The hidden cash flow leaks that drain your business

Growing businesses face a puzzling situation – sales are increasing, but bank balance remains low. This cash flow disconnect leaves many business owners wondering where their money goes each month.

The growth paradox

For many New Zealand family businesses, growth brings unexpected challenges. As revenue increases, available cash often decreases, creating a cash flow squeeze when expansion needs more resources. Recent studies show that 82% of business failures come from poor cash flow management, not lack of profitability.

A common scenario is that a business reaches $1.2 million in revenue, much higher than the previous year, yet the owner constantly worries about making payroll. It feels like success is making the business poorer, which makes no sense… until the hidden cash leaks are found.

The business owners who are good at sales can miss subtle cash flow leaks that undermine growth. These leaks rarely show up clearly on profit and loss statements, making them difficult to spot.

One of my friends, the former CFO of a growing group, told me a story about how she improved their cash position. The headquarters provided financial support to project teams by lending money. Each team could ‘reserve’ a portion of cash for specific project needs.

This created a problem: by allowing each team to hold onto allocated funds, headquarters ended up with reduced available cash. My friend implemented Internal Rate of Return (IRR) on cash investments for each team. IRR measures investment profitability over time. This created an incentive for teams, and the result was significant: headquarters dramatically improved their cash position. While this may not work for every business, it shows how creative problem-solving can improve cash management.

Here are three common examples.

Leak 1: The accounts receivable lag

For service businesses especially, poorly managed receivables create significant cash flow issues. Many businesses focus so much on making sales that they neglect crucial follow-through of collecting payment.

Warning signs appear gradually: average payment times exceeding industry norms, no formal collection process, inconsistent invoicing, high percentage of overdue accounts, and no early payment incentives. A typical consulting firm might discover that the average payment time has reached 60+ days despite 30-day terms—effectively providing free financing to clients while struggling with their own cash needs.

Start addressing this with proven strategies: immediate invoicing upon completion, clear payment terms on all invoices, early payment discounts (2% for payment within 10 days works well), automated reminders, and requiring deposits for new clients or large orders.

Policies offering discounts for prompt payment, with regular follow-ups, can reduce collection time. Cutting the average collection time from 47 to 28 days could bring tens of thousands back into your business without changing anything else.

Also consider modern payment technologies: integrated payment links in digital invoices, direct debit options, or buy-now-pay-later services where the financing company pays you immediately.

Leak 2: Unbalanced inventory management

For product-based businesses, inventory represents cash sitting on shelves. When sales increase, the natural instinct is to increase stock levels—often disproportionately to actual needs.

Warning signs appear gradually: growing stock without corresponding sales increases, dusty products in the warehouse, last-minute rush orders to suppliers, and no clear inventory tracking. Take a retail business with significant capital tied in slow-moving inventory that hasn’t been properly evaluated in years. While some items might be best-sellers requiring consistent stock, others could be tying up valuable cash.

Implementing an inventory classification system can change cash position. Start by categorising products using ABC analysis:

• A items: top 20% of products generating 80% of revenue
• B items: mid-tier products with moderate turnover
• C items: slow-moving products representing significant cash investment

For each category, establish appropriate stock levels and reorder points. For A-items, maintain healthy stock with frequent reorders. For C-items, reduce quantities or consider elimination.

One approach to managing inventory involves consignment stock arrangements. Under this model, suppliers retain ownership of inventory until it is sold, effectively transferring inventory holding costs and financial risk. This strategy allows businesses to display and sell products without tying up substantial working capital. Suppliers benefit from guaranteed market exposure, while businesses enjoy improved cash flow and reduced financial strain.

Beyond consignment strategies, businesses can further optimise their inventory management to free up significant cash within months. Proper control systems can unlock capital without compromising order fulfilment capabilities. The freed resources can be immediately redirected towards growth initiatives, transforming inventory from a financial burden to a strategic asset. Consider exploring alternative arrangements with suppliers that minimise your capital investment while maintaining product availability.

Leak 3: Hidden operational inefficiencies

The most challenging leak involves subtle operational inefficiencies that silently drain resources for both product and service businesses. As organisations grow, they often maintain processes designed for smaller operations, creating cash-consuming bottlenecks.

You might notice staff regularly working overtime, paying rush fees to suppliers, increasing error rates, multiple systems that don’t communicate, and growing customer service issues. Manufacturing businesses might spend thousands extra monthly on premium shipping because production scheduling isn’t aligned with order patterns.

Begin addressing with a simple process mapping exercise to visualise key workflows. Identify bottlenecks where work piles up, redundant steps, manual processes that could be automated, and areas requiring frequent rework. Focus first on cash-generating processes like order fulfilment and client onboarding. Small improvements here often yield immediate cash flow benefits.

The cash flow dashboard: An early warning system

Implementing a simple cash flow dashboard provides visibility for business owners before problems become critical. Unlike complex financial reports, an effective dashboard focuses on leading indicators:

• Inventory turnover ratio (cost of goods sold divided by average inventory)
• Days sales outstanding (accounts receivable divided by average daily sales)
• Cash conversion cycle (days inventory plus days receivable minus days payable)
• Weekly cash flow forecast (13-week rolling projection)
• Available working capital (current assets minus current liabilities)

Checking cash flow metrics weekly instead of waiting for month-end reports can completely change your business. You can spot potential issues 30-45 days before they impact your bank account, giving time for preventive action.

Start plugging

If these hidden leaks sound familiar, here’s how to take action:

1. Conduct a cash flow audit to examine where cash is currently tied up
2. Implement weekly cash flow monitoring rather than waiting for month-end surprises
3. Optimise inventory by classifying products and adjusting stock levels
4. Tighten receivables processes with clear terms and consistent follow-up
5. Map key operational workflows to identify and eliminate inefficiencies

By identifying and addressing hidden leaks, you can unlock the capital needed to fund projects and ideas without taking unnecessary debt or equity dilution.

Contact Yi Ping at Gilligan Sheppard, for a confidential discussion about identifying and addressing specific cash flow challenges in your business. Email yiping@gilshep.co.nz or call +64 9 309 5191 to get started.

Edited by Yi Ping.