“My CA says we made \u20b940 lakh profit this year. But I cannot pay my supplier this week.”<\/p>\n
I hear this from business owners more than almost any other sentence. It sounds like a contradiction. It is not. It is one of the most common \u2014 and most fixable \u2014 financial situations in Indian MSMEs. Once you understand why it happens, the solution becomes clear.<\/p>\n
Your Profit and Loss account shows the difference between what you earned and what you spent \u2014 on an accrual basis. This means it counts revenue when you invoice your customer, not when they pay you. And it counts expenses when you incur them, not necessarily when you pay them.<\/p>\n
So if you invoiced \u20b980L in revenue this year, your P&L shows \u20b980L in sales \u2014 even if \u20b930L of that is still sitting in your debtors, unpaid. You have earned it. You have not collected it. The P&L does not distinguish between the two.<\/p>\n
Profit is an opinion. Cash is a fact. Your accountant calculates profit. Your bank balance tells you the truth. Understanding the difference between the two is the beginning of financial literacy for every business owner.<\/p><\/blockquote>\n
The three most common reasons profitable businesses run out of cash<\/h2>\n
Reason 1 \u2014 Customers take too long to pay.<\/strong> You deliver the goods in April. You invoice in April. Your customer pays in July. For those three months, you have “earned” the revenue in your P&L but you have not received the cash. If your debtors are consistently 75\u201390 days, you are effectively financing your customers’ operations with your own cash.<\/p>\n
Reason 2 \u2014 You pay suppliers faster than customers pay you.<\/strong> The working capital cycle measures the gap between when you pay your suppliers and when your customers pay you. If you pay suppliers in 30 days and collect from customers in 90 days, you have a 60-day cash gap that must be funded \u2014 either from your own reserves or from a bank credit line.<\/p>\n
Reason 3 \u2014 Profit is being invested in growth.<\/strong> You bought new machinery. You expanded to a new city. You hired people ahead of the revenue they will generate. These are capital expenditures or working capital investments \u2014 they do not appear as expenses in your P&L (or appear gradually as depreciation), but they directly reduce your cash. This is not a problem \u2014 it is growth. But it must be funded consciously, not accidentally.<\/p>\n
The Cash Conversion Cycle \u2014 the number that explains everything<\/h2>\n
The Cash Conversion Cycle (CCC) measures how many days it takes to convert your investments in inventory and other resources into cash from sales.<\/p>\n
CCC = Inventory Days + Debtor Days \u2212 Creditor Days<\/strong><\/p>\n
Example: Your stock sits for 45 days before being sold. Customers pay in 75 days. You pay suppliers in 30 days. CCC = 45 + 75 \u2212 30 = 90 days<\/strong>.<\/p>\n
This means your business needs 90 days of operating expenses funded at any given time just to keep the cycle moving. On \u20b96Cr annual revenue, that is roughly \u20b91.5Cr of working capital permanently locked in the cycle. If you do not have that funded \u2014 through a CC limit, own capital, or NBFC credit \u2014 you will always feel cash-tight even in a profitable year.<\/p>\n
Five specific actions to improve your cash position this quarter<\/h2>\n
\n
- Invoice on the day of delivery<\/strong> \u2014 not at month end. Every day of delay on invoicing is a day added to your collection cycle. On \u20b96Cr revenue, moving from month-end to immediate invoicing can free up \u20b925\u201350L of cash per year.<\/li>\n
- Negotiate 15-day early payment discounts with key customers<\/strong> \u2014 offer 1% discount for payment within 15 days. The interest saving on your CC facility often exceeds the 1% cost.<\/li>\n
- Extend supplier credit terms<\/strong> \u2014 ask your suppliers for 45\u201360 day credit if you currently pay in 30. One conversation that goes well can free up significant working capital without any financing cost.<\/li>\n
- Register on TReDS<\/strong> \u2014 if you supply to large companies, convert your 90-day debtor into 24-hour cash through invoice discounting. No collateral, no loan.<\/li>\n
- Build a 13-week cash flow forecast<\/strong> \u2014 a simple spreadsheet showing expected cash inflows (from known debtors) and outflows (supplier payments, salaries, loan EMIs) for the next 13 weeks. This converts the feeling of “running out of cash” into a specific date and a specific amount \u2014 which is a problem you can solve.<\/li>\n<\/ul>\n
What to say to your CA<\/h2>\n
Ask your CA for a Cash Flow Statement \u2014 not just the P&L. The Cash Flow Statement shows where your cash actually went: operating activities, investing activities, and financing activities. If operating cash flow is negative while P&L shows profit, you have a working capital problem. If investing activities show large outflows, you have funded growth from internal cash. Each of these has a different solution \u2014 and knowing which situation you are in is the first step.<\/p>\n
\nBebaak \u2014 Finance, Finally Honest<\/div>\nDid this help? Let’s talk about your business.<\/div>\nI am Siba Panda \u2014 CA, CS, former CFO of a leading Indian venture fund. I work with MSMEs, exporters, funded startups, and GCC businesses to make their finances bank-ready, investor-ready, and clear. Start with a 45-minute Health Check.<\/div>\n