Busy order book, bigger team, record sales, and still a tight bank balance at the end of the month. If that sounds familiar, you are not alone. Cash flow problems in a growing engineering consultancy are common, and they rarely mean the business is failing. They usually mean growth is using cash faster than the work turns into money. This guide sets out the usual causes, shows with a worked example how much cash growth can absorb, and gives you steps to take this week.
Why profit and cash go separate ways when you grow
Profit is earned when the work is done. Cash arrives when the customer pays. In a consultancy, the gap between the two is filled by wages, which go out every month whether the invoice has been paid or not.
When sales are flat, that gap stays roughly the same size, so you barely notice it. When sales grow, the gap grows with them. Every extra pound of work means more salaries paid in advance, more unbilled hours and more invoices waiting to be paid. The profit and loss account looks healthy while the bank account gets tighter.
The usual causes of cash flow problems in a growing engineering consultancy
When we map how cash moves through a consultancy, the same causes come up again and again. Most firms have two or three of them at once.
1. Debtors grow with sales
If customers take, on average, 60 days to pay, you are always owed about two months of sales. Grow sales by half and the amount owed grows by half too. That extra money is cash you have earned but cannot spend. Our guide to how much cash is tied up by customers paying late shows how to work out your own figure.
2. Work done but not yet billed
Engineering projects often run for months with invoices only at a few milestones, or at the end. Every hour worked between milestones is unbilled work in progress. Larger projects, which tend to come with growth, usually mean longer gaps between invoices.
3. Invoices going out late
As the team grows, invoicing often still depends on one person collecting timesheets and getting a project lead to sign off. Invoices slip from the day the work finishes to the end of the week or month. Each day of delay adds a day to every customer’s payment terms. We cover the fix in same-day invoicing in Xero.
4. Hiring ahead of the fees
You win a large project and recruit two engineers. They start a month or two before they are fully billable, and their first invoiced work is not paid until one or two months after that. You may be paying a new salary for three or four months before it brings any cash in.
5. Fixed fees that overrun
Growth often brings bigger, fixed-fee bids. If a job takes more hours than were priced, the firm pays for those hours in salaries and gets nothing extra back. The overrun shows up as lower profit, but it hits cash first. Our guide on checking job margins shows how to spot this on your last ten jobs.
6. Tax bills sized on a better year
Tax deadlines are fixed, and growth makes the bills bigger. On GOV.UK’s published deadlines, a VAT return and payment are usually due one calendar month and seven days after the end of the VAT period, employers’ PAYE is due by the 22nd of the next tax month if you pay monthly, and Corporation Tax for companies with taxable profits up to £1.5 million is due nine months and one day after the end of the accounting period. A strong year means a larger Corporation Tax bill arriving long after the profit was made, often when the cash has already gone into growth. Ask your accountant how much to set aside for tax and when.
7. One customer that is too big
Winning a large client is good news, until it pays slowly or delays a sign-off. If one customer makes up a large share of your debtors, a single late payment can decide whether you can pay the month’s wages comfortably.
Worked example: how much cash growth can absorb
Take a made-up firm, Example Structural Design Ltd. Its sales grow from £2m to £3m in a year. Customers take 60 days on average to pay, and it typically has about 20 days of work done but not yet invoiced.
- Extra money owed by customers: £1m of extra sales × 60 days ÷ 365 = £164,384
- Extra unbilled work: £1m × 20 days ÷ 365 = £54,795
- Two new engineers hired three months before their work is paid for, at an assumed total cost of £65,000 each a year: 2 × £65,000 × 3 ÷ 12 = £32,500
Total: £164,384 + £54,795 + £32,500 = £251,679 of extra cash needed to support one year of growth.
If the firm makes a 10% profit on £3m, that is £300,000. Growth has absorbed about £252,000 of cash, so most of the year’s profit never reaches the bank. The firm is profitable and short of cash at the same time. The £65,000 is an assumption for the example; ask your accountant for your own full cost per employee.
The good news is that the same arithmetic works in reverse. On £3m of sales, each day knocked off the time between finishing the work and being paid releases about £8,219 of cash (£3m ÷ 365).
What to do this week
None of these needs new software or outside funding. They need an hour or two and someone to own them.
- Work out your debtor days. Trade debtors ÷ annual sales × 365. Compare it with your payment terms. The gap is how late, on average, you are being paid.
- List your unbilled work. For each live project, note the hours or value worked since the last invoice. Anything over a month old needs an invoice or a reason.
- Move to monthly billing on long projects. For new work, agree a deposit at order and monthly or stage payments, written into the quote. Our guide to payment terms wording has clauses you can adapt.
- Invoice on the day the work or stage finishes. Make it a rule and fix whatever holds it up, usually timesheets or sign-off.
- Build a 13-week cash forecast. One row per week: cash in from expected payments, cash out for wages, suppliers, VAT, PAYE and rent. Update it every Monday. It shows a tight week while there is still time to act.
- Set a hiring trigger. Before recruiting, check the forecast shows you can carry the new salary for at least three months before the first related invoice is paid.
- Check your largest debtor. If one customer makes up a large share of what you are owed, call their accounts team now to confirm their invoices are approved and scheduled.
When to get help
If the forecast shows a gap you cannot close with the steps above, it helps to see every leak ranked by £ value so you fix the biggest first. That is what our Insight review does over two weeks, covering late payment, invoicing, pricing, quoting and admin. You can see the process on our how it works page. For tax, borrowing or anything regulated, speak to your accountant.
Find out how much cash your business is holding
Our free leak calculator takes four numbers and shows how much cash your late payers and slow invoicing are tying up, in about two minutes. If the figure is bigger than you expected, book a free 30-minute call and we will look at where to start.
