By CA Surekha S Ahuja
Seven warning signs that growth is consuming working capital—and what promoters should do before borrowing more
Sales are rising. Orders are pouring in. The profit and loss account shows a healthy profit.
Yet the promoter is struggling to pay suppliers, meet salaries and fund tax payments—without borrowing again.
If your business is profitable but has no cash, the problem may not be profitability. It may be the speed at which profit converts into cash.
Delayed customer payments, excess inventory and reduced supplier credit can consume cash faster than a growing business generates it. The result is a familiar paradox: higher turnover, reported profits and increasing dependence on bank finance.
Before asking the bank for a higher limit, a promoter must answer one question:
Is the business borrowing to finance productive growth—or to compensate for cash trapped in its existing operations?
The answer matters more than the next increase in turnover.
Why a profitable business can have no cash: a ₹98 lakh illustration
Consider a business with annual turnover of ₹24 crore and profit after tax of ₹1.20 crore.
Its customers are paying later, inventory is increasing and suppliers are allowing less credit.
| Particulars | Amount |
|---|---|
| Annual turnover | ₹24.00 crore |
| Profit after tax | ₹1.20 crore |
| Additional cash locked in receivables | ₹1.48 crore |
| Additional cash locked in inventory | ₹0.40 crore |
| Additional cash required due to reduced supplier credit | ₹0.30 crore |
| Illustrative working-capital absorption | ₹2.18 crore |
| Profit less working-capital absorption | (₹0.98 crore) |
The receivables calculation assumes ₹18 crore of annual credit sales and an increase in the average collection period from 45 to 75 days.
The additional 30 days tie up approximately ₹1.48 crore:
₹18 crore × 30 ÷ 365 = ₹1.48 crore.
Inventory absorbs another ₹40 lakh, while reduced supplier credit requires ₹30 lakh of additional cash.
The business is profitable, yet its working-capital requirement has increased substantially.
This is an illustration of liquidity pressure, not a complete reconciliation of profit to cash. Actual cash flow also depends on non-cash expenses, taxes, capital expenditure, financing and other cash movements.
The lesson is straightforward: profitability does not guarantee liquidity.
Seven warning signs of cash-flow problems
1. Sales are rising, but collections are slowing
More customers do not necessarily mean more cash. When credit periods stretch from 45 to 75 days, the business effectively finances its customers for an additional month.
What to check: Receivables ageing, overdue invoices, disputed bills, customer-wise credit limits and collection performance.
2. Inventory is growing faster than sales
Excess raw material, slow-moving finished goods and purchases made ahead of realistic demand lock up cash.
What to check: Stock ageing, movement, saleability and inventory levels against actual orders. Identify stock that can be liquidated without unnecessarily sacrificing margins.
3. Borrowings are rising despite reported profits
Borrowing for productive expansion may be justified. Repeated borrowing to finance overdue receivables, unsold inventory or recurring operating shortfalls requires closer scrutiny.
Ask: Is the additional finance funding growth that will generate cash, or covering a weakness management has not addressed?
4. Supplier payments are becoming difficult
Delayed payments can damage relationships, shorten future credit periods, disrupt supplies and increase operating costs.
Action: Prepare a realistic payment calendar and negotiate sustainable terms before arrears accumulate.
5. Turnover is growing while margins are shrinking
Discounts, freight, wastage, rework, input-price increases and customer-specific costs can make growth less profitable than it appears.
Action: Review contribution and profitability by product, customer and segment. Sales that generate inadequate contribution may worsen cash flow as volumes increase.
6. GST, TDS, payroll and EMIs are funded at the last minute
These obligations must be planned, not left to the cash balance available on the due date. Money earmarked for liabilities is not freely available surplus.
Action: Include statutory dues, salaries and debt instalments in the cash forecast, with a responsible person and a due date for each.
7. Management discovers a shortage only when a payment falls due
A monthly profit and loss account explains past performance. It does not establish whether cash will be available three weeks from now.
Action: Maintain a rolling 13-week cash-flow forecast and update it every week.
Measure the cash-conversion cycle
The cash-conversion cycle measures how long cash remains tied up in business operations.
Receivable days: How long customers take to pay.
Inventory days: How long stock remains tied up before sale.
Payable days: How long the business takes to pay suppliers.
Cash-conversion cycle = Receivable days + Inventory days − Payable days
Consider this example:
| Measure | Earlier period | Current period |
|---|---|---|
| Receivable days | 45 | 75 |
| Inventory days | 50 | 60 |
| Payable days | 45 | 40 |
| Cash-conversion cycle | 50 days | 95 days |
The cycle has lengthened by 45 days. Customers are paying later, inventory is being held longer and suppliers are being paid sooner.
Together, these changes can substantially increase the working-capital requirement.
The exact cash impact must be calculated from actual receivable, inventory and payable balances using the appropriate sales or cost bases. A change in cycle days is a warning signal, not a substitute for a proper working-capital calculation.
What should a promoter do before borrowing more?
The first step is to identify where cash is trapped and how much can realistically be released.
| Priority | Management action | Expected benefit |
|---|---|---|
| 1 | Assign responsibility for overdue accounts and resolve billing disputes | Faster collections |
| 2 | Identify excess, obsolete and slow-moving inventory | Cash release and lower carrying costs |
| 3 | Review customer-wise and product-wise profitability | Better pricing and sales decisions |
| 4 | Align purchasing and production with realistic demand | Less unnecessary stock |
| 5 | Prepare a payment calendar and negotiate sustainable supplier terms | Fewer payment surprises |
| 6 | Test the cash impact of new machinery, branches and projects | Better investment decisions |
| 7 | Define the purpose, amount, tenure and repayment source before borrowing | More disciplined financing |
A higher bank limit may still be necessary. But it should be based on a realistic working-capital assessment, not simply on rising turnover or immediate payment pressure.
Borrowing should finance a defined business requirement—not conceal an unresolved operational weakness.
The 13-week cash-flow forecast every growing business needs
A rolling 13-week forecast provides visibility of expected receipts, payments and potential shortfalls over the next quarter.
| Cash-flow item | What to include |
|---|---|
| Opening cash | Actual available bank balances and cash, excluding restricted funds |
| Customer receipts | Expected collections, with overdue amounts separately identified |
| Supplier payments | Purchase commitments and outstanding invoices |
| Operating expenses | Salaries, rent, freight and other regular payments |
| Statutory liabilities | GST, TDS and other applicable dues |
| Debt servicing | Interest and scheduled principal repayments |
| Capital expenditure | Committed and proposed investments |
| Projected closing cash | Expected surplus or shortfall, with corrective action |
Update the forecast weekly. Separate confirmed receipts from optimistic assumptions and prepare an expected case alongside a downside case.
Test what happens if:
A major customer pays 15 days late.
Sales fall 10–15% below budget.
An unexpected repair or other significant expense arises.
The objective is not to predict every event. It is to give management enough warning to accelerate collections, review discretionary spending, renegotiate commitments where appropriate or arrange suitable finance before a shortage becomes urgent.
Why the CA's role must go beyond annual accounts
Annual accounts explain a completed period. Timely management information helps the promoter decide what to do next.
A business health review should bring together the promoter, finance team and relevant department heads to examine:
Profitability by customer, product and segment.
Receivables ageing and collection performance.
Inventory movement and working-capital requirements.
Actual cash flow against budget.
Borrowings, interest costs and repayment capacity.
Upcoming statutory payments and major commitments.
Corrective decisions, each with an owner and a deadline.
For example, a review may reveal that three customers account for most overdue receivables. Resolving those accounts could release more cash than a broad cost-cutting exercise.
The value is not another report. It is a timely management decision based on reliable financial information.
A CA in a management-advisory role can help identify pressure points, test assumptions and establish a regular review discipline. Commercial decisions remain with management, supported by appropriate professional advice.
A monthly or quarterly business health review may suit a growing business. Where liquidity is under pressure, reviews should be more frequent.
The two-minute cash health check
Answer these seven questions honestly:
Do I know my receivable, inventory and payable days?
Are overdue receivables improving?
Is inventory growing in line with realistic demand?
Are margins holding up as turnover grows?
Are statutory dues and EMIs planned in advance?
Is my 13-week cash forecast updated this week?
Does every proposed borrowing have a defined purpose and repayment source?
Every unchecked item identifies an area requiring attention. Several unchecked items together warrant a structured review of liquidity and working capital.
CA S.Ahuja Perspective
The most dangerous cash-flow problem is not always the one a business cannot afford. It is the one the promoter discovers too late.
Before asking the bank for a higher limit, ask three questions:
Where exactly is our cash getting trapped?
How much can we release through better collections, inventory control and operating decisions?
Can we finance the next stage of growth without putting routine payments under pressure?
The real test of profitable growth is not how much profit a business reports. It is how reliably that profit becomes cash—and whether that cash can fund the next stage of growth.
For a growing business, cash-flow discipline is not merely an accounting exercise. It is a management priority.
Need a cash-flow and working-capital review for your business? Contact Casahuja to discuss a structured business health review.
Disclaimer: This article provides general business and financial-management guidance. Financing, credit, taxation and statutory-payment decisions should be based on the facts of the individual business and appropriate professional advice.
Frequently asked questions
Why is my business profitable but has no cash?
Profit may be recorded when a sale is made, but cash may arrive weeks or months later. If receivables and inventory increase while supplier credit reduces, cash can become trapped in operations. A profitable business may therefore need additional working capital even when its reported earnings are healthy.
What is the cash-conversion cycle formula?
Cash-conversion cycle = Receivable days + Inventory days − Payable days. It measures the time cash remains tied up in the operating cycle. A rising cycle generally increases working-capital pressure, although the actual cash impact depends on the business's sales, costs and operating balances.
What are the warning signs of cash-flow problems?
The main warning signs are slowing collections, inventory growing faster than sales, rising borrowings despite profits, difficulty paying suppliers, shrinking margins, last-minute funding of statutory dues and discovering shortages only when payments fall due.
What is a 13-week cash-flow forecast?
It is a rolling weekly projection of expected receipts and payments over the next 13 weeks. It covers opening cash, customer collections, supplier payments, operating expenses, statutory dues, debt servicing and capital expenditure. Weekly updates help management identify potential shortfalls early enough to take corrective action.
Should I take a bigger bank loan to fix a cash shortage?
Only after identifying the underlying cause. Borrowing to finance overdue receivables or excess stock may conceal an operational weakness. First review collections, inventory and margins. Then quantify the genuine funding requirement and establish a clear purpose, tenure and repayment source before seeking additional finance.
