Where Is All the Money Going Series: Chapter 4 - The Silent Cash-Flow Killers

Future Accounting
24 hours ago
4 min read

Why a profitable business can still feel constantly short of cash

Sometimes there is no dramatic financial problem. Sales are coming in. The business is profitable. Customers are happy. Staff are being paid. Yet cash always seems tight.

Often, the answer is not one major expense. It is money becoming trapped throughout the business: debtors, stock, work in progress, poor billing practices, supplier timing, tax obligations and the everyday funding gap between paying for the work and eventually being paid for it.

Working capital is largely about one question: How much of your money has to stay tied up in the business just to keep it operating?

Cash Flow Is About Timing

A profitable transaction can still create short-term cash pressure if you pay before you get paid. A $100,000 job with $70,000 of direct costs may produce a healthy $30,000 gross profit, but if most of the $70,000 must be paid before the customer pays, the business has to fund that gap.

One of the most common cash-flow killers is the timing gap between when cash leaves the business and when it returns.

Cash-Flow Killer #1: Slow-Paying Customers

For a business turning over approximately $5 million per year, moving average collections from 60 days to 45 days could potentially release around $206,000 of cash. No extra sales. No new customers. Just collecting existing money sooner.

Sometimes the quickest way to improve cash flow is not to make more money. It is to collect the money you've already made.

Cash-Flow Killer #2: Work in Progress

Staff have been paid and materials purchased, but the job has not yet reached the point where it can be invoiced — or perhaps it could be invoiced but no one has done it. Cash is effectively sitting inside unfinished or unbilled work.

Cash-Flow Killer #3: Too Much Stock

Stock ties up cash, takes up space and can become obsolete, damaged or discounted. A useful question is: if we did not already own this stock, would we buy it today?

Cash-Flow Killer #4: Supplier Timing

If customers pay in 45 days but suppliers are paid in 14, the business is funding a 31-day gap. Good working-capital management looks at both sides. Paying suppliers reliably within agreed terms is important; paying everything immediately regardless of available terms can unnecessarily increase cash requirements.

Cash-Flow Killer #5: GST and Tax Money That Feels Like Yours

A healthy bank balance can create an illusion. Some cash may ultimately need to fund GST, PAYG withholding, superannuation, income tax, payroll tax or other obligations. If those amounts are treated as available operating cash, the business can feel comfortable until the obligation falls due.

Cash-Flow Killer #6: Too Many Repayments

One loan may be manageable. Then another vehicle is financed. Then equipment. Then property. Each decision may have made sense individually, but the cumulative monthly commitment can become enormous.

Cash-Flow Killer #7: Growth Without a Funding Plan

If sales grow rapidly, debtors, stock, WIP, wages, equipment needs, tax obligations and administration can all grow too. Ask: if sales increased by 25% next year, how much additional cash would the business need to fund that growth?

Cash-Flow Killer #8: Small Leaks Everywhere

Subscriptions nobody uses. Duplicated software. Poor purchasing. Fuel wastage. Uncontrolled overtime. Pricing errors. Unbilled variations. Rework. None may feel material by itself. Together, they can be very material.

Improving cash flow does not mean cutting everything. Good employees, technology, marketing, training, systems and insurance can create enormous value. The objective is not 'spend less'. It is 'spend deliberately'.

Your Cash-Conversion Cycle

Spend money buying stock, materials or labour
Complete the work or sell the product
Issue the invoice
Wait for payment
Cash finally returns to the bank

The shorter and more efficient that cycle becomes, the less external cash the business generally needs to support its operations.

Ask Yourself

How many days, on average, do customers take to pay?
How quickly after completing work do you issue invoices?
Who owns responsibility for debtor collection?
How much cash is tied up in overdue accounts?
How much is sitting in work in progress?
How much stock do you hold, and how much is slow-moving?
Are you paying suppliers earlier than necessary?
Are customer and supplier terms reasonably aligned?
Do you know upcoming tax obligations?
How much cash leaves the business each month in loan repayments?
If sales grew by 25%, could you fund the additional working capital?

How many dollars have you already earned that are currently trapped somewhere inside your business?

3P'S FUTURE PROSPERITY INSIGHT

PRESERVE

You do not always need to make more money to improve cash flow. Sometimes you need to release the money already sitting inside the business through better debtor collection, faster invoicing, improved WIP and smarter stock levels.

PROTECT

If too much cash is tied up in customers, stock and WIP, the business has less room to absorb an unexpected event. A stronger cash position creates a buffer.

PROSPER

Once cash is moving efficiently, capital can be directed toward growth, property, productive equipment, investments, superannuation, debt reduction and long-term family wealth.

If your business constantly feels short of cash, first ask: how much of the money we've already earned is trapped inside the business — and what can we do to release it?

Feeling profitable but constantly short of cash?

Let's identify where your cash is getting trapped. Book a confidential strategy meeting with the 3P's Future Prosperity team and discover practical opportunities to improve cash flow, strengthen working capital and create greater financial flexibility for growth.

Book your meeting today.

Disclaimer  

This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.  

Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder 

Liability limited by a scheme approved under professional standards legislation.