Revenue can grow while cash becomes tighter.
The income statement records revenue when earned and expenses when incurred. Cash moves when customers pay, suppliers are paid, tax is deposited, stock is purchased, loans are serviced and assets are acquired. The timing difference can become dangerous during growth.
A business may report higher profit and still need additional borrowing because more money is locked in receivables and inventory. Growth therefore increases the importance of working-capital discipline.
Operating cash is influenced by profit plus or minus changes in receivables, inventory, payables, taxes and other operating balances.
Follow the journey from purchase to collection.
Buy or produce
Cash may leave before the product is ready for sale.
Hold inventory
Stock remains funded while it waits to be sold.
Sell on credit
Revenue is recorded, but cash is still with the customer.
Collect
Only collection completes the cash cycle.
The cash conversion cycle is broadly inventory days plus receivable days minus payable days. A longer cycle means more cash is required to support the same level of activity.
Look for pressure before the bank balance becomes critical.
- Sales rise, but operating cash flow remains negative for several months.
- Receivable days increase or collection promises are repeatedly extended.
- Inventory grows faster than revenue, especially slow-moving or customised stock.
- Supplier terms shorten because payments are delayed.
- GST, TDS or other statutory amounts are used as working capital.
- Short-term borrowing funds long-term assets or permanent losses.
- The business relies on one large customer’s payment to meet payroll or tax.
Diagnose the movement with a cash bridge.
Start with operating profit and explain the movement to closing cash. The bridge should separately show receivables, inventory, payables, tax, capital expenditure, loan movements and owner withdrawals. This prevents vague explanations such as “money is stuck in the market”.
| Question | Analysis | Possible action |
|---|---|---|
| Which customers caused the receivable increase? | Ageing, disputes, credit limits and promised dates. | Resolve disputes, revise credit terms and assign collection ownership. |
| Which stock caused the inventory increase? | SKU ageing, demand, minimum order size and production batch. | Reduce purchases, liquidate slow stock or change planning rules. |
| Why did supplier funding reduce? | Term changes, delayed payments or altered purchase mix. | Negotiate terms based on volume and improve payment predictability. |
| Are taxes and capex planned? | Upcoming GST, TDS, advance tax, machinery and deposits. | Reserve cash and separate one-time outflows from operations. |
Use a rolling thirteen-week cash forecast.
A weekly forecast is detailed enough for action and long enough to show payroll, tax, supplier and debt-service pressure. Begin with opening bank balances, then list realistic customer receipts and committed outflows by week.
Make the forecast decision-ready
- Use customer-wise collection estimates, not only a percentage of sales.
- Separate committed, probable and uncertain receipts.
- Include GST, TDS, salaries, loan instalments and planned capital expenditure.
- Show minimum cash required to operate safely.
- Update actual versus forecast every week to improve reliability.
Improve cash without damaging the business.
Design better collection terms
Define limits, advances, milestone billing, documentation and escalation before the sale.
Plan by movement
Separate fast, slow and non-moving stock; align purchasing with realistic demand.
Negotiate predictably
Reliable payment plans often create better terms than repeated emergency extensions.
Price the funding need
Evaluate how much additional receivable and inventory every new unit of sales requires.
Make cash a weekly management conversation.
- Refresh the thirteen-week forecast with actual bank balances.
- Review the top overdue customers and named next action.
- Review critical supplier payments and operational consequences.
- Identify tax, payroll and debt payments due in the next four weeks.
- Approve discretionary purchases and capital expenditure against the forecast.
- Record the funding gap early enough to take a considered decision.