Cash flow, sales and working capital · Illustrative example
Sales are rising, but cash is shrinking: what should you check first?
Short answer: a sale is not necessarily a cash receipt. A company can invoice more while waiting for customers to pay, purchasing inventory or settling bills before that cash arrives.
Sales, collections and cash are different things
Under accrual accounting, a sale can be recorded before the customer pays. Cash may also be tied up in inventory. Revenue, accounting profit and cash at the bank are therefore different measures.
Often the key question is timing: which invoices remain unpaid, how much cash was used to replenish stock, when suppliers expect payment and what falls due this week.
A simple cash bridge you can calculate
Cash received from customers − cash paid to suppliers − operating expenses actually paid = net operating cash movement for the period, before any other excluded items.
In this example: USD 8,000 − 6,000 − 3,000 = −USD 1,000. Even though USD 12,000 was invoiced, cash fell from USD 2,500 to USD 1,500.
The gap between invoiced sales and collections is USD 4,000. It represents an increase in receivables only if these are all sales and collections in the period, with no opening balances or adjustments.
| Movement | Amount (USD) | What it tells you |
|---|---|---|
| Sales invoiced | +12,000 | Not all of this has been collected |
| Cash collected from customers | +8,000 | Money received during the month |
| Payments to suppliers | −6,000 | Cash paid for purchases |
| Payroll, rent and other operating payments | −3,000 | Cash paid for operations |
| Net operating cash movement | −1,000 | 8,000 − 6,000 − 3,000 |
| Opening cash | 2,500 | Before these movements |
| Closing cash | 1,500 | 2,500 − 1,000 |
Five checks that help locate the cause
- Uncollected invoices: group receivables by age and likely payment date, not by the sale date.
- Inventory: separate stock purchased, stock sold and slow-moving stock; purchasing inventory is not necessarily a profit-and-loss expense for the month.
- Supplier terms: line up actual supplier due dates with expected customer receipts.
- Operating costs and debt: distinguish operating payments from loans, investments, taxes and owner draws; do not confuse any of them with gross margin.
- Weekly outlook: map documented inflows and outflows for the next several weeks against a minimum cash reserve.
What this example cannot prove
It does not prove that the business is losing money, is insolvent or needs financing. Nor does it calculate profit: accrued cost of sales, opening balances, taxes and other flows are omitted. All figures are fictional, not customer data.
If the next decision needs a second set of eyes
The Express Advisory in Business Finance covers cash flow, a practical budget and options to improve profitability. The published offer is USD 100 per advisory, with 2–3 hours of work in total depending on the topic and a recommendations report. Scope is confirmed before any commitment.
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For a pricing decision, see our worked explanation of discounts and contribution margin.
Sources and limits
Formal cash-flow reporting separates operating, investing and financing activities. This page illustrates only a simplified operating cash bridge. It is not a complete statement of cash flows or a full accounting reconciliation.
- IFRS Foundation — IAS 7 Statement of Cash Flows
- FDIC — Money Smart for Small Business, Module 10: Managing Cash Flows
· Fictional example from the JFCarpio.com team. No client data or performance claims.