Why Your Business Sells a Lot but Has No Money Left

It's one of the most common things business owners say: "We sell well, but I don't know where the money goes." The month closed with record sales, the team worked overtime, customers are happy, and the bank account has no more money than it did six months ago. Sometimes less.

It isn't bad luck, and it doesn't mean the business doesn't work. Almost always, selling and earning are two different things, and between them there are leaks that don't show up in the sales report. The report tells you how much came in the door. It doesn't tell you what it cost to bring it in, how much is still uncollected or how much is stuck in the warehouse.

What's the difference between selling and making money?

A sale is the price the customer agreed to pay. Profit is what's left after subtracting the cost of the product, labor, shipping, commissions, discounts, rent and everything the business spends to exist. And cash flow is something else again: it's the money actually sitting in the account, and it depends on when you get paid and when you pay.

A business can have high sales, low profit and negative cash flow all at once. It happens to the distributor who sells on 60-day credit and pays suppliers in 15. It happens to the repair shop that charges well for parts but gives away the labor. It happens to the store that sells a lot on promotion and barely covers its cost. In all three cases, the sales report looks healthy.

Where does the money go in a business that sells well?

• Margins nobody has reviewed. The price was set two years ago and the supplier's cost has gone up three times since. Every sale leaves less than the last one and nobody notices because the volume hides the drop.
• Uncontrolled discounts. Every salesperson gives their own discount to close, and added up they eat a whole month's margin. A discount doesn't show up as an expense: it shows up as a sale that looks normal.
• Growing receivables. You sell, you invoice and you wait. If customers pay later and later, your money is financing their business while you borrow to cover payroll.
• Inventory that doesn't move. What you paid for merchandise that has sat in the warehouse for months is money that isn't in the bank. It also takes up space, gets damaged or becomes obsolete.
• Hidden operating costs. Rework, returns, rush shipping, overtime and shrinkage. Each one looks small, but together they can be the difference between making and losing money.

Almost no business has just one of these leaks. The norm is two or three at once, each one looking manageable on its own.

The sales report tells you how much came in. Only your margins, your collections and your inventory tell you how much stayed.

How do you find the leak with your own numbers?

You don't need an audit to get started. You need four figures from the last three months: the real margin per product or service, meaning sale price minus current cost, not last year's; total discounts given; the average number of days customers take to pay you; and the value of inventory that has gone more than 90 days without selling.

Put those four figures on one sheet and the problem almost always shows up. A star product that actually earns 4 percent. A large customer who pays in 75 days. A salesperson who gives twice the discount of everyone else. A warehouse holding the equivalent of two months of payroll sitting on the shelves.

The problem is that in most businesses those figures live in different places: the point of sale, the invoicing system, the warehouse spreadsheet and the collections notebook. Pulling them together takes days, so it gets done once a year, when it's already too late. A custom-built dashboard can connect those sources and show you margin, collections and slow inventory every week without anyone having to build the report.

What do you do once you find the leak?

Tackle one at a time, starting with the biggest. If it's margin, review the price of your 20 best-selling products. If it's discounts, set a cap per salesperson and require approval for anything above it. If it's collections, send automatic reminders before and after the due date. If it's inventory, run an orderly clearance and set stricter purchasing rules.

What matters is to stop measuring the business only by what it sells. A month with lower sales and better margins can leave more money in the account than a record month. When you review profit and cash flow as often as you review sales, the question of where the money goes stops being a mystery.