Where the cash gets stuck
Think of the cash cycle: the number of days between paying for raw material and receiving payment from the customer.
| Component | How to calculate (days) |
|---|---|
| Inventory days | Average stock ÷ cost of goods sold × 365 |
| Receivable days | Average debtors ÷ sales × 365 |
| Payable days | Average creditors ÷ purchases × 365 |
| Cash cycle | Inventory days + receivable days − payable days |
Every day you take off the cash cycle frees up cash. On ₹10 crore of annual sales, each day of the cycle is worth roughly ₹2.7 lakh of working capital.
9 fixes
1. Write a credit policy
Define credit limits and credit days per customer category, who can approve exceptions, and what happens when a customer crosses the limit. Share it with sales and accounts.
2. Review receivables ageing every week
Look at debtors by age: 0 to 30, 31 to 60, 61 to 90, over 90 days. Each overdue account gets a named follow-up owner and a date.
3. Hold supply to overdue accounts
New supply to a customer with overdue bills, without a dated payment plan, is the most common way receivables grow out of control.
4. Pay sales incentives on collection
See sales incentive structures that work.
5. Price credit into your quotes
A customer who wants 90 days instead of 30 is asking you to finance them. Include the interest cost in the price, or offer a discount for early payment.
6. Set inventory minimum and maximum levels
Base them on consumption and supplier lead time, and review slow-moving items monthly.
7. Negotiate supplier terms honestly
Reliable payment on agreed dates often earns better credit terms than delaying payments does.
8. Separate business and personal money
A fixed monthly drawing for the owner makes cash planning possible and protects the business in a tight month.
9. Run a 13-week cash forecast
List expected collections and payments week by week for the next 13 weeks. Update it every Monday. Shortfalls become visible weeks in advance, when you still have options.
A simple 13-week cash forecast format
| Week 1 | Week 2 | … | Week 13 | |
|---|---|---|---|---|
| Opening cash | ||||
| + Expected collections | ||||
| − Salaries and wages | ||||
| − Supplier payments | ||||
| − EMIs, rent, taxes | ||||
| Closing cash |
Cash problems are usually symptoms. The root causes sit in pricing, credit discipline and inventory control. Start with an accurate cost sheet and a weekly receivables review.
TBS builds costing, credit policy and cash review systems for MSMEs. See finance and costing consulting. This article is general guidance; for tax and financing decisions, consult your chartered accountant.
Want this built for your business?
TBS installs these systems inside MSMEs and stays until your team runs them without you. Start with a 45-minute strategy session with the founder, or take the 20-minute Business Depth Assessment to see where you stand.
Frequently asked questions
Why does a profitable business run out of cash?
Because profit is recorded when sales are billed, but cash arrives only when customers pay. Money tied up in receivables and inventory, longer than supplier credit, creates a cash gap even when the business is profitable.
How do I reduce receivables in my business?
Write a credit policy, review receivables ageing weekly with named follow-up owners, hold supply to overdue accounts without a dated plan, and pay sales incentives on collection rather than billing.
What is a 13-week cash forecast?
A week-by-week list of expected collections and payments for the next 13 weeks, updated every Monday, so cash shortfalls are visible early enough to act.
Munishh Latawa is the founder of The Business Studio, an execution-first MSME consulting firm in Ludhiana that builds sales, operations, HR and costing systems for manufacturers, traders and service businesses across North India. About TBS