The situation
The owner sees profit every month and a bank balance that keeps falling. The usual explanations are timing, a slow customer, a large purchase. Each is partly true, and none tells management what to do.
From profit to cash
The bridge from profit to cash lines up every use of cash for the quarter. Here receivables absorbed $266K and inventory $128K. Suppliers financed only a small part of it. Capital expenditure, debt service and taxes took the rest.
The useful step is to split each movement into two parts: how much is because the business sold more, and how much is because the rate changed. Receivables grew partly because sales grew, which is healthy, and partly because customers are paying 4.1 days later than three months ago, which is not. Each day of collection is worth about $40K of cash in this business.
13-week cash forecast
Projected cash at the end of each week, US$ thousands.
Looking forward: thirteen weeks
A 13-week cash forecast shows where the balance is heading. In this example cash falls to $167K in week 9, below the $200K minimum the company wants to keep, because a seasonal inventory purchase is paid in weeks 8 and 9.
The business is not losing money. The timing of cash is the issue, and it is visible eight weeks ahead, while there is still time to act.
What management can do with it
- Agree a collection plan for the accounts behind the slower payment. Returning to the earlier collection period would release about $165K.
- Split the seasonal purchase into two deliveries, or negotiate extended terms. That keeps cash above the minimum without new borrowing.
- If a credit line is needed, arrange it now, not in week 8.
The management questionWhat is absorbing cash, and is the cause structural or temporary?