There is a particular kind of stress that a lot of business owners know well. The accountant says the year was profitable. Sales are up. And yet every month there is a week where you are moving money around to make payroll, delaying a supplier, or putting your own savings into the business account.
If that sounds familiar, the business may well be healthy. What is happening is that two different measurements of the same business, profit and cash, are telling two different stories, and the owner is being asked to live in the gap between them. That gap is one of the most useful financial ideas a growing business can learn, so let's take it apart properly.
Profit and cash measure different things
Profit is a measurement of whether the business made money over a period. You take what you earned from sales in the month and subtract what it cost to earn it. It counts a sale when you make it, whether or not the customer has paid.
Cash is a measurement of what is in the bank today. It counts a sale when the money arrives.
For a business where every customer pays on the spot, buys nothing in advance and keeps no stock, the two measurements line up. For almost every other business, they drift apart, and the distance between them is made of time. Time between paying for stock and selling it. Time between selling and being paid. Time between receiving supplies and paying for them.
So the cash gap is a result of timing. The timing is a result of your terms: how long customers take to pay, how long stock sits, how long you take to pay suppliers. And the terms are a result of decisions, some made on purpose, many made by habit or by whatever the trade normally does.
That chain matters, because it tells you where to work. The bank balance is where a cash problem shows up. The terms are where it gets fixed.
An everyday way to picture it: say you sell a friend your old phone for LKR 50,000, and agree they'll pay you next month. Today the sale is made, and you're LKR 50,000 better off on paper. And you can't buy lunch with it, because the money isn't in your hand. A business that sells on credit is doing that hundreds of times a month, in both directions, all at once.
Seeing the gap in numbers
Let's make this concrete with a distributor selling LKR 3 million a month at a 25% gross margin (the share of each sale left after paying for the goods). It gives customers 60 days to pay. It holds about 45 days of stock. It pays its own suppliers in 30 days.
At any moment, this business has:
- about LKR 6.0 million owed to it by customers (60 days of sales),
- about LKR 3.4 million sitting on its shelves as stock (45 days of what it pays for goods),
- minus about LKR 2.3 million it owes its suppliers (30 days of purchases).
That is roughly LKR 7.1 million of the owner's money tied up in the operation of the business, every single day, just to keep it running. Nobody sees it on the profit and loss statement. It lives on the balance sheet (the snapshot of what the business owns and owes), which many owners rarely look at.
Now here is the part that surprises people. Say this business has a great year and sales grow by 20%, to LKR 3.6 million a month. Every one of those balances grows by 20% too. The money tied up rises to about LKR 8.6 million. The business needs to find an extra LKR 1.4 million in cash to support its own growth.
If the business makes a 5% net profit (what's left after every cost), its monthly profit has risen from LKR 150,000 to LKR 180,000. The extra cash the growth consumed is equal to about eight months of that new profit. So the owner sees a better year on the accounts and a worse year in the bank, at the same time, and both are correct.
Growth eats cash. The faster a business with credit terms grows, the more cash it needs to fund that growth, which is the opposite of what many owners expect. Does that make sense? It is worth sitting with for a minute, because it explains how a profitable business can get into trouble in its best year.
What makes it worse in Sri Lanka
A few local features widen the gap.
In many Sri Lankan trades, credit is given and taken through post-dated cheques. A cheque dated 60 days ahead is a promise, and it sits outside your bank account until its date, however profitable the sale was.
If you are VAT-registered, part of what lands in your account belongs to the Inland Revenue Department. At the standard 18% rate, a VAT-inclusive receipt of LKR 118,000 contains LKR 18,000 of VAT that you will have to pay over. A business that treats its whole balance as available will find the VAT payment arriving as a shock.
And costs that come round on a cycle, salaries, EPF and ETF contributions, rent, loan repayments, quarterly or annual payments like insurance and licences, don't care when your customers pay.
Why the forecast has to be weekly
The tool that closes this gap is a cash flow forecast: a table that predicts your bank balance into the future, so the tight weeks show up on paper before they show up in the account.
The version that works best for small businesses is the 13-week cash flow forecast. Thirteen weeks is one quarter. It is long enough to catch every monthly cycle, salaries, rent, VAT, loan repayments, and short enough that you can predict it with reasonable accuracy. And weekly columns matter, because a monthly forecast can show a healthy month-end balance while hiding the week in the middle where you went below zero.
Here is how to build one.
Columns: thirteen weeks, each starting on a Monday.
Top row: the opening bank balance for week one. After that, each week's opening balance is the previous week's closing balance.
Cash in, one line per source:
- receipts from customers, listed by customer and by the week you realistically expect the money (use when they actually pay, which may differ from when they are supposed to pay),
- post-dated cheques, entered in the week they become payable,
- cash sales,
- anything else: a loan drawdown, a deposit from a new contract.
Cash out, one line per cost:
- supplier payments, in the week they are due,
- salaries, and EPF and ETF,
- rent, utilities, transport, marketing,
- loan repayments and lease payments,
- VAT and other tax payments,
- owner drawings, as their own line,
- planned purchases of equipment.
Bottom row: the closing balance for each week.
Then add one more line: the minimum balance you are prepared to hold. It might be one week of salaries. Any week where the closing balance falls below that line is a week you need to act on now, while there is still time.
Every Monday, roll the forecast forward a week, and compare last week's forecast to what actually happened. The comparison is where the learning is. After a month or two you will know which customers pay late, which costs you always underestimate, and how far ahead you can see clearly.
What to change, in order
Once the forecast shows you where the gap is, there are a handful of levers. They are worth taking in a particular order, because the early ones cost you nothing.
1. Get paid faster. Invoice the day the work is delivered. Agree payment terms in writing before the job starts. Ask for deposits on large or custom orders. Offer shorter terms to new customers than to your oldest ones. And follow up on a schedule: a reminder before the due date, a call on it, and a clear step after it. In the distributor example, bringing the average customer payment from 60 days down to 45 releases about LKR 1.5 million in cash, once, permanently. No loan does that as cheaply.
2. Hold less stock. List your stock by how fast it sells. Slow-moving lines tie up cash for months. Selling them through, ordering smaller quantities more often, or dropping lines that rarely move all release cash.
3. Pay suppliers on the terms you agreed, and negotiate better terms. Paying a supplier early is lending them your money for free. Paying them late damages the relationship you will need when things are tight. The good move is to negotiate longer terms in exchange for something they value: reliable volume, prompt payment on the new date, a longer contract.
4. Check your margins. Some cash problems are profit problems in disguise. If the forecast stays negative even when every customer pays on time, the business isn't earning enough on what it sells, and the fix is in pricing and costs (see our guide to pricing and margins).
5. Use finance for timing, and only for timing. An overdraft or a working capital facility is a good tool for bridging a gap that the forecast shows will close: a large order that pays in 90 days, a seasonal build-up of stock. It is a dangerous tool for covering a gap that never closes, because then it is funding losses, and the debt grows every month.
That fourth and fifth point are really one point, and it's the most important distinction in this whole guide. A timing problem and a profitability problem look identical in the bank account. Both feel like "not enough cash." But they have opposite cures. A timing problem is cured by changing terms or by bridging finance. A profitability problem is made worse by finance, because borrowing to cover losses only delays the moment the business has to face them, and adds interest on top. The 13-week forecast is how you tell them apart: a timing gap opens and then closes; a profitability gap keeps getting wider.
Three ways of relating to cash flow
It helps to notice the stages owners tend to go through.
The first is the hopeful stage. Sales are what matter; sell more and the cash will follow. As we saw, growth can make cash tighter, so this belief produces a lot of painful surprises.
The second comes after those surprises, and it's a kind of resignation. Cash is always tight in this trade; that's just how it is. There is some truth in it, every trade has its norms, but it treats the terms as fixed when most of them were negotiated at some point by someone.
The third is the stage where an owner treats cash flow as something designed. The terms, the stock levels, the payment schedule and the financing are all decisions, and they can be set on purpose, with a forecast that shows the consequences before they arrive. Owners at this stage still have tight weeks. They just see them six weeks ahead.
How Gridwerk helps
Building the 13-week forecast, finding which of your terms are creating the gap, and working out whether a cash problem is about timing or about profit is the core of our Financial Intelligence and Forecasting work, and setting the credit terms that close the gap is part of Process & Financial Control. If cash is tight even though the business is profitable, take the free diagnostic. It's eighteen questions, about seven minutes, and then we call you to go through the rest.
Gridwerk diagnostic