Quick answer
Growth eats cash because a growing business pays for wages, stock and materials before customers pay for the extra sales, carries more debtors and stock at every level of turnover, buys equipment upfront, and pays provisional tax that can lag behind actual profit. A simple estimate: each extra dollar of monthly sales needs working capital equal to its direct costs multiplied by the months between paying costs and collecting payment.
Key points
- Working capital grows with sales: more debtors, more stock, more wages paid in advance of receipts.
- Upfront spending on equipment, fit-out and recruitment comes before the revenue it enables.
- Standard-option provisional tax lags a year, so strong growth brings a large terminal tax bill later.
- Estimate the working capital each extra dollar of sales needs, then plan funding to match.
- Arrange funding while the business is performing well, not after cash runs short.
There’s a moment in many growing businesses when the owner looks at a record month of sales and a bank balance lower than it’s been all year, and wonders what’s gone wrong. Usually nothing has. The business is doing exactly what growing businesses do: turning cash into work, stock and receivables faster than customers turn it back into cash. Understanding the mechanics is the first step to funding it calmly instead of lurching from one tight week to the next.
Where does the cash go when you grow?
Four places, mostly:
1. Work in progress and debtors. You pay staff weekly and suppliers monthly, but customers on 20th-of-the-month terms pay five to seven weeks after invoicing, sometimes longer. Every extra dollar of monthly sales adds roughly a month and a half of costs to the amount you’re carrying.
2. Stock. A bigger business holds more stock. If you need 60 days of stock and sales rise by $50,000 a month, stock rises by around $100,000 at cost, paid for well before it sells. See stock and supplier terms.
3. Upfront investment. New vehicles, equipment, premises fit-outs, recruitment and training all come before the revenue they enable.
4. Tax lag. On the standard provisional tax option, instalments are based on last year’s tax plus 5%. A year of strong growth means instalments well below actual tax, and the difference arrives as terminal tax the following February (or April with an agent), just when the next stage of growth needs funding.
How much working capital does each dollar of growth need?
A simple formula gets you close:
Working capital needed = extra monthly direct costs × months between paying costs and collecting payment + extra stock
Illustrative example. A New Plymouth steel fabrication business turns over $250,000 a month excluding GST. It wins a contract with a large customer worth $80,000 a month, on 20th-of-the-month terms, with direct costs (wages, steel, consumables) of 65% of sales.
| Item | Amount |
|---|---|
| Extra monthly sales | $80,000 |
| Extra monthly direct costs (65%) | $52,000 |
| Months between paying costs and collecting (average) | 1.8 |
| Extra working capital for debtors and work in progress | $93,600 |
| Extra steel stock held (about 30 days of extra usage) | $35,000 |
| Total extra working capital | about $128,600 |
| Plus GST timing on the invoice basis (paid before the customer pays) | Roughly $12,000 at any one time |
The contract is profitable: about $28,000 a month of extra gross profit. But the business needs around $130,000 of extra cash to carry it, and that’s before any new equipment. A business with $60,000 in the bank can’t take that contract without funding, however profitable it is.
Why do fast-growing businesses get caught out?
Because the profit and loss looks fantastic. Sales are up, margins are holding, profit is higher than ever. But profit and cash are different things, and in a growing business the gap between them widens with every month of growth. Owners who watch the profit and loss but not the cash forecast tend to discover the problem on a Wednesday when payroll is due on Thursday.
The tax lag makes it worse. Picture a business whose profit doubles in a year. On the standard option it pays provisional tax based on the old, smaller profit, then faces a terminal tax bill for the difference early the following year, while also paying higher provisional tax for the new year based on the bigger profit. In that second year, it can be paying close to two years’ worth of growth-driven tax in a few months.
What are the warning signs that growth is outrunning cash?
They tend to show up in the same order:
- The tax account starts being used to cover a payroll or a supplier, “just this once”.
- Debtor days rise as you take on bigger customers on longer terms.
- Supplier payments stretch, and statements arrive with overdue notices.
- The owner’s own pay gets skipped to keep the business account above zero.
- The overdraft or credit card becomes permanent rather than occasional.
Any one of these on its own may be a blip. Two or three together, in a month when sales are at a record, is the classic pattern of growth outrunning working capital. Our monthly numbers check is designed to catch it early, while there’s still time to choose a response rather than have one forced on you.
How can you reduce the cash growth needs?
Before reaching for funding, squeeze the working capital:
- Ask for deposits or progress payments on large jobs and new contracts. See payment terms.
- Invoice the day work is done, not at month end.
- Negotiate supplier terms to match your customer terms where you can.
- Hold leaner stock for the new work, with agreed delivery schedules from suppliers.
- Use the payments basis for GST if eligible, so you don’t pay GST on invoices customers haven’t paid. See GST accounting basis.
- Review your provisional tax option with your accountant. Estimation or AIM can bring tax payments closer to actual profit, so there’s no surprise later.
- Check your prices before taking on big contracts: a large customer at a thin margin can consume more cash than it earns. Your break-even point tells you how much room you have.
How should growth be funded?
Match the funding to what it pays for:
| Growth need | Funding approach that usually suits |
|---|---|
| Debtors and work in progress | A facility that can be drawn and repaid as receipts arrive |
| Stock builds | Short-term working capital sized to the stock cycle |
| Equipment and vehicles | Term funding over the asset’s working life |
| Fit-outs and premises | Term funding, often secured on property for larger amounts |
| Tax catch-up after a strong year | Short-term funding repaid from the coming year’s trading, or an instalment arrangement with Inland Revenue |
For equipment, Investment Boost lets businesses claim 20% of the cost of eligible new assets first available for use from 22 May 2025 as an immediate deduction, which helps the tax position, though not the upfront cash. Our page on funding a growth plan covers how to test whether the plan pays for its funding.
When is the right time to arrange funding?
Earlier than feels necessary. The best time is when the business is trading well, the forecast shows the growth coming, and there’s time to compare options. The worst time is the week the contract starts and payroll doesn’t balance. A business that arranges working capital before it needs it can say yes to the next contract with confidence. You can check what you could qualify for in about a minute, with no credit check.
What does a growth-ready business look like?
- A rolling 13-week cash forecast that includes the new work, tax dates and loan repayments.
- Tax money set aside weekly in its own account; the GST & provisional tax set-aside planner helps size it.
- Clear payment terms, prompt invoicing and a chasing routine.
- Prices that deliver a healthy margin on new work, not just more volume.
- A cash reserve for surprises, and a funding facility for planned growth.
Grow without the cash squeeze
Profitable growth is worth funding properly. If your forecast shows a working capital gap, an equipment purchase or a tax catch-up that would slow you down, talk to us before it bites. We look at unsecured options for trading businesses, typically $5,000 to $500,000 and sized on turnover and bank statements, and loans secured on residential or commercial property from $20,000 to $5,000,000. Enquiring won’t touch your credit file, your enquiry isn’t shopped around to other lenders, and a real person on our New Zealand team reads it. Bring your forecast, answer the form accurately, and the first call can get straight to what’s realistic. See if you qualify.
Frequently asked questions
Why does my growing business always seem short of cash?
Because costs come before receipts. Each new customer or contract means paying wages and materials now and collecting weeks later, so the faster you grow, the more of your cash is tied up in work that hasn't been paid for yet.
How do I estimate the working capital growth will need?
Multiply the extra monthly direct costs by the number of months between paying those costs and collecting from customers, then add any extra stock you'll hold. A cash flow forecast refines the estimate.
Does provisional tax make growth harder?
On the standard option, instalments are based on last year's tax plus 5%, so a year of strong growth often brings a large terminal tax bill the following February or April. The estimation or AIM options can bring tax closer to actual profit.
Should I slow growth to protect cash?
Sometimes being selective helps: prioritising customers who pay promptly, asking for deposits on large jobs or pacing hiring. But if the growth is profitable, funding the working capital is usually better than turning work away.
What kind of funding suits working capital?
Funding that matches the cycle it supports: facilities that can be drawn and repaid as receipts arrive for debtors and stock, and term funding spread over the asset's life for equipment and fit-outs.