A business can show a profit every month and still have no money to pay salaries on the 7th. It happens to traders, manufacturers and service firms alike, and it is the most common reason good small businesses get into trouble.
Profit is what you earned. Cash is what you have. The gap between them is made of customer credit, stock, supplier credit, loan repayments and tax payments that fall on different days from your sales.
01Why profit and cash differ
Take a Surat textile trader in October:
| Profit view | Cash view | |
|---|---|---|
| Sales billed | ₹40,00,000 | Collected: ₹26,00,000 |
| Goods bought | ₹32,00,000 | Paid to suppliers: ₹30,00,000 |
| Rent, salaries, power | ₹4,00,000 | Paid: ₹4,00,000 |
| Loan instalment | Not an expense | Paid: ₹1,50,000 |
| GST paid for September | Not an expense | Paid: ₹1,80,000 |
| Result | Profit ₹4,00,000 | Cash short by ₹11,30,000 |
The trader made money and still needed ₹11 lakh from the overdraft. Customers owed more at the end of the month than at the start, he paid suppliers faster than customers paid him, and the loan and GST went out in cash without appearing as expenses in the profit figure.
02Where cash gets stuck
- Customer credit
- Every day of credit you give is money lent to customers.
- Stock
- Goods on the shelf are cash you have already spent.
- Advances paid
- to suppliers for materials not yet received.
- Capital spending
- a new machine, a vehicle, an extension to the shop.
- Owner's drawings
- Money taken out for the family is cash leaving the business.
03Build a simple cash forecast
A cash forecast lists the money you expect in and out, week by week, for the next 13 weeks, about three months. It need not be precise. It needs to show the weeks when you will be short, early enough to do something.
What to put in
Money in:
- Collections from customers, based on invoices already raised and when they are due, adjusted for how late each customer usually pays
- Cash sales, from your average weekly figure
- Advances expected on confirmed orders
- Any loan disbursement or capital the owner is putting in
Money out:
- Supplier payments, by due date
- Salaries and wages, on the dates you pay them
- Rent, power, phone and other fixed costs
- GST, TDS, PF and ESI, on their due dates
- Loan instalments and interest
- Planned capital spending
- Owner's drawings
Read it
| Week | Opening | In | Out | Closing |
|---|---|---|---|---|
| 1 Nov | ₹3,20,000 | ₹8,50,000 | ₹6,10,000 | ₹5,60,000 |
| 8 Nov | ₹5,60,000 | ₹4,20,000 | ₹10,00,000 | -₹20,000 |
| 15 Nov | -₹20,000 | ₹7,60,000 | ₹3,40,000 | ₹4,00,000 |
Week 2 is short by ₹20,000, because salaries and a large supplier payment fall in the same week. Knowing this on 1 November gives you time to chase two customers, move a supplier payment by three days with their agreement, or draw on the overdraft.
Update the forecast every week with what happened. After a few weeks, you will see how accurate your collection estimates are, and they will improve.
04Levers that improve cash
Bring money in sooner
- Bill on the day of dispatch
- Shorten credit terms
- for new customers, and hold to them.
- Follow up weekly
- See getting paid on time.
- Take advances
- on made-to-order work. See collecting advances.
- Offer a small discount for early payment,
- such as 1 percent for payment within 7 days, where it costs less than your overdraft interest.
Send money out later, fairly
- Use the credit your suppliers give,
- and pay on the agreed due date. Pay micro and small suppliers within the 45 days the law allows. See MSME payments and the 45 day rule.
- Negotiate terms
- with large suppliers when your volumes grow.
- Spread capital spending,
- or finance it with a term loan so that it does not drain working cash.
Hold less stock
- Clear dead stock
- See dead stock.
- Set reorder levels
- from real sales. See reorder levels.
- Buy for the scheme only when you will sell it
- within the credit period.
05A weekly cash routine
Cash management works well as a habit. A routine that fits most small businesses:
- Monday morning: update the forecast with last week's actual receipts and payments.
- Look at the next four weeks closely. Mark any week where the closing balance falls below a safety level, such as two weeks of salaries.
- List the five largest amounts due from customers in the next two weeks and assign each to someone for follow-up.
- List supplier payments due and confirm which will be paid on the due date.
- Tell the bank early if you will need more than usual from the overdraft. Banks respond better to a planned request than an unplanned excess.
For a firm of 30 to 40 staff, this takes about half an hour a week. The first month is the hardest, because the forecast and reality are far apart. As you compare the two each week, collection estimates get steadily closer.
06Keep business and family money apart
Many owners pay household bills from the business account and business bills from personal accounts. It makes cash impossible to read. Take a fixed monthly drawing for the family, paid on a set date, and keep everything else separate.
07For larger businesses
A manufacturer with ₹20 crore turnover should run the 13 week forecast every week, with sales, purchase and accounts heads each owning their lines. Add a monthly forecast for 12 months to plan capital spending and bank limits. Banks appreciate a borrower who arrives with a forecast before asking for a higher limit.
In MatruOS, the Home screen shows today's sales, money to collect and money to pay, which are the starting figures for a weekly cash review.