An increase in sales doesn't always mean a business is becoming financially stronger. Sometimes, growth is exactly what creates the cash flow problem.
Imagine a business that has been doing well for the past three months. Orders are increasing, customers are coming back, and monthly sales are higher than ever.
On paper, everything looks promising.
But the owner is struggling to pay suppliers on time.
How does that happen?
One explanation is that the business is making sales faster than it is collecting cash. Another is that growth requires additional spending on inventory, staff, equipment, and operations before the corresponding revenue arrives.
Profitability and cash flow are two different things.
In a 2016 study involving approximately 600,000 American small businesses, the JPMorgan Chase Institute found that the median business had enough cash reserves to cover just 27 days of normal outflows if income stopped.
The research is historical and US-based, but it illustrates a financial vulnerability that remains important for business owners to understand.
The number worth checking
Instead of looking only at monthly sales, calculate how many days your business could continue operating using the cash currently available.
Here's a simplified example:
- Available operating cash: ₱60,000
- Average monthly cash outflows: ₱90,000
- Estimated daily outflows: ₱3,000
- Cash buffer: 20 days
That means the business has approximately 20 days of cash coverage if new inflows stop and spending remains unchanged.
Now imagine accepting a large project that requires ₱50,000 upfront for materials, but the client will pay after 45 days.
The project may be profitable. However, the business still needs enough cash to cover the expenses in between.
What business owners can do
Begin with a simple weekly cash forecast.
Record your expected collections, upcoming supplier payments, payroll, subscriptions, loan obligations, and other operating expenses.
For each week, calculate your projected ending cash balance.
This helps identify shortages before they become emergencies.
You can also review payment terms. For projects requiring substantial upfront spending, consider reasonable deposits or milestone-based billing.
And before expanding inventory or accepting another large order, check whether the business can financially support the additional activity.
The important lesson is that growth should improve the strength of a business over time.
If higher sales consistently leave you with less available cash, it may be time to review how that growth is being financed.
Research reference
JPMorgan Chase Institute, Cash Is King: Flows, Balances, and Buffer Days (2016)