Funding Growth When Profitability Looks Strong but Cash Is Tight
Growth can consume cash before it creates it. Diagnose the working-capital gap before choosing the facility.
Why strong trading can create cash pressure
A growing business may pay staff, suppliers, VAT and other operating costs before customers settle invoices. If sales rise faster than cash conversion, the debtor book, stock or work in progress can absorb more cash even while reported profit improves.
Worked example: a 40% increase in turnover
Consider a profitable B2B company turning over £3 million a year. It wins new contracts that could increase annual turnover to £4.2 million, a 40% increase. The company pays staff and many suppliers throughout the month, while customers typically pay around 60 days after invoicing.
Before growth, average monthly sales are £250,000. At roughly 60 days, around £500,000 may be tied up in trade debtors. After growth, average monthly sales rise to £350,000 and the debtor book could rise to around £700,000.
The increase creates an additional £200,000 working-capital requirement before considering stock, recruitment, equipment, VAT or other growth costs.
The calculation
| Measure | Before growth | After growth | Movement |
|---|---|---|---|
| Annual turnover | £3,000,000 | £4,200,000 | £1,200,000 |
| Average monthly sales | £250,000 | £350,000 | £100,000 |
| Approx. debtors at 60 days | £500,000 | £700,000 | £200,000 |
What could fund the gap?
- Invoice finance where the additional requirement is mainly sitting in eligible B2B invoices.
- A revolving credit facility where the requirement fluctuates and cash flow supports the structure.
- A business loan for a defined investment with a sensible repayment profile.
- Asset finance for vehicles, machinery or equipment, preserving working capital for trading.
- A blended structure where different needs are matched to different facilities.
What should you as the accountant examine?
- Debtor days and the movement in aged debtors.
- Creditor days and whether supplier support is tightening.
- Stock, work in progress and fulfilment costs.
- Payroll timing and the cost of new hires.
- VAT, Corporation Tax and other scheduled outflows.
- Capital expenditure and existing debt service.
- The point at which new sales convert into cash.
The key question
Shadowfax view
Funding is easier to structure before the cash position becomes urgent. We can work with you and your client to quantify the requirement, consider appropriate funding routes and identify what prospective lenders are likely to need.
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Use the figures as an initial indication, then discuss the client's circumstances before relying on a particular funding route.
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This guide is for general information only. Funding availability and terms depend on the circumstances of the applicant, the facility and the lender's assessment. Shadowfax Funding Solutions Limited is authorised and regulated by the Financial Conduct Authority under Firm Reference Number 937211 and is a member of the NACFB under membership number 28659.