Your revenue increased 40 percent over the past year, profits are up substantially, and the business is performing better than ever. Yet your bank account shows less cash than it did 12 months ago, and you're struggling to meet payroll and supplier obligations despite the strong performance.
This paradox confuses and frustrates business owners who reasonably expect that growing revenue and increasing profits should improve cash position, not worsen it. The reality is that growth consumes cash through working capital expansion, and many businesses don't recognise this until they're facing a cash crisis despite record sales.
Understanding why growth worsens cash flow helps you anticipate the cash requirements of scaling, plan funding appropriately, and avoid the trap of assuming profit equals cash availability.
Profitable revenue growth typically worsens cash flow in the short to medium term through three primary mechanisms that absorb cash faster than profit generates it.
As revenue grows, the inventory or work in progress required to support that revenue grows proportionally or faster. This ties up cash before you've collected from customers.
A product business selling $500,000 quarterly might carry $120,000 in inventory to support that sales level. When quarterly sales grow to $750,000, required inventory grows to approximately $180,000, absorbing an additional $60,000 in cash that's now sitting on shelves rather than in the bank account.
Service businesses face the same dynamic through work in progress. A consulting firm billing $400,000 quarterly might have $85,000 in unbilled work in progress representing time invested but not yet invoiced. When quarterly billing grows to $600,000, work in progress grows to approximately $127,000, absorbing $42,000 in additional cash through wages paid for work not yet billed.
This working capital absorption happens before revenue converts to cash through customer payment, creating timing gaps that worsen as growth accelerates.
Smaller clients often pay immediately or within 7 to 14 days because they're grateful for the service and keen to maintain the relationship. Larger clients that drive growth typically demand 30-day terms minimum, with many insisting on 45 to 60-day payment cycles.
A business growing from $1.5 million to $2.8 million annually might see its average customer payment timing extend from 12 days to 38 days as larger clients become a bigger proportion of revenue. This increases accounts receivable from approximately $50,000 to $290,000, absorbing $240,000 in additional working capital.
You've done the work, incurred the costs, and recognised the revenue, but the cash won't arrive for another 30 to 45 days. During that gap, you still need to pay your team, your suppliers, and your overheads.
Sustainable growth requires hiring staff before the revenue they'll generate arrives. You can't deliver $600,000 in quarterly revenue with a team sized for $400,000 and then suddenly hire once you've won the work. You need capacity in place to win and deliver it.
This means paying wages for 2 to 4 months before those employees become fully productive and generate the revenue that justifies their cost. A business adding three employees at $75,000 each to support growth invests $37,500 to $75,000 in wages before those employees contribute meaningfully to revenue.
Additionally, new employees rarely achieve full productivity immediately. They typically operate at 40 to 60 percent effectiveness during their first 2 to 3 months, creating a productivity gap where you're paying full wages for partial output.
A Sydney professional services business grew quarterly revenue from $200,000 to $500,000 over 18 months, increasing profit from $45,000 to $150,000 quarterly. Despite this impressive performance, their cash position deteriorated from $85,000 in the bank to $45,000, creating stress and confusion.
Work in progress increase: At $200,000 quarterly revenue, the business carried approximately $65,000 in unbilled work in progress. At $500,000 quarterly revenue, work in progress grew to $180,000, absorbing $115,000 in additional cash through wages paid for work not yet invoiced.
Accounts receivable increase: Small client base paying within 15 days created average receivables of $45,000 at the lower revenue level. Larger clients paying within 45 to 60 days at the higher revenue level pushed receivables to $165,000, absorbing $120,000 in additional cash.
Hiring ahead of revenue: Growing the team from 6 to 14 people required hiring in groups of 2 to 3 every 3 to 4 months. This created approximately $27,000 in productivity gap costs as new employees ramped up over their first quarters.
Total working capital absorbed: $262,000 through the combination of these three factors.
Profit generated over period: $105,000 in additional quarterly profit multiplied by 6 quarters equals approximately $210,000 in cumulative additional profit (allowing for gradual growth).
Cash position change: Despite generating $210,000 in additional profit, the business absorbed $262,000 in working capital, resulting in a $52,000 deterioration in cash position. The bank account showed $40,000 less cash despite the best performance in the company's history.
This isn't theoretical. It's the mathematical reality of growth for most service and product businesses.
The cash conversion cycle measures how long your cash is tied up in operations before returning through customer payments. For Australian SMEs, the Reserve Bank's Small Business Finance 2025 report shows typical cash conversion cycles of 45 to 60 days, though this varies significantly by industry.
The cycle calculation is: Days Inventory Outstanding plus Days Sales Outstanding minus Days Payable Outstanding
Days inventory outstanding measures how long cash sits in inventory before sale. A business with $180,000 in inventory and $1.8 million in annual cost of goods sold has 36.5 days inventory outstanding, meaning cash is tied up in inventory for 36.5 days on average.
Days sales outstanding measures how long after sale you collect payment. A business with $165,000 in receivables and $2 million in annual revenue has 30 days sales outstanding, meaning you wait 30 days on average between invoice and payment.
Days payable outstanding measures how long you take to pay suppliers. A business with $95,000 in payables and $1.5 million in annual purchases has 23 days payable outstanding, meaning you hold supplier cash for 23 days on average before paying.
For this example business, cash conversion cycle is 36.5 plus 30 minus 23 equals 43.5 days. Your cash is tied up in operations for 43.5 days from when you pay for inventory or wages through to when customers pay you.
When revenue doubles, the absolute amount tied up in this 43.5-day cycle also doubles, absorbing significant cash even while the cycle length stays constant.
Steady predictable growth allows you to plan working capital needs and arrange financing appropriately. Volatile growth creates cash whiplash that's harder to manage.
According to Xero's Cash Flow Insights 2025 report, businesses experiencing revenue volatility above 15 percent quarter-to-quarter face cash flow difficulties at three times the rate of businesses with stable growth patterns. The unpredictability makes it nearly impossible to maintain appropriate working capital levels.
A business that grows 10 percent one quarter, contracts 5 percent the next, then grows 25 percent the following quarter never achieves equilibrium. You're constantly either over-resourced with excess inventory and staff, or under-resourced struggling to deliver, with working capital lurching between extremes.
The solution isn't to avoid growth. The solution is to forecast cash requirements accurately and secure appropriate working capital before growth accelerates.
Several practical approaches help businesses manage cash flow through growth without crisis.
Monthly cash flow forecasts aren't granular enough for businesses experiencing rapid growth or significant volatility. By the time you see a problem in monthly projections, you're weeks away from crisis with limited options.
Rolling 13-week cash flow forecasts updated weekly provide the visibility needed to anticipate shortfalls 6 to 10 weeks ahead when you still have time to act. The forecast shows expected cash receipts by customer and date, planned cash payments by category and date, committed obligations like loan repayments and tax, and resulting cash position week by week.
Updating this weekly as actual results come in and projections change keeps you ahead of problems rather than reacting to crises. Most accounting software can generate these forecasts if set up properly, or your finance team can maintain them in spreadsheets.
Accepting 60-day payment terms from large clients because they demand it isn't inevitable. Many businesses successfully negotiate more favourable terms through staged payments, milestone billing, or early payment discounts.
Instead of accepting 60-day terms on a $180,000 project, structure it as three $60,000 milestones with payment due within 14 days of each milestone delivery. This converts a 60-day receivables cycle into a 20-day average cycle, releasing $120,000 in working capital.
Not every client will accept this, but more will than you expect if you're confident in proposing it. The clients who refuse are often those creating the most cash flow pressure, suggesting they're exactly the clients where you need better terms.
Excessive work in progress in service businesses or inventory in product businesses absorbs cash without improving service delivery or sales capability.
Service businesses should invoice at least fortnightly or implement milestone billing that converts work in progress to invoices faster. Waiting until month end or project completion to invoice creates unnecessary working capital absorption.
Product businesses should implement just-in-time inventory practices where feasible, negotiate better terms with suppliers to reduce cash tied up in stock, and regularly review slow-moving inventory that's absorbing cash without generating sales.
The goal isn't zero inventory or zero work in progress, which would paralyse operations. The goal is optimising levels to match actual needs rather than letting them build unchecked as revenue grows.
Hiring ahead of revenue is necessary for growth, but hiring too far ahead or hiring in large batches creates unnecessary cash pressure.
Instead of hiring three people at once anticipating growth, hire one person, validate that growth materialises, then hire the next. This staggers the cash outflow and reduces risk if growth doesn't materialise as expected.
Additionally, consider whether contractors, part-time employees, or embedded services can bridge gaps during growth phases before committing to full-time permanent hires. The flexibility of scaling these resources up or down as revenue fluctuates reduces working capital pressure.
Banks and lenders provide working capital facilities like overdrafts, lines of credit, or invoice finance when your business is performing well and you don't desperately need them. When you're in crisis, these facilities become expensive or unavailable.
Arrange working capital facilities during strong performance periods, even if you don't immediately draw on them. Having $150,000 available in overdraft or $250,000 in invoice finance capacity provides buffer when growth accelerates and absorbs cash.
The cost of maintaining these facilities is modest, typically 1 to 2 percent annually on undrawn amounts. This is worthwhile insurance against growth-driven cash crunches.
Some growth patterns consume so much working capital that internal cash generation can't sustain them, requiring external funding.
Rapid growth above 40 percent annually typically requires external working capital support unless you have exceptional payment terms or low inventory requirements. The absolute dollar working capital increase overwhelms internal cash generation.
Large contract wins that represent 25-plus percent of annual revenue in a single project often require invoice finance, progress payment arrangements, or working capital loans to fund delivery before payment arrives.
Geographic or product expansion into new markets or offerings requires upfront investment in inventory, marketing, and capability before revenue materialises, justifying growth funding.
Seasonal businesses with concentrated revenue periods benefit from working capital facilities that fund operations during low seasons and repay during peak seasons.
External funding for growth isn't a sign of poor management. It's a recognition that working capital absorption during growth often exceeds the pace of internal cash generation, and strategic funding accelerates growth that would otherwise be constrained by available cash.
Working capital absorption during growth eventually stabilises once growth rate moderates. A business growing 50 percent annually absorbs working capital aggressively. The same business growing 10 percent annually after reaching larger scale absorbs working capital modestly.
Additionally, as you gain experience managing cash through growth cycles, you develop systems and forecasting capability that reduce surprise and allow proactive management rather than reactive crisis response.
The businesses that navigate growth successfully are those that understand working capital dynamics, forecast cash needs accurately, arrange appropriate facilities before crisis, and accept that short-term cash pressure during rapid growth is normal and manageable rather than a sign of fundamental problems.
If your revenue is growing strongly but cash position is deteriorating, you're experiencing normal growth dynamics. The question is whether you have visibility into the working capital drivers and strategies to manage them effectively.
How much working capital should I budget for growth?
Estimate working capital requirements as a percentage of revenue increase. Most service businesses need 25 to 40 percent of revenue increase as additional working capital. Product businesses need 35 to 55 percent depending on inventory intensity. A business growing from $2 million to $3 million in revenue should budget $250,000 to $550,000 in additional working capital depending on model.
Will cash flow improve once growth stabilises?
Yes, once revenue growth moderates, working capital requirements stabilise and cash generation from operations catches up. The cash pressure is temporary during acceleration phases. However, if you fund growth with debt, you'll have ongoing repayment obligations even after growth stabilises.
Should I slow growth to improve cash flow?
Only if you're unable to secure working capital funding and the alternative is business failure. Deliberately slowing profitable growth to preserve cash is rarely optimal strategy. More commonly, the right answer is arranging appropriate working capital support to fund growth that creates long-term value.
How do I know if cash pressure is normal growth dynamics or a deeper problem?
Normal growth dynamics show strong revenue increase, improving profit margins, growing but not deteriorating receivables aging, and stable customer payment behaviour. Deeper problems show revenue growth but declining margins, receivables aging deteriorating with increasing overdue amounts, and customer payment delays indicating market stress. If fundamentals are strong and pressure is purely timing, it's growth dynamics.
What types of working capital funding work best for growth?
Invoice finance suits businesses with strong B2B receivables, releasing 80 to 90 percent of invoice value immediately. Overdrafts or lines of credit suit businesses with variable timing needs. Equipment finance suits businesses needing to fund physical assets. The right structure depends on what's absorbing cash in your specific situation.
Can better payment terms from suppliers help fund growth?
Yes, extending supplier payment terms from 14 days to 30 days releases working capital equivalent to roughly two weeks of purchases. This helps but rarely fully funds growth. Negotiate respectfully and maintain excellent payment reliability to preserve supplier relationships while optimising terms.
Reserve Bank of Australia. (2025). Small Business Finance Report: Working Capital and Cash Conversion Benchmarks.
Xero. (2025). Cash Flow Insights Report: Revenue Volatility and Cash Flow Stability Research.
Australian Bureau of Statistics. (2025). Business Indicators: Working Capital and Growth Patterns.
Australian Small Business and Family Enterprise Ombudsman. (2025). Growth Funding and Working Capital Access Report.
CPA Australia. (2025). Cash Flow Management Best Practices for Growing Businesses.
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