The question is not how much profit the business made. The question is how much cash the business has. I have sat across from founders who built Rs 10 crore businesses, reported Rs 80 lakh of annual profit and could not pay their suppliers on the 15th of the month. The profit was real. The accountant calculated it correctly. The CA filed it accurately. The ITR accepted it. And the bank balance on the 15th was Rs 1.4 lakh against Rs 12 lakh of payments due that week.
The founder’s reaction, every time, is the same: “But the business is profitable. Where did the money go?”
The money did not go anywhere dramatic. Nobody stole it. Nobody diverted it. The money is sitting in the business, trapped in places the founder cannot see because the financial reporting was never designed to show them. The reporting was designed for compliance: file the GST, file the TDS, file the ITR, produce the annual accounts for the statutory audit. The reporting was never designed to answer the question the founder actually needs answered: how much cash do I have, how much am I owed, how much do I owe, and can I afford what I am about to commit to?
That gap between compliance reporting and decision reporting is where Indian founders lose money, lose sleep and occasionally lose the business.
The profit-to-cash gap
Profit and cash measure different things. Profit measures performance over an accounting period. Cash measures what is available to pay obligations when they fall due. A sale recognised today generates profit today. The customer pays 60 or 90 days later. The profit is in the P&L. The cash is in the customer’s bank account. Meanwhile, the founder’s obligations, salaries on the 1st, rent on the 5th, GST on the 20th, supplier payments on the 30th, loan EMI on the 7th, do not wait for the customer to pay.
Growth makes the gap worse, not better. A founder who wins a Rs 2 crore order celebrates. The order requires Rs 1.2 crore of material, Rs 30 lakh of labour and Rs 15 lakh of logistics before the first invoice is raised. The invoice is raised on delivery. The customer pays in 90 days. The founder has spent Rs 1.65 crore and will receive the payment four months later. In between, the founder must fund the gap from existing cash, from the working capital facility or from personal savings.
A Rs 10 crore business growing at 25% per year needs approximately Rs 1.5 crore to Rs 2.5 crore of additional working capital every year just to fund the growth (depending on the operating cycle). If the founder does not plan for this, the growth itself creates the cash crisis. The P&L shows a thriving business. The bank account shows a business running on fumes.
Where the cash gets trapped
In my experience across Northrop’s advisory engagements, the cash is trapped in five places. Each is visible in the accounts, but only if the accounts are maintained for visibility rather than for filing.
Receivables. The most common trap. The founder invoices Rs 80 lakh per month. The customers pay in 75 days on average, not the 30 days the invoice specifies. At any given time, Rs 2 crore is sitting in the receivable book: money the business has earned, the P&L has recognised and the founder cannot use. Within that Rs 2 crore, Rs 40 lakh may be older than 120 days, owed by customers who are disputing, delaying or defaulting. The founder does not know this because the receivable ageing report is run once a year for the auditor, not weekly for the management.
Inventory. A manufacturer or a trader with Rs 1.5 crore of inventory may have Rs 30 lakh of stock that has not moved in six months. The stock is on the shelf. It is in the books at full cost. It is included in the stock statement that supports the bank’s drawing power. But it will not convert to cash because it is damaged, obsolete, out of season or simply unsaleable at the price the books carry it at. The founder does not know which Rs 30 lakh because nobody runs an inventory ageing analysis. The stock is “there.” Whether it is saleable is a different question.
Unbilled work. A services firm or a contractor completes work but does not raise the invoice promptly. The work is done. The cost has been incurred. The revenue has not been billed. The delay may be administrative (the project manager forgot), procedural (the client’s system requires a specific format that takes time to prepare) or deliberate (the founder is waiting for the milestone to be “perfect” before invoicing). Every day of billing delay is a day of free financing provided to the client.
Unreconciled bank balances. The cash balance in Tally says Rs 8 lakh. The bank statement says Rs 3.2 lakh. The Rs 4.8 lakh difference is cheques issued but not yet cleared, deposits recorded but not yet credited, bank charges not yet entered, or transactions in one system that do not appear in the other. The founder looks at Tally and believes Rs 8 lakh is available. Rs 3.2 lakh is available. The Rs 4.8 lakh difference is a fiction created by the lag between the books and the bank.
Personal expenses through the business. The founder’s vehicle EMI, fuel, insurance, family medical expenses, children’s school fees, club membership and personal travel run through the business account. Each is individually small. Collectively, they consume Rs 3 lakh to Rs 8 lakh per year of business cash that the P&L does not flag as a problem (because the accountant records them as business expenses) but that the cash flow absorbs silently.
What the accounts should actually tell the founder
A founder who receives a monthly P&L and a year-end balance sheet is receiving a historical document, not a management tool. The P&L says what happened last month. The balance sheet says where the business stood on a specific date. Neither answers the question the founder needs answered today: can I afford to take this order, hire this person, pay this supplier, accept these terms?
The accounts should produce, monthly, at minimum:
A cash position statement showing the actual bank balance (reconciled, not the Tally balance), the expected collections for the next 4 weeks (by customer, by amount, by expected date), the committed outflows for the next 4 weeks (salaries, rent, EMIs, supplier payments, statutory dues) and the net position after expected collections minus committed outflows. This is the number that determines what the founder can afford.
A receivable ageing by customer showing current, 30-day, 60-day, 90-day and 120-day-plus buckets. The ageing should be reviewed weekly, not monthly, because a receivable that crosses 90 days without intervention has a significantly lower probability of collection than one caught at 45 days.
An inventory ageing showing how long each material category has been sitting. Stock older than the business’s normal sales cycle is a warning. Stock older than twice the normal cycle is a write-off candidate.
A working capital trend showing receivable days, inventory days and payable days over the last 6 months. The trend matters more than the snapshot. Receivable days increasing from 60 to 75 over three months is a signal that the cash cycle is stretching, regardless of what the P&L shows.
The founder’s responsibility
I say this to every founder Northrop works with: your accountant’s job is to file your returns. Your job is to understand your cash. These are not the same thing. The accountant produces the data. The founder must read it, question it and act on it. A founder who delegates financial understanding to the accountant and reviews only the bank balance on the phone is managing the business blind. The P&L is the rearview mirror. The cash position is the windshield. You cannot drive a business by looking only in the rearview mirror.
The starting point is not a new ERP or a sophisticated dashboard. The starting point is a weekly 30-minute conversation between the founder and the accountant covering three questions: what is the actual cash position (reconciled to the bank, not to Tally)? What are we owed and when do we expect to collect it? What do we owe and when must we pay it? A founder who asks these three questions every week will never be surprised by a cash crisis. A founder who does not ask them will eventually be surprised by one.
Financial reporting is not a compliance exercise. It is a survival discipline. The business that reports accurately, reviews frequently and acts on what the reports show will outlast the business that reports for filing and discovers its cash position when the bank calls.
The views expressed are personal.
Ashish Chaudhary is the Founder and Managing Director of Northrop Management Private Limited, an Indian forensic accounting, corporate governance and financial advisory firm. He is a Chartered Accountant.
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