Why a profitable business can still run short of cash
Profit measures revenue minus costs over a period. Cash depends on when money is collected and paid. A business can record a sale before the customer pays, or pay for inventory long before selling it.
A simple example
Illustrative monthly figures: revenue ₹20 lakh, cost of goods ₹12 lakh and operating expenses ₹7 lakh. Operating profit is ₹1 lakh before the items excluded from this simplified model. If cash is tied up in receivables and inventory, that ₹1 lakh does not mean there is ₹1 lakh more in the bank.
How much cash could faster collection release?
A rough steady-sales estimate is monthly revenue ÷ 30 × collection days reduced. At ₹20 lakh monthly revenue, collecting five days earlier gives an illustrative ₹3.33 lakh cash release, limited by actual receivables. This is a one-time balance-sheet effect, not ₹3.33 lakh of new monthly profit.
What should a founder review?
- Which invoices are genuinely collectible this week?
- Which inventory items are slow-moving?
- Which supplier payments fall due before collections?
- Are taxes, loan repayments and capital expenditure included in the cash plan?