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A bridge from a month's profit to its change in cash through receivables, stock, equipment, loan repayments and drawings, the largest of them named first, and how growth eats cash.
Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.
You will build a bridge from a month's profit to its change in cash, name the largest place the profit went, sort events by what they do to profit and to cash, and choose actions that fix a timing problem rather than a profit one. You will also work out the cash a burst of profitable growth needs up front.
You have met every piece of this lesson separately: money customers owe, stock as cash on a shelf, equipment kept off the income statement, loan repayments and drawings that leave the account without being costs. This lesson puts them in one line — a bridge from the month's profit to the month's change in cash — and reads it for which drains will happen again, which can be moved, and why growth itself is one of the biggest.
| Term | What it means |
|---|---|
| Bridge | The walk from a month's profit to its change in cash. |
| Drain | A place profit went without reaching the account. |
| Receivables | What customers owe; when they grow, cash has not yet arrived for profit already counted. |
| Timing problem | Cash short because money moves at the wrong time, though the trading is profitable. |
| Overtrading | Growing faster than the cash can carry the extra receivables and stock. |
In March Corner Bean made a profit of 1800 dollars, and the account fell by 3400. Both figures are right. The bridge shows where the 1800, and 3400 more, went.
$$\text{change in cash} = \text{profit} - \text{more owed by customers} - \text{more stock} - \text{equipment} - \text{loan repaid} - \text{drawings}$$
| Line | Effect on cash |
|---|---|
| Profit | +1800 |
| Catering clients owe 600 more | −600 |
| Stock up by 200 | −200 |
| A second grinder and fridge | −2500 |
| Loan repaid | −400 |
| Alexa's drawings | −1500 |
| Change in cash | −3400 |
Each drain is a real event and none of them is a cost of March's trading, which is exactly why profit does not see them. The equipment is the biggest, so it is the reason Alexa gives first when the bank asks.
Notice what the bridge does not contain. There is no line for wages, rent or the roaster's beans: those are costs, already taken off inside the profit. The bridge lists only the movements profit cannot see — money that moved without being a cost or a sale, and sales and costs whose money has not moved yet. Get that split right and the bridge always lands exactly on the bank statement; a bridge that misses by some amount has a line missing or counted twice.
Another way: steps
Another way: story
Tomasz's June: salad sold well and the month made 1700. But 900 of it is in boxes of herbs and seedlings waiting for July, 300 is owed by two restaurants, 200 went to the bank and he drew 700. The account fell by 400, and every dollar of the gap is accounted for.
Take the profit from the income statement. The month's operating profit less interest.
Measure the two working-capital lines. What customers owe at the end of the month less what they owed at the start; the same for stock. A rise is a drain; a fall is cash coming home, and goes in with a plus sign.
Add the three lines profit never sees. Equipment bought, the principal part of loan repayments, and drawings — each from the bank statement.
Add the column. The result is the change in cash.
Check the bridge against the bank: the opening balance plus the bridge's result must equal the closing balance. If it misses, look first for a payment that was counted as a cost and also as a drain, or an owner's transfer into the account that was left out. Then read the bridge for its largest line and for which lines will be back next month.
The bridge is also a forecast, if each line is read for whether it will happen again. Equipment is usually a one-off: March hurts, April does not. Loan repayments repeat on a schedule anyone can read. Drawings are a choice, and the easiest line to move in a tight month.
Receivables and stock are the dangerous pair, because they grow when the business grows. A café that wins three new catering clients on thirty days carries more money owed every month it expands; a shop that stocks up for a bigger month carries more on the shelf. That is how a business can grow itself out of cash while every month is profitable, and why a growing business watches these two lines hardest.
A month that made money and ran short has a timing problem, and it needs a timing answer. The useful actions all change when money moves: chasing what customers owe and agreeing dates; invoicing on the day of the job; ordering stock as it is needed rather than a month ahead; asking a supplier for longer terms; drawing less this month and making it up when the invoices are paid; spreading an equipment purchase with a lease or a loan.
Actions that change how much the month earns — raising prices, opening longer, cutting a cost — are answers to a profit problem. They may be worth doing for their own sake, but they do not fix a timing gap quickly, and some make it worse: opening longer to take more work on thirty-day terms adds to what customers owe before it adds any cash.
So the bridge is read first for its biggest timing line, and the first action is aimed at that line.
Profitable growth on credit terms uses cash before it brings any. A wholesale bakery that wins 3,000 dollars a month of new café customers on thirty days has 3,000 more owed at the end of the first month, and keeps it owed every month after while the customers keep ordering. It also needs more flour and packaging on the shelf. The growth's extra profit — say 900 a month at a 30 percent margin — arrives month by month, but the 3,000 of receivables and the extra stock are needed at once.
So in the first month of growth the account falls by the new receivables and stock less the new profit, and it only begins to recover once the growth stops accelerating. A business that keeps growing fast can stay short of cash for as long as it grows. This is sometimes called overtrading, and it is one of the commonest reasons profitable small businesses fail.
The defense is to forecast the working capital growth needs before taking it on: the new customers' monthly sales times their payment terms in months, plus the extra stock. That figure is the cash, or the line of credit, the growth requires, and it should be in place before the first order is delivered.
The same bridge explains a month when cash rose by more than the profit. If customers owe less at the end of the month than at the start, money earned in earlier months has come home, and the fall in receivables goes in with a plus sign. If stock on the shelf fell, goods paid for earlier were sold this month, and that fall is a plus too. A loan drawn down, or money the owner put in, is cash that is not profit, and it also goes in with a plus.
Take a shop that made 800 dollars of profit in January while the clients who had owed it 1,500 over Christmas paid 1,100 of it, and stock fell by 600 as the seasonal lines sold through. Its account rose by 800 + 1,100 + 600 = 2,500, three times the profit.
A month like that looks better than it is. The 1,700 that came from receivables and stock was profit from December, arriving late; it will not come again in February unless December comes again. So the reading is the same in both directions: find the lines that are timing, set them aside, and what is left is what the trading itself did to the account. An owner who plans drawings from a January like this one ends February short.
A catering business doubled its corporate work in a year, from 8,000 to 16,000 dollars a month, and every month showed a profit of 20 percent. By the autumn its owner could not pay her staff on time.
Her accountant built the bridge for the year. Profit: about 28,000. Corporate clients on forty-five days now owed 24,000 at any time, up from 12,000: a drain of 12,000. More stock in the stores for bigger events: 3,000. A second van, paid for in cash: 18,000. Drawings: 20,000. The account had fallen by 28,000 − 12,000 − 3,000 − 18,000 − 20,000 = −25,000, and a line of credit was covering the gap.
Nothing in the income statement was wrong. The growth had tied up 15,000 in receivables and stock, the van had taken 18,000 at once, and her drawings had assumed the profit was in the account.
She made three changes. She moved new corporate clients to thirty days and a 30 percent deposit on large events, which over three months brought about 8,000 of receivables home. She refinanced the van over three years, which returned most of the 18,000 to the account in exchange for a monthly repayment. And she set her drawings at what the bridge showed the business could carry. The next year grew more slowly and the account rose every month.
When a growing business asks a bank for help, the first question is often about receivables and stock, not about profit, because those are where growth hides its cash. Many banks offer facilities designed for exactly this: lending against unpaid invoices, so that the cash tied up in receivables is released before customers pay.
A profit guarantees money in the account. Profit counts what was earned; cash counts what moved, and five things sit between them.
If cash fell, the profit figure is wrong. Usually both are right and the bridge explains the gap.
Raise prices to fix a cash shortage. That changes profit; a timing problem needs a timing answer.
Growth fixes cash. Growth usually needs more of it first.
Wages and rent belong in the bridge. They are costs already inside the profit; the bridge lists only what profit cannot see.
A month where cash beat profit is a good sign. It may only be earlier months' profit arriving late.
Start from the profit.
$1400$
From March's income statement.
List the drains: clients 1,100, stock 400, loan 350, drawings 1,200.
$1100 + 400 + 350 + 1200 = 3050$
Every place the profit went.
Take them from the profit.
$1400 - 3050 = -1650$
The change in cash.
Name the largest.
$\text{drawings, } 1200$
The biggest single line.
Name the one that will grow.
$\text{clients' } 1100$
It repeats and grows if the clients keep paying late.
Start from the profit.
$1800$
March's income statement.
Take off the working-capital drains: owed 600, stock 200.
$1800 - 600 - 200 = 1000$
Profit not yet in the account.
Take off the grinder and fridge.
$1000 - 2500 = -1500$
A one-off.
Take off the loan and the drawings.
$-1500 - 400 - 1500 = -3400$
The change in cash.
Check against the bank statement.
$3400 \text{ opening} - 3400 = 0 \text{ closing}$
The bridge lands on the statement.
Work April without the equipment.
$-3400 + 2500 = -900$
Still negative: drawings above what the trading leaves.
Note the new customers: 3,000 a month on thirty days.
$3000$
Extra sales from month one.
Find the extra profit at a 30 percent margin.
$3000 \times 0.30 = 900$
What the growth earns each month.
Find the extra owed at the first month's end.
$3000$
None of the new sales is paid yet.
Add the extra stock.
$500$
More flour and packaging on the shelf.
Find the first month's change in cash from the growth.
$900 - 3000 - 500 = -2600$
Profitable growth that takes cash.
Find the second month's, with sales flat at the new level.
$900 - 0 - 0 = 900$
Receivables and stock stop rising; the profit now arrives.
Find the cash the growth needed up front.
$2600$
The line of credit to arrange before the first delivery.
Add the drains.
$200 + 100 + 400 + 1500 = 2200$
Every line except the profit.
Take them from the profit.
$1200 - 2200 = -1000$
The change in cash.
Name the largest drain.
In October, Corner Bean made a profit of $1200$ dollars. Over the month, customers came to owe it $200$ more, stock on the shelf grew by $100$, it bought equipment for $0$, repaid $400$ of a loan, and the owner drew $1500$. Fill in the bridge from profit to the change in cash, in dollars: a plus figure for money that reached the account, a minus figure for money that did not.
| Effect on cash, dollars | |
|---|---|
| Profit for the month | |
| More owed by customers | |
| More stock on the shelf | |
| Equipment bought | |
| Loan repaid | |
| Owner's drawings | |
| Change in cash |
Complete the worked solution: a shop made a profit of $2200$ dollars in April. Customers came to owe $500$ more, stock grew by $200$, it bought a display cabinet for $2400$, and the owner drew $1100$. Walk from the profit to the change in cash.
Add the drains.
$500 + 200 + 2400 + 1100 =$ d
Every place the profit went without reaching the account.
Take them from the profit.
$2200 - (\text{drains}) =$ h
The change in cash.
Name the largest drain.
$\text{the cabinet}$
It explains most of the gap.
Take out the drain that will not repeat.
$2200 - 500 - 200 - 1100 =$ n
A month like it without the cabinet.
Read what next month looks like.
$\text{above zero without the cabinet}$
The fall was a one-off, not a trading problem.
In March, Corner Bean made a profit of $1800$ dollars. Over the month, customers came to owe it $600$ more, stock on the shelf grew by $200$, it bought equipment for $2500$, repaid $400$ of a loan, and the owner drew $1500$. The owner has to explain to a lender why a profitable month left less cash. Which reason should come first?
Six things that happened at Fixit Mobile in November. Match each one to what it did to the month's profit and to the account.
| Profit up, cash not yet | Cash down, profit unchanged | Profit and cash both down | Profit and cash both up | |
|---|---|---|---|---|
| A $500$-dollar invoice to the clinic, unpaid at the month end | ||||
| Screens bought and still on the shelf | ||||
| Dan's drawings | ||||
| The technician's wages | ||||
| A repair paid for at the counter | ||||
| Repaying part of the van loan |
A plumber made a profit of $2200$ dollars in May. By the end of the month customers owed her $1000$ more than at the start, she paid a $1700$-dollar deposit on a new van, and she drew $1000$ for herself. Nothing else touched the account. By how many dollars did the account change? Write a fall with a minus sign.
Answer:
A wholesale bakery wins new café customers worth $1200$ dollars of extra sales a month, all on thirty-day terms, so each month's sales are paid the month after. To supply them it keeps $200$ more flour and packaging in stock. The new sales earn a margin of $12$ percent. Fill in what the growth does in its first month, in dollars.
| Amount | |
|---|---|
| Extra profit in the month | |
| Extra owed by customers at the month end | |
| Extra stock | |
| Change in cash from the growth |
A landscaper made a profit of $2700$ dollars in April. Town governments came to owe her $1400$ more, she bought a mower for $3400$, repaid $500$ of a loan and drew $2000$. Fill in the bridge's totals, in dollars.
| Amount | |
|---|---|
| Total of the drains, dollars | |
| Change in cash | |
| Change without the mower | |
| Change without the mower, the towns paying on time |
Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.
In March, Corner Bean made a profit of $1800$ dollars. Over the month, customers came to owe it $600$ more, stock on the shelf grew by $200$, it bought equipment for $2500$, repaid $400$ of a loan, and the owner drew $1500$. If customers had paid as quickly as in earlier months, so that what they owed did not grow, by how many dollars would the account have changed? Write a fall with a minus sign.
Answer:
You can explain a profitable month that ended with less cash, line by line, and size the cash growth needs. Tell someone why a growing business can run out of cash while every month is profitable. Next: buying equipment, judged on cash and capacity together.
16. Your turn: profit 1200; owed up 200, stock up 100, loan 400, drawings 1500, step 3
$\text{drawings, } 1500$
The line to move first.