Here is what landed in my inbox this week:
“David, we’re growing 60% year on year and I have never been more stressed. Every month we sell out, every month I’m scrambling to fund the next production run, and my accountant keeps telling me we’re ‘profitable’ while my bank balance says otherwise. Everyone congratulates us on the growth. It feels like we’re dying. What am I missing?”
You are not missing anything. You have correctly identified that you are in danger. I want to be direct. This is a serious issue and me giving you a reassuring answer would be irresponsible.
Growth is the most common cause of death in consumer brands. Not slow growth. Fast growth.
You are describing the exact condition that took Trapstar from £40 million in revenue to administration. Their own advisers put it in writing: the revenue decline was driven by “working capital constraints impacting inventory availability, rather than any underlying demand or brand performance.”
The demand was there. The brand was intact. Rihanna, Jay-Z and Stormzy still wore it. They just ran out of money to make the thing people wanted to buy. By the time administrators were appointed, 57 jobs were at risk and the business was being sold for parts.
So let me explain what is happening to your cash, why your accountant is technically right, and what you do about it starting this week
Why Profitable Companies Run Out Of Money
Profit and cash are measured on completely different clocks. Your P&L records a sale the moment you invoice. Your bank account records it the moment the money lands. In a fast-growing physical product business, those two events can be separated by four months, and in between you have already spent the cash on the next production run.
Say you are doing £3 million in revenue at 60% gross margin, growing 60% a year. Your accountant shows you a healthy P&L. Here is what is actually happening to your cash.
The cash conversion cycle, step by step:
