How to Scale a Business Without Losing Control of Cash
Growing a business sounds simple.
Sell more. Take on more customers. Hire more people. Increase revenue.
But there is a problem that catches many growing businesses by surprise:
The faster you grow, the more cash you can need.
A business can be profitable, have a growing order book and be winning new customers, yet still find itself under serious cash flow pressure.
This is particularly common when a business moves from £500k to £1m turnover, or from £1m to £2m and beyond.
More sales often mean:
More employees
More stock
Larger supplier bills
More VAT
More corporation tax
Longer customer payment periods
Greater overheads
More investment in equipment and systems
So how do you scale a business without losing control of cash?
The answer isn't simply to keep more money in the bank.
You need to understand where your cash is going, when it is coming in and what your growth is actually costing you.
Growth Can Create Cash Flow Problems
One of the biggest misconceptions in business is that increasing sales automatically improves cash flow.
It doesn't.
Imagine your business wins a £250,000 contract.
That's fantastic news.
But suppose you need to spend £100,000 on staff, materials and suppliers before you receive payment from the customer.
Your accounts may show significant revenue and profit.
But your bank account may be under pressure.
This is known as working capital.
The bigger your business becomes, the more important working capital management can become.
You need enough cash to fund the gap between paying your costs and receiving money from customers.
Profit Doesn't Equal Cash
This is one of the most important concepts for any growing business owner to understand.
You can be profitable and still run out of cash.
Imagine your business generates:
£1m revenue
and makes:
£150,000 profit
That sounds healthy.
But if your customers are taking 90 days to pay, you could have a substantial amount of money tied up in unpaid invoices.
At the same time, your employees, suppliers and HMRC still expect to be paid on time.
Your profit and loss account might look healthy while your bank account is under pressure.
This is why profitability and cash flow need to be managed separately.
Create a Cash Flow Forecast
If you want to scale without losing control of cash, one of the most important things you can have is a cash flow forecast.
A cash flow forecast looks forward rather than simply telling you what has already happened.
It should help you understand:
How much cash you currently have
What customers are expected to pay
When those payments are expected
What suppliers need to be paid
Upcoming payroll
VAT payments
Corporation tax
Loan repayments
Planned investment
Other significant expenditure
The goal isn't to predict the future perfectly.
The goal is to identify potential problems before they happen.
For example, if your forecast shows that your bank balance could fall to £20,000 in three months, you have time to do something about it.
You might:
Chase outstanding invoices
Delay non-essential expenditure
Negotiate supplier terms
Arrange finance
Slow down recruitment
Adjust your growth plans
Finding out about the problem when the bank account reaches £20,000 is very different.
Don't Confuse Sales Growth With Healthy Growth
Revenue is one of the most visible measures of business growth.
But bigger isn't always better.
Suppose your business grows from £1m to £1.5m turnover.
That sounds excellent.
But what if:
Gross margin falls
Staff costs increase significantly
Customers take longer to pay
Overheads increase
Cash requirements double
You may have created a bigger business without creating much more value.
This is why growing businesses should monitor profit margins as well as revenue.
Ask yourself:
"Are we becoming more profitable as we grow?"
rather than simply:
"Are we selling more?"
Keep a Close Eye on Gross Margins
One of the simplest ways to protect cash while scaling is to understand your gross profit margin.
If you generate £1m of revenue and your direct costs are £600,000, you have £400,000 of gross profit.
That's a 40% gross margin.
But imagine your revenue increases to £1.5m while your direct costs increase to £1m.
Your gross profit has increased, but your margin has fallen to around 33%.
That's an important warning sign.
You are selling more but keeping a smaller percentage of each pound of revenue.
As your business grows, regularly monitor:
Gross profit
Gross margin
Margin by customer
Margin by product or service
Changes in supplier costs
Pricing
A growing business with deteriorating margins can quickly find itself under cash flow pressure.
Get Paid Faster
One of the most effective ways to improve cash flow is remarkably simple:
Collect the money you're already owed.
Many businesses spend a huge amount of time trying to win new customers while neglecting outstanding invoices from existing customers.
If a customer owes you £50,000, that isn't just an accounting entry.
It's cash that isn't currently available to your business.
Good credit control should include:
Clear payment terms
Accurate invoices
Invoices sent promptly
Regular debtor reviews
Payment reminders
Follow-up calls
Escalation of overdue accounts
Monitoring debtor days
Even reducing average customer payment time by a couple of weeks can make a significant difference to a growing business.
Don't Let Growth Outpace Your Finance Function
This is something we see regularly with growing businesses.
The business starts small.
The owner keeps an eye on the bank account.
Invoices are raised.
Bills are paid.
The accountant produces the year-end accounts.
Then the business starts growing rapidly.
Suddenly there are hundreds of transactions every month, multiple employees, larger supplier balances, more customers and increasingly complicated cash flow.
But the finance function hasn't changed.
The business has effectively outgrown its financial infrastructure.
This can result in:
Late management accounts
Poor visibility of profitability
Unreconciled accounts
Weak credit control
Poor cash forecasting
Decisions being made using outdated information
Your finance function needs to grow with your business.
Know Your Cash Conversion Cycle
Another useful concept for growing businesses is the cash conversion cycle.
Put simply, it looks at how long your cash is tied up between spending money and receiving money back from customers.
For example, imagine:
You pay suppliers after 30 days.
You hold stock for 45 days.
Your customers pay you after 60 days.
Your business could have a significant amount of cash tied up during that period.
Improving the cash conversion cycle might involve:
Getting customers to pay sooner
Negotiating longer supplier terms
Reducing stock levels
Improving purchasing
Reducing production times
Improving invoicing processes
Small improvements can have a meaningful impact when you're operating at scale.
Be Careful With Recruitment
One of the biggest cash commitments a growing business can make is hiring employees.
And recruitment can be essential to growth.
But hiring too early can create significant fixed costs.
Before recruiting, consider:
What additional revenue will this person generate?
When will that revenue arrive?
Can the business comfortably fund the salary while the role becomes productive?
Is this a permanent requirement or a temporary increase in workload?
This doesn't mean businesses shouldn't hire.
It means recruitment decisions should be made with a clear understanding of the cash flow implications.
Understand Your Monthly Fixed Costs
As your business grows, your fixed costs tend to grow with it.
You might take on:
Larger premises
More employees
Additional software
More insurance
Higher professional fees
Increased marketing expenditure
Vehicles
Equipment
Finance agreements
Individually, these costs may seem manageable.
Together, they can dramatically increase your monthly break-even point.
Every growing business should know:
How much does it cost us to operate each month?
And:
How much revenue do we need to generate before we start making money?
Knowing your break-even point makes growth decisions much easier.
Don't Take Too Much Cash Out of the Business
When a business is doing well, it can be tempting to take money out.
After all, you've worked hard to generate the profit.
But if you're planning significant growth, you may need to leave more cash within the business.
Growth often requires investment.
You may need money for:
Recruitment
Marketing
Stock
Equipment
Technology
Premises
New vehicles
Expansion into new markets
Before taking significant dividends or distributions, understand what your business is likely to need over the next 6–12 months.
A large bank balance doesn't necessarily mean the money is surplus cash.
Some of it may already be committed to future costs.
Have a 13-Week Cash Flow Forecast
For businesses experiencing rapid growth, a 13-week cash flow forecast can be particularly useful.
Rather than looking at the next financial year in broad terms, you forecast cash movements week by week.
This can give you a much clearer picture of short-term liquidity.
You can see:
Opening cash
Expected customer receipts
Payroll
Supplier payments
VAT
Tax
Finance payments
Other significant expenditure
Closing cash
The shorter timeframe means you can identify potential cash shortages much earlier.
For businesses where cash flow is particularly important, this can become a regular management tool.
Build Financial Information Into Your Growth Decisions
Financial information shouldn't be something you look at after you've made a decision.
It should help you make the decision in the first place.
For example, if you're considering taking on a new contract, don't just ask:
"How much revenue will it generate?"
Also ask:
What will the gross margin be?
How much working capital will we need?
When will the customer pay?
When do we need to pay suppliers?
Will we need additional employees?
What additional overheads will we incur?
What will the impact on cash flow be?
A £500,000 contract can look very attractive.
But if it requires £300,000 of additional working capital that you don't have, the financial implications are very different.
Use Monthly Management Accounts
One of the most effective ways to maintain control as your business grows is to have accurate monthly management accounts.
Year-end accounts are important.
But they tell you what happened after the fact.
Monthly management accounts can give you a much more current view of your business.
Your monthly reporting might include:
Profit and loss
Balance sheet
Cash position
Gross margin
Net profit
Debtors
Creditors
Budget vs actual
Key performance indicators
Cash flow forecast
This allows you to identify trends while there is still time to act.
What Should a Growing Business Monitor?
You don't need a 50-page finance pack.
In fact, too much information can sometimes make it harder to see what's important.
A growing business should have a small number of key financial indicators that are reviewed consistently.
These could include:
Revenue
Are sales growing as expected?
Gross margin
Are you retaining enough profit from each sale?
EBITDA or operating profit
Is the underlying business becoming more profitable?
Debtor days
Are customers paying on time?
Cash balance
How much cash is currently available?
Forecast cash balance
What is your expected cash position over the next few months?
Monthly fixed costs
How much does the business need to generate every month?
Working capital
How much money is tied up in the operation?
The exact KPIs will depend on your business model.
The important thing is to know your numbers and review them consistently.
Growth Should Give You More Control, Not Less
Scaling a business can be exciting.
But growth shouldn't mean the owner has less visibility over what's happening financially.
If you're growing from £500k to £1m, or £1m to £2m+, your financial systems should become more sophisticated as your business becomes more complex.
You should be able to answer questions such as:
How profitable are we?
Which customers make us the most money?
How much cash will we have in three months?
How much money are customers currently owing us?
Can we afford another employee?
What will this new contract do to cash flow?
How much can we safely take out of the business?
Are we growing profitably?
If you can't answer those questions, it may be time to strengthen your finance function.
Outsourcing Your Finance Function
You don't necessarily need to employ a large internal finance team to get this level of financial visibility.
For many growing businesses, an outsourced finance department can provide access to the expertise and systems they need without building a full finance department internally.
An outsourced finance team can potentially provide:
Bookkeeping
Management accounts
Cash flow forecasting
Credit control
Payroll
Profitability analysis
Financial reporting
Budgeting
Finance Director support
This can allow business owners to access different levels of financial expertise as the business grows.
You don't necessarily need a full-time Finance Director.
You may simply need access to one when you need them.
The Bottom Line
Scaling a business is about more than increasing revenue.
You need to make sure that cash flow keeps pace with growth.
The key is to:
Forecast your cash.
Monitor your margins.
Collect your debts quickly.
Understand your working capital.
Control fixed costs.
Think carefully about recruitment.
Monitor financial performance every month.
Make growth decisions using accurate financial information.
The businesses that manage growth successfully aren't necessarily the ones with the highest turnover.
They're the ones that understand where their money is going and what their growth actually costs them.
How Welf Accountants Can Help
At Welf Accountants, we provide outsourced finance services for growing businesses that need more visibility and control over their finances.
Our services include bookkeeping, management accounts, cash flow forecasting, payroll, credit control and financial reporting, giving business owners access to the information they need to make confident financial decisions.
As your business grows, your finance function should grow with it.
Don't wait until cash becomes a problem to start managing it properly.
Want more control over your business finances?
Talk to Welf Accountants about creating an outsourced finance function for your growing business.