Cash Flow: Profitable on Paper, Short on Cash

Most companies get into trouble not because they lose money but because they cannot manage cash. Profit is an accounting outcome and arises when an invoice is issued. Cash arises when money lands in the account. The gap between those two moments is the trap that catches growing companies.

The pattern is familiar: sales are rising, the profit statement looks healthy, and yet payroll week is tight. The reason is simple — growing requires spending before collecting.

The Cash Conversion Cycle

• Days inventory held: Average days between buying goods and selling them.
  
• Days sales outstanding: Average days between selling and collecting.
  
• Days payables outstanding: Average days between buying and paying.
  

Cycle = inventory days + receivable days − payable days. If the result is 60 days, you are financing every sale for 60 days. Planning growth without knowing this number means not knowing how much cash you will need.

Four Things That Squeeze Cash

Term mismatch. Paying suppliers in 30 days while collecting in 90 means financing the 60-day gap yourself. That gap grows as you grow.

Slow-moving inventory. Goods in the warehouse are cash tied up. Dead stock appears as an asset on the balance sheet but produces no cash.

Loose collections. A receivable nobody chases at its due date does not pay itself. Collection is part of selling, not a separate job.

Unplanned capital spend. Funding machinery, vehicles or stock out of working capital. Financing a long-term asset with short-term funds is a classic error.

The 13-Week Forecast

An annual budget is too coarse for cash management; daily tracking hides the wood for the trees. In practice the most useful tool is a rolling 13-week forecast with weekly buckets:

• Opening cash: Bank and cash balances.
  
• Collections: Receivables falling due that week, multiplied by a realisation rate taken from your own history. Assuming 100 per cent makes the forecast useless.
  
• Payments: Supplier terms, payroll, taxes, rent, loan instalments.
  
• Closing cash: Opening plus collections minus payments.
  

Update it weekly and compare last week's forecast against what actually happened. Finding the source of the variance improves your forecasting quickly.

Where ERP Helps

• Open invoices and due dates from the receivables ledger.
  
• Open purchase orders and payment schedules.
  
• Bank balances via integration.
  
• Recurring payments — payroll, rent, loans — from a defined calendar.
  

Concrete Ways to Improve Cash

• Offer an early-payment discount. A small discount costs less than factoring.
  
• Shorten invoicing lag. An invoice issued three days after dispatch delays collection by three days.
  
• Clear dead stock. Stock with no movement for a year converts to cash even when sold at a loss.
  
• Renegotiate supplier terms. As a consistently paying customer, asking for longer terms is reasonable.
  
[*]Systematise collections. A reminder before the due date, a call on the day, a written notice when overdue.

In Short

Cash needs managing separately from profit. Calculate your conversion cycle, build the 13-week forecast and refresh it weekly. Shortening days sales outstanding is the fastest and cheapest source of cash for most companies.

We can connect your cash forecast to live data with Mekjoy Pre-Accounting & Finance.