A growing, profitable business can run short of cash when receipts arrive after payments.
01 · The picture
A growing, profitable business can run short of cash when receipts arrive after payments.
Keep these distinctions visible
01Profit recognised
02Cash collected
03Payments due
04Funding gap
02 · The idea
How I understand it.
Profit records revenue and expenses under accounting rules. Cash flow records money moving into and out of the business. A sale made on credit can increase reported profit before the customer pays. Inventory, equipment purchases, loan repayments and tax payments can create further differences between profit and available cash. Growth can therefore increase the money tied up in running the business. Build a cash forecast using expected payment dates and update it as collections, orders and obligations change. Examine several scenarios, including slower customer payments and lower sales. Ratios can highlight pressure, but the timing of actual commitments determines whether the business can meet them. Read the income statement, balance sheet and cash flow statement together.
03 · A fictional example
Put it into a business.
A furniture maker wins a large order with payment due after delivery. Timber and wages must be paid first. The order is expected to earn a profit, yet the business faces a temporary cash shortage. A weekly forecast reveals the gap early enough to negotiate a deposit and arrange temporary funding before production begins and suppliers become overdue.
04 · Bring it into the room
If every customer paid a month later, which payment would become difficult first?
One decisionOne next actionOne way to check
Where this note comes from
An original explanation drawn from my saved learning material. The worked example is fictional.
Harvard OPM · Unit 1Course reading or session material
Finance - Finance Module Unit I Wrap-Up Slides
Session faculty: Josh Lerner
PDF page 3; key insights from Unit I finance
These notes collect my interpretations and applications. The schools and authors retain their original teaching materials.