M33ManageFinance· Module 2
Cash vs Profit
Sales are up and the accounts show a profit. The bank account is empty.
- Start
- Stabilise
- Fix
- Manage
- Finance
- ~5 min · Calculation
The business problem
Profit is an accounting measure; cash is what pays salaries and suppliers. Growing businesses often run out of cash while profitable because money is trapped in customer credit, stock and investment, or leaves as loan repayments that don't appear in profit.
Why it matters
More businesses fail from lack of cash than lack of profit. Knowing the difference, and forecasting cash, lets you act before a crisis.
What you will learn
- Distinguish profit from cash and explain the gap
- Identify where cash is trapped
- Build a simple 13-week cash forecast
- Make operating decisions with cash in mind
Core questions
- Why did cash fall when profit rose?
- How much cash is tied up in receivables and stock?
- What will our cash position be in 13 weeks?
- Which decisions this month will consume cash?
Work through the module
CaseWhat is happening?
Distribution, 40 people · Illustrative teaching case
A distributor has its best sales year and cannot pay suppliers on time. Receivables have grown faster than sales, credit terms are agreed case by case and stock has built up in slow lines. With no weekly cash view, the founder learns of shortfalls only when payments bounce.
Full teaching case: Revenue Without Cash
DecisionWhat does the leader need to decide?
Borrow to cover the gap, or change how credit, collections and stock are managed?
FrameworkHow should they think about the problem?
Profit-to-cash bridge
Start with profit. Subtract increases in receivables and stock; add increases in payables. Subtract capital spending and loan repayments. The result is the change in cash. Each item is a lever you can manage.
ToolWhat can they use?
13-week cash forecastCalculation
- Opening cash
- Expected receipts by week, based on real collection patterns
- Committed payments by week: salaries, suppliers, rent, tax, loans
- Closing cash and minimum balance line
ApplicationHow does it apply to their business?
Apply it to your own business:
- Build the profit-to-cash bridge for last year
- Build a 13-week forecast
- Identify the week of lowest cash and what could change it
ImplementationWhat changes?
What should change in the business:
- Update the forecast weekly
- Review it in the weekly management meeting
- Tie large commitments to the forecast before approval
ReviewDid it work?
How to tell whether the change worked:
- How accurate was the forecast against actual cash?
- Have cash surprises stopped?
- Has the minimum cash balance improved?
After this module you should be able to decide
Borrow to cover the gap, or change how credit, collections and stock are managed?
And leave with: A reconciliation of profit to cash and a 13-week cash view.
Sequence · Finance