Why cash flow matters more than your margin: The strategic decision most business owners miss

I was having coffee with a client last week. Well, I had coffee. She was too stressed to drink hers, which should have been my first clue.

She’d just spent three hours negotiating with a packaging supplier. Back and forth on email, then a phone call, then more emails. She’d got them down 5% on the quote. She was quite pleased with herself, actually. Felt like she’d protected her margin, done the responsible business owner thing.

“That’s great,” I said. “When did you last look at your aged debtors report?”

Silence.

Turns out she had £18,000 worth of invoices just sitting in her system. Not sent. Plus another £8,000 owed from last month that she hadn’t chased. “They’re good clients,” she said. “They’ll pay eventually.”

And £22,000 worth of stock sitting in the warehouse for six weeks because she hadn’t got round to the marketing campaign she’d planned.

I didn’t say what I was thinking, which was “Geez, you’ve just spent three hours to save maybe £200 while nearly £50,000 is just … sitting there doing absolutely nothing.”

What I actually said was “Hmmm, I’m not sure the packaging discount is where your biggest opportunity is right now.”

The thing nobody tells you about running a business

When I was running my ice cream business, I was obsessed with margins. I’d spend ages working out exactly how much each scoop cost me. I had spreadsheets. I had systems.

And all the while, the business was slowly strangling me.

Not because the margins were wrong – they were fine. But because I had no idea what my cash flow looked like from one week to the next. I’d have a great week of sales, feel flush, spend money on supplies. Then two weeks later I’d be scrambling to make payroll..

It was exhausting and lonely. I felt completely out of control, like I’d created this monster that was consuming everything – my time, my energy, my family life.

And I thought it was just me being rubbish at business.

It wasn’t. It was because I was focusing on the wrong thing.

What successful businesses understand

Now that I work with business owners on their finances, I see this pattern everywhere. Smart people who can tell you their margin to two decimal places but have no real grip on their cash flow.

A 5% margin improvement is great. But it’s meaningless if the invoice goes out two weeks late and gets paid a month after that. The price you charge matters less than how quickly you turn that price into actual cash you can use.

You can even see this in some well-known high street businesses if you dig under the surface.

Hotel Chocolat are a great example. They bootstrapped for years, turning down private equity approaches because PE firms typically want their money back in 2-5 years, which would have forced Hotel Chocolat to grow faster than felt right for their business. Instead, they were religiously disciplined about cash flow and grew at their own pace.

In 2010, they even raised £4 million through a “chocolate bond” – offering returns payable in chocolate rather than cash. A brilliant and innovative approach.

They grew methodically, making sure cash from existing sales funded the next phase. When they went public in 2016, they floated at a £167 million valuation, with the founders maintaining significant control. They’d grown on their terms because they never let cash flow pressure force their hand.

The reactive decision trap

I’m working with a tech consultancy right now. Smart founder, genuinely useful product. They’ve invested in getting set up properly – website, CRM, marketing, office space.

But for two quarters running, they’ve been surviving on VAT refunds and credit cards, as well as some additional lending secured with personal guarantees. They’re betting everything on a couple of big contracts landing.

Maybe they will. But what if those contracts take three months to negotiate instead of three weeks? What if payment terms are 45 days from invoice?

Without a cash flow forecast, they won’t see the problem until they’re in the thick of it. Then decisions become reactive. They’ll accept unfavorable terms, discount to get cash in, rack up credit card balances at rates they can’t afford. Not because those are good business decisions, but because they’re out of options.

What poor cash flow actually costs you

Cash flow pressure shows up as:

• Short-term borrowing at high interest rates because you need cash now
• Discounting you can’t afford to get money in faster
• Accepting unfavorable payment terms because you need the work
• Missing supplier discounts because your cash is too tight
• Saying no to growth opportunities because you can’t fund them
• Constantly firefighting instead of building

Every one of those is a cost. And all stem from the same cause: making decisions based on immediate cash pressure rather than strategic choice.

The better solution: generate cash from within

The businesses that avoid this trap treat cash flow as strategic, not operational. They think about:

Getting invoices out faster. Not just “when the work is done” but actively planning the invoicing schedule. For longer projects, they invoice at milestones. Cash comes in throughout, not in one lump weeks later.

Getting paid faster. Following up on overdue invoices within days. Making it easy to pay. Thinking about the payment process from the customer’s perspective.

Moving stock faster. For product businesses, cash tied up in unsold stock is cash you can’t use. Better forecasting, marketing, and sell-through aren’t just sales issues – they’re cash flow issues.

Spending strategically. Timing expenditure deliberately. Not launching a marketing campaign the same week as a big payment unless you’ve forecasted you can afford both.

Building buffers before you need them. When cash is strong, that’s when you build reserves. Businesses that weather storms prepare during calm weather.

What this looks like in practice

You don’t need complex systems. Just think about cash flow as strategically as you think about pricing.

Forecast your cash 13 weeks ahead. That’s a full quarter, which gives you enough visibility to spot problems early while keeping forecasts accurate. Not a detailed P&L. Just what cash is coming in, what’s going out, and what you’ll have left each week. Update it weekly. You’ll spot problems well before they arrive, when you still have options.

Measure the gap between invoice and payment. If your terms are 30 days but the average is 45, that 15-day gap is where your cash is leaking. Fix the gap and you’ve given yourself a cash flow boost without changing your business model.

Use cash flow as a decision-making filter. Before committing to anything – new hire, marketing spend, new product line – ask: how does this affect cash, and when? Not just: will this be profitable eventually? But: can we afford the cash timing?

The strategic advantage nobody talks about

Businesses who get this operate differently. They’re calmer. More confident. They make better decisions because they’re not making them under pressure.

They don’t panic when a big client pays late – it’s irritating but doesn’t break them, because they’ve forecasted conservatively and built buffer.

They don’t waste time negotiating tiny margin improvements while letting major cash flow leaks go unfixed. They know where the real leverage is.

And when they do choose to raise funding, they’re doing it strategically, from strength, on terms that work for them. Not because the bank balance is about to hit zero.

That’s the difference. Not profit versus loss. But strategic versus reactive. Controlled versus chaotic. Sleeping at night versus lying awake at 3am wondering how you’ll make payroll.

The real lesson

Hotel Chocolat kept control because they planned for cash from the start. They understood the constraint wasn’t ideas or ambition or product quality. It was cash. So they made cash the strategic priority and built everything else around it.

You might never raise millions through chocolate bonds. But the same principle applies to every business decision you make.

Poor cash flow management forces your hand. It pushes you to making expensive decisions. It keeps you in survival mode instead of growth mode.

Better cash flow management doesn’t just prevent crisis. It creates strategic advantage. It gives you options. And that advantage compounds over time in ways that a 5% margin improvement never will.

So the next time you’re spending three hours negotiating a small discount, ask yourself: is this where my biggest opportunity actually is? Or am I focusing on the wrong thing while the real issue quietly strangles my business?

Because understanding your cash flow strategically is probably the most valuable thing you can do for your business this year. Even if it doesn’t feel as immediately satisfying as getting 5% off your packaging.