Sales are rising and the accounts show a profit, but a supplier payment is approaching and the bank balance is insufficient. Profit does not describe when money arrives. The sale may still sit in receivables, or cash may have become inventory waiting for a buyer. Follow the sequence from purchase through sale to collection, distinguishing its effect on earnings from its effect on cash. The example below shows how a good result can coexist with a funding gap requiring early action.
A SAR 20,000 profit with less cash
Consider a trader starting the month with SAR 30,000 cash. It sells goods for SAR 100,000 and collects only SAR 40,000. The goods sold cost SAR 60,000. Operating expenses of SAR 20,000 are paid in full. The business also pays SAR 70,000 for inventory purchases, including some stock that remains unsold. There are no other movements in this illustration.
| Item | Profit calculation | Cash movement |
|---|---|---|
| Sales | SAR 100,000 | SAR 40,000 collected |
| Cost of goods sold | SAR 60,000 | SAR 70,000 paid for purchases |
| Operating expenses | SAR 20,000 | SAR 20,000 paid |
| Period result | SAR 20,000 profit | SAR 50,000 cash decrease |
Profit is 100,000 less 60,000 less 20,000: SAR 20,000. Net cash movement is 40,000 less 70,000 less 20,000: negative SAR 50,000. Opening cash covers only SAR 30,000, leaving a SAR 20,000 funding gap. That gap needs attention before payments fall due, or payment timing needs to change by agreement.
This simplified teaching example excludes taxes, financing and depreciation. A negative forecast identifies a funding requirement; it does not mean an ordinary bank account can automatically spend beyond its available balance.
What does each measure tell you?
Profit compares revenue and expenses recognised in a period. Cash flow follows money received and paid during that period. A sale that meets the conditions for revenue recognition may be recorded before payment arrives. Stock may be paid for before it is sold. Sales therefore need not equal receipts, and inventory purchases need not equal the cost of goods sold.
The IFRS material for IAS 7 distinguishes operating, investing and financing cash flows. That distinction helps explain whether cash changed because customers paid, an asset was purchased or funding was raised. For day-to-day management, a simple weekly schedule can be a useful starting point alongside the formal cash flow statement prepared with your accountant.
Find the cash in your operating cycle
Begin with uncollected invoices. Link each amount to its due date and expected receipt date. Then examine stock already paid for but still on the shelf. Was it purchased for a known season, or did an attractive offer take the place of a sales plan? Compare those dates with supplier obligations and fixed expenses. Timing often explains more than an expense total.
Do not assume every customer balance becomes cash this week. Separate confirmed payments from amounts awaiting invoice acceptance or dispute resolution. Similarly, owner funding is not sales revenue: it increases available cash without proving better trading performance. A larger bank balance caused by delaying suppliers should not automatically be treated as a lasting operational improvement.
Build a weekly routine you can update
- Start with a bank and cash balance reconciled to records at a stated date.
- Add expected collections with customer names and invoice references.
- Schedule payments by date, separating payroll, suppliers and discretionary purchases.
- Calculate each closing weekly balance and carry it into the following week.
- Test the effect of your largest receipt arriving two weeks late.
- Assign responsibility for refreshing dates and comparing actuals with the forecast.
Use the review meeting to identify which receipt changed, which purchase could be split and which decision needs approval now. Keep the answer beside the amount so the next meeting does not repeat the same investigation. After several weeks, examine recurring forecasting errors, such as including an invoice the customer has not accepted or overlooking a known annual payment.
Turn the numbers into a decision
If profit is healthy but cash is tight, review collections, stock and payment timing. If cash is healthy but profit is weak, examine the cash source as well as pricing and costs. Compare similar periods and seasons. Buying stock ahead of a peak season can explain a temporary cash decrease, but commitments still need funding while the business waits.
When reviewing accounting software, use a sample sale, collection and stock purchase from one coherent scenario. Ask to follow the document into the balance and report, then discuss how the team assembles a cash forecast. This provides a practical basis for exploring accounting and reporting with Wali ERP within the scope agreed for your business.
Sources & further reading
Visit the original source to explore the concept and its wider context.
General educational content. Appropriate treatment depends on your business and accounting policies; consult your accounting professional when applying it to business records.
