Sales growth consumes cash. It doesn’t generate cash. Please remember that, as you grow your business and increase sales, you will need to order more inventory, incur more payroll and expenses and generate more accounts receivable. As a result, there could be a 60 – 90 day lead time before you collect your newly invoiced accounts receivable, which cash you will need in order to pay for the additional costs incurred.
One rule of thumb is to always make sure that you are invoicing your customers as soon as you ship them product and that you collect your accounts receivable faster than you are paying your trade payables. For example, if you are collecting accounts receivable in 30 days from invoice date, you should be paying the trade payable in 45 days, not in 15 days.
A good way to monitor how you are doing on a cash basis is to prepare a detailed 13-week cash flow forecast, showing how much you expect to collect each week and what you need to pay. Start off with your beginning cash balance, then add the sales for the week, as well as the forecasted cash receipts from the sales incurred. That will show how much cash is available to pay for payroll, material and other overhead expenses on a weekly basis. Then, show how much you will need to pay each week for purchases, payroll and other overhead expense items. Roll forward the ending cash balance each week so that you can see the peak amount of cash you will need in order to make sure you will have enough cash flow to continue to grow sales. Once you complete the 13-week cash flow forecast, then run weekly actual cash receipts and actual cash disbursements to make sure you are on track with your forecast.
If you find you are getting off track and will need more cash than you had forecast, you will need to make the appropriate corrections so that you don’t run out of the cash needed to fund your business operations.