsold products while still having supplier invoices and other expenses to pay.
Inventory management is therefore an important part of working-capital management. Inventory, accounts receivable and accounts payable all affect the time it takes for money to move through the business.
Businesses should monitor:
- Inventory turnover
- Slow-moving products
- Seasonal stock
- Reorder points
- Supplier payment terms
- The amount of cash invested in inventory
- Product-level sales performance
A useful question is not simply, “How much inventory do we have?”
It is:
“How much of our cash is currently sitting in inventory, and how quickly will that inventory turn back into cash?”
This distinction can reveal problems that a basic sales report may not show.
4. Payroll and Fixed Expenses Arrive Before Revenue
A business may also experience working-capital pressure when its major expenses arrive on a fixed schedule while its revenue arrives irregularly.
Payroll is a good example.
Employees must generally be paid according to an agreed schedule regardless of whether a major customer has paid that week.
The same applies to expenses such as:
- Rent
- Insurance
- Utilities
- Software subscriptions
- Vehicle costs
- Taxes
- Debt payments
- Contractor payments
- Other recurring operating expenses
This can become particularly difficult for businesses with seasonal or project-based revenue.
A company might have a very profitable quarter but still experience a cash shortage during a particular month because its expenses have to be paid before expected customer receipts arrive.
This is why looking only at monthly or annual profit can give business owners an incomplete picture of liquidity.
A 13-week cash-flow forecast can provide a more practical short-term view.
The model tracks expected cash receipts and payments week by week, allowing management to see when cash may become tight and take action before the problem becomes urgent.
A basic forecast can include:
| Cash Inflows | Cash Outflows |
|---|---|
| Customer payments | Payroll |
| Accounts receivable collections | Supplier payments |
| Other business receipts | Rent |
| Financing proceeds | Taxes |
| Other expected cash receipts | Debt payments |
| Insurance and other operating expenses |
The objective is not to predict the future perfectly.
The objective is to identify potential cash gaps early enough to respond.
If the forecast shows that cash may fall below the company’s minimum operating level several weeks from now, management has more time to collect outstanding invoices, delay non-essential spending, negotiate payment terms or consider appropriate financing options.
5. New Business Opportunities Require Cash Upfront
Growth itself can create working-capital pressure.
A business may receive a large new contract, identify an opportunity to open another location, receive a purchase order or decide to launch a new product.
These opportunities can be positive.
However, they may require significant cash before they begin generating additional revenue.
For example, accepting a large order may require the company to purchase inventory, hire temporary staff, increase transportation capacity or pay suppliers before receiving payment from the customer.
Similarly, expanding into a new location can require deposits, equipment, inventory, staff and other upfront costs.
The opportunity may ultimately generate a healthy profit, but the business still needs enough liquidity to reach the point where the revenue is collected.
This is one of the reasons growing companies sometimes seek additional working capital.
Before committing to a major opportunity, management should estimate:
- How much cash is required upfront.
- When the money will have to be paid.
- When the additional revenue is expected to arrive.
- When customers are likely to pay.
- What happens if the revenue is delayed.
- Whether the business will still have enough cash to meet its normal obligations.
The important question is not simply whether the opportunity is profitable.
It is whether the business can finance the period between spending the money and receiving the resulting cash.
Working-Capital Problem or Profitability Problem?
The two problems can look similar, but they are not the same.
A profitability problem means the business is not generating enough profit from its operations.
A working-capital problem can occur when a business is profitable but does not have enough readily available cash to meet short-term obligations when they become due.
For example, a company could make a profitable sale today but not collect the customer’s payment for 60 days.
The profit may be real.
The cash may simply not be available yet.
To understand which problem the business has, owners should look beyond the bank balance.
Review:
- Gross profit margins
- Operating profitability
- Operating cash flow
- Accounts receivable
- Inventory
- Accounts payable
- Short-term debt and other obligations
- Customer payment behaviour
- Supplier payment terms
- Short-term cash-flow forecasts
Working capital is fundamentally about the company’s ability to support its day-to-day operations and meet short-term obligations.
That means a business should not automatically assume that falling cash balances mean the underlying business is failing.
The cause needs to be identified first.
What Can a Business Do About a Working-Capital Problem?
Once the problem has been identified, there are several practical steps a business can consider.
Invoice Customers Promptly
Delaying invoicing delays the beginning of the collection process.
Where appropriate, businesses should issue accurate invoices promptly after delivering goods or services.
Follow Up on Outstanding Receivables
Businesses should have a clear process for monitoring unpaid invoices.
An ageing report can help management identify which customers owe money, how long the invoices have been outstanding and which accounts may require attention.
Make Payment Easy for Customers
The easier it is for customers to pay, the easier it may be for the business to collect cash.
Businesses should review whether their available payment methods are convenient for their customers and suitable for their market.
Review Supplier Terms
Where commercially appropriate, businesses can discuss payment terms with suppliers.
Negotiating terms that better match the timing of customer collections can reduce pressure on working capital.
However, businesses should maintain good supplier relationships and avoid simply delaying payments without agreement.
Reduce Slow-Moving Inventory
If certain products are consistently slow to sell, management should investigate why.
Reducing unnecessary purchases and improving inventory planning can release cash that would otherwise remain tied up in unsold stock.
Match Purchases to Actual Demand
Businesses should be careful about purchasing large amounts of stock simply because sales are increasing.
Forecasting demand, monitoring product performance and reviewing reorder points can help prevent excessive inventory accumulation.
Build a Cash Reserve
A cash reserve can provide protection against unexpected expenses and temporary gaps between receipts and payments.
The appropriate reserve will differ from one business to another because operating cycles, industries and risk levels are different.
Review Major Expenses
Businesses should regularly review significant operating expenses to determine whether they are necessary, properly timed and aligned with revenue generation.
The objective should not always be to cut costs.
Sometimes the better objective is simply to make the timing of expenses more manageable.
When Additional Financing May Become Necessary
Some working-capital problems can be addressed through better collection, inventory and payment management.
Others may require additional capital.
For example, a business experiencing rapid growth may need funding to purchase inventory, fulfil a large order, cover operating expenses or bridge the period between delivering a product or service and receiving customer payment.
The important thing is to understand why the money is needed before choosing a financing solution.
A business should know:
- How much capital it needs
- Why it needs it
- When it needs it
- How long it expects to need it
- How the financing will be repaid
- What the total cost of financing will be
- What happens if customer payments arrive later than expected
Working-capital financing can be useful when the underlying business is healthy but cash is temporarily tied up in receivables, inventory or growth.
For businesses considering this type of financing, it is important to compare the available options carefully and understand the full cost and repayment obligations.
For example, businesses looking specifically at working capital financing can learn more about the types of funding available and how they may be structured.
Conclusion
Growth is usually a positive sign for a business.
But growth can also consume cash.
Sales can increase while customers take longer to pay. Inventory can increase before the resulting products are sold. Payroll and supplier expenses can arrive before customer payments. A new business opportunity can require substantial upfront spending before it produces cash.
None of these situations automatically means that the business is unprofitable.
They may instead indicate a working-capital problem.
The key is to understand the difference between profit, cash flow and working capital.
A profitable business still needs enough liquidity to operate between the time it spends money and the time it receives money.
By monitoring accounts receivable, inventory, supplier obligations, operating expenses and short-term cash requirements, business owners can identify pressure earlier and make better decisions.
For a growing company, the most important question is not only “Are we making money?”
It is also:
“Will we have enough cash available when we need to pay for the next stage of growth?”
Understanding that difference can help a business grow without allowing its own success to create an avoidable cash-flow crisis.