It is one of the more frustrating situations for a business owner.

Sales are increasing, everyone seems busy and there is plenty of work coming through the door. Yet the bank balance does not seem to improve, and, in some cases, cash becomes even tighter as the business grows.

The problem is that increasing sales does not necessarily mean increasing profits or cash.

Start with your profit margin

Suppose a business sells something for £100 that costs £60 to provide. The £40 difference contributes towards overheads and ultimately profit.

If the cost increases to £70 but the selling price remains £100, the business is still generating exactly the same turnover from each sale, but its margin has fallen from £40 to £30.

The business now needs considerably more sales simply to produce the same level of profit.

This can easily happen when wages, materials, subcontractor costs, energy and other expenses increase gradually but selling prices remain unchanged.

Are all your customers profitable?

Another common problem is assuming that all sales are equally valuable.

One customer may be straightforward to service and pay promptly. Another paying exactly the same price might require additional meetings, telephone calls, revisions and administration, and then take two months to pay.

The turnover figures may look identical, but the profitability of the two customers could be quite different.

The same principle applies to individual products and services. Knowing which parts of the business produce the best margins can help management decide where future effort should be directed.

Growth can consume cash

Rapid growth can also create its own cash flow problems.

A growing business may need additional employees, equipment or stock before it receives payment from customers. VAT, PAYE and other liabilities may also increase.

The result can be the strange situation where the accounts show a profitable and growing business while its bank account remains under constant pressure.

This is why profit and cash need to be monitored separately.

When did you last review your prices?

Businesses sometimes increase prices only when rising costs leave them with little alternative.

Regular small increases may be easier to manage than waiting several years and then needing a substantial increase simply to restore margins.

It is also worth considering whether every customer should necessarily receive the same percentage increase.

Look beyond turnover

Turnover is important, but it tells only part of the story.

Regular management information can show whether gross margins are improving or deteriorating, which costs are increasing and whether additional sales are actually producing additional profit.

If your business is busier than ever but the financial rewards do not seem to reflect the additional work, speak to your accountant.

A review of your margins, costs, pricing and cash flow may reveal where the money is going and, more importantly, what you can do about it.