How Much Cash Will Your Growth Eat? Three Sums to Find Your Speed Limit

Growth has to be paid for before it pays you back.

Every extra pound of sales ties up cash in unpaid invoices and stock before the customer pays. Grow quickly and that cash goes out faster than profit comes in. This is how a business can have its best year ever on paper and still struggle to pay the VAT bill.

The good news is that you can work out, in advance, how fast your business can grow on its own cash. It takes three sums.

Step 1: cash tied up per £1 of sales

Add your debtors and stock, take away what you owe suppliers, and divide by annual sales.

For Brightwater Fabrications, the fictional example from our Levers for Growth guide: debtors of £658k plus stock of £296k, less creditors of £263k, divided by £4m of sales. That's 17p for every £1 of sales.

Step 2: cash needed to grow

Multiply the extra sales in your plan by that figure. Growing from £4m to £5m means £1m of extra sales, so Brightwater ties up about £173,000 in working capital. That's before any new people, equipment or premises.

Step 3: your self-funded speed limit

Divide the profit you keep per £1 of sales (after tax and dividends) by the cash tied up per £1.

Brightwater keeps £150,000 a year, or 3.75p per £1 of sales. 3.75p ÷ 17.3p = about 22% a year. That's how fast it can grow from its own cash. Any faster and it needs outside funding, better working capital, or both.

What to do if your plan beats your speed limit

You have three options, and the best plans use all of them.

1. Fund it from inside first. Brightwater's customers take 60 days to pay. Cutting that to 45 releases about £164,000, nearly enough to fund the whole £1m of growth without borrowing a penny.
2. Slow down, or grow differently. Growth through price and margin needs far less working capital than growth through volume.
3. Arrange funding early. Lenders say yes more easily, and on better terms, when the numbers look good. Ask while you're ahead of plan, not when the cash is already tight.

The warning sign most owners miss

Running ahead of budget feels like good news. But if sales are more than 10% ahead for two months running, check that cash, people and capacity can keep up, and refresh the forecast. A 13-week rolling cash forecast is the simplest way to see the squeeze coming.

Do this next

Run the three sums on last year's accounts. If your growth plan beats your speed limit, plan the funding now, while it's a choice rather than an emergency.