A distributor wins a major customer. Sales rise, the margin looks attractive and the team celebrates. Weeks later, the owner is calling the bank about an overdraft.

Nothing necessarily went wrong with the sale. The business may simply have paid for inventory, transport and payroll long before the customer paid the invoice. Growth has expanded the distance between earning a profit and receiving the cash.

Find out who is financing the gap

The cash conversion cycle combines days of inventory and days of customer receivables, less days of supplier payables. It is a useful starting point for understanding how long cash is committed to operations. Averages, however, can conceal a new customer's slower payment pattern or a product line with unusually large minimum orders.

In a simplified example, a business adds $100,000 of monthly sales and incurs $70,000 of related cash operating costs. If those costs are paid two months before the sales are collected, the initial funding gap can approach $140,000 before overhead, taxes, capital spending and timing differences. This is an illustration, not a universal working-capital formula.

The margin may be healthy. The cash requirement is still real. The right question is whether the additional contribution justifies the financing, execution risk and management attention required to deliver it.

A credit limit is not always usable cash

An operating facility may limit advances to a percentage of eligible receivables or inventory. Depending on the agreement, overdue accounts, concentrated customers or particular inventory can be excluded. A higher sales forecast does not establish that every dollar of the facility will be available when needed.

Model the expected borrowing base alongside the cash forecast using the actual lender's definitions. Then test a slower collection case. A customer who pays late can increase your need for cash at the same time that the related receivable becomes less useful as borrowing support.

Treat that overlap as a design problem before accepting the order. Deposits, progress billing, smaller inventory releases or a different funding structure may improve the economics. Each option needs to fit the customer relationship and the contract.

Make growth answer three questions

First, when does cash leave, and when is it realistically collected? Use a rolling weekly forecast to expose the lowest cash point, rather than relying only on a profitable annual budget.

Second, what happens if growth is faster than planned? An upside sales case can require more inventory, more labour and more borrowing before it generates surplus cash. Capacity and liquidity should be tested together.

Third, which operating changes release cash without damaging the franchise? Invoice promptly, resolve billing disputes early and review slow-moving stock. Discuss supplier terms openly; delaying payment without agreement can weaken a relationship the business depends on.

Good growth is not merely growth the company can sell. It is growth the company can deliver, finance and collect. Making that distinction early can turn a stressful expansion into a deliberate one.

A QUESTION FOR YOUR NEXT MEETING

How much extra cash would your largest new customer require before the first payment arrives?

General information only. Decisions should reflect your circumstances and appropriate professional advice.