Overtrading Risk Calculator

This page answers the question that catches out successful businesses: how much cash does growth actually consume before it produces any. The mechanism is simple and almost entirely invisible from a profit and loss. When you win additional work you pay for the materials, the wages and the stock immediately, then wait for the customer to pay, and the gap between those two events has to be funded out of your own money. The faster you grow, the wider that funding requirement becomes, which is why a profitable business with a full order book can run out of cash at the exact moment it looks most successful. The calculator turns your debtor days, stock days and creditor days into a single figure, the working capital consumed per dollar of revenue, then applies it to your growth target to produce a cash requirement. Against that it sets the retained profit the business actually generates, and the difference is the funding you need to arrange. It also works the problem backwards to give the growth rate you could fund from your own profit, which is usually a good deal lower than the rate being planned. None of this argues against growing. It argues for knowing the number before you commit, because funding is far easier to arrange in advance than in the middle.

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Growth Consumes Cash Before It Produces Any

The order is what matters. You buy materials, you pay wages, you deliver the work, you invoice, and then you wait. On the worked example the whole sequence takes 79 days, and every one of them is funded out of your own money.

At a steady size that is manageable, because the cash coming in from last quarter's work funds this quarter's. Growth breaks the pattern: this quarter's work is larger than last quarter's, so the money coming back is never enough to fund what is going out. The faster the growth, the wider the shortfall, and the shortfall keeps widening for as long as the growth continues.

Worked Example: A 60% Plan That Needs $165,746.58

The business turns over $1,850,000.00 at a 40% gross margin and a 5% net margin. Customers pay in 55 days, stock sits for 70 days, and suppliers are paid in 30.

Those three numbers give 21.64 cents of working capital per dollar of revenue: 15.07 cents in debtors, plus 11.51 cents in stock, less 4.93 cents of supplier credit.

Growing 60% adds $1,110,000.00 of revenue, which consumes $240,246.58 of working capital. Winning 40 new customers at $450.00 each costs another $18,000.00. Total cash required: $258,246.58.

The business generates $92,500.00 of retained profit. The gap is $165,746.58, and it has to come from somewhere before the growth arrives, not after.

The Rate You Can Actually Afford

Run the arithmetic backwards. Retained profit of $92,500.00 less $18,000.00 of upfront costs leaves $74,500.00 for working capital. At 21.64 cents per dollar, that funds $344,208.86 of additional revenue, which is 18.61% growth.

That is the honest number. The business can grow at about 19% a year from its own resources. It plans to grow at 60%. Neither figure is wrong, but they require completely different preparation, and only one of them can be done by accident.

Fix The Cycle Before You Borrow

Borrowing is the obvious answer and rarely the first one to reach for. The cash cycle itself is usually the cheaper lever.

Ten days off debtor days releases 2.74 cents per dollar of revenue. Ten days off stock releases 1.64 cents. Ten days more supplier credit releases another 1.64 cents. Applied to the grown revenue, those three together are worth $178,410.96, which more than closes the gap on its own.

None of that requires a bank, none of it costs interest, and all of it improves the business permanently rather than for the term of a facility. Deposits and progress payments on larger jobs are particularly effective, because they remove the funding requirement for that portion of the work entirely. Our Days Sales Outstanding Calculator and Cash Conversion Cycle Calculator model those changes in detail.

The Same Answer From The Ratio Side

This page derives the growth limit from the cash cycle. Our Sustainable Growth Rate Calculator derives it from return on equity and retention, which is the classic ratio approach.

Both are answering the same question and the two rarely agree exactly, because they measure different constraints. The ratio version assumes the balance sheet can expand proportionally with borrowing available on the same terms. This version assumes it cannot, and asks only what your own cash will support. For an owner-managed New Zealand business without ready access to additional funding, the cash cycle version usually binds first, and it is the one to plan against.

If You Cannot Fund It

There are only four honest options, and hoping is not among them. Arrange the funding in advance, using our Business Loan Structure Calculator to compare how to structure it. Change the terms, so the work funds itself through deposits and progress claims. Grow at the rate you can fund. Or improve the margin, which raises retained profit and lifts the self-fundable rate directly.

Taking the work anyway and expecting it to resolve is the option that ends businesses, and it does so at the point when the order book is full, the staff are busy and everything looks like it is going well. Check the number before you commit, and build a buffer with our Business Cash Buffer Calculator so a good month does not become a crisis.

Related NZ Business Growth Calculators

• Sustainable Growth Rate Calculator: the same limit derived from the ratios.
• Cash Conversion Cycle Calculator: the cycle this page prices.
• Working Capital Calculator: the money currently tied up.
• Business Cash Buffer Calculator: the reserve that absorbs the shock.
• Business Health Check Calculator: whether the cycle is the real weakness.
• How to Price a Job: the background to this calculation.