Why growing sales doesn’t always improve cash flow

Profit is not the same as money in the bank

Profit generally measures revenue earned less expenses incurred during a period. Cash flow tracks the money actually coming into and leaving the business. A sale made on credit may increase reported revenue today, while the customer only pays weeks later. Meanwhile, wages, stock purchases and other costs may be due much sooner.

A simple example

Suppose a business sells R100,000 worth of services this month and its associated expenses are R70,000. That suggests R30,000 of profit before considering any further adjustments. But if customers have not yet settled their invoices, the business may not have the cash available to cover its immediate payments. The example is illustrative; actual profit depends on the accounting treatment and additional costs.

What typically puts pressure on cash flow

Long customer payment terms, stock purchases, debt repayments, seasonal revenue, unexpected expenses and rapid growth can all create a gap between incoming and outgoing cash. Growing sales may increase the amount of inventory or working capital required, rather than immediately free up cash.

Four practical steps

Review who owes you money and when they are expected to pay. Identify your upcoming supplier, payroll, debt and tax commitments. Build a rolling cash-flow forecast for the next 13 weeks using realistic payment dates. Compare your forecast with actual outcomes each week and update your assumptions.

Use the numbers to make better decisions

Your management accounts explain performance; a cash-flow forecast explains liquidity. Looking at both gives you a more useful picture of whether the business can meet obligations, fund investment and operate through difficult periods.